Introducing the new Dow

Dow will separate from DowDuPont on April 1, 2019, after spending a year and a half merged with DuPont. But the firm that emerges from the temporary matchup will be considerably different from the one that went in.

At an investor day in New York City earlier this month, the CEO designate of the new Dow, Jim Fitterling, and its future president and chief financial officer, Howard Ungerleider, unveiled their vision. Gone is the old Dow of former CEO Andrew N. Liveris, who had big ambitions for technological achievement, manufacturing scale, and a high profile for the company. Fitterling and Ungerleider want their Dow to be a cash-producing machine, generating high returns from well-considered investments.

This simpler philosophy was always the point of the merger, which sought to redistribute businesses to where they fit best. Dow’s seed and agricultural chemical business has merged with DuPont’s to form a new company, Corteva Agriscience, which will separate from DowDuPont by June. Other longtime Dow businesses—including building products, water treatment, electronics materials, and food ingredients—are headed for the new DuPont, also set to launch by June. Dow picked up the old DuPont’s packaging plastics business, a giant in ethylene copolymers.

The old Dow had more than 15 major lines of business; the new Dow will have only six businesses and three segments. The new Dow will be more commodity focused than the old. Its chief chemistries will be petrochemicals, packaging and polymers, acrylics, polyurethanes, and silicones.

The new firm will also be smaller. In 2017, the old Dow generated $55.5 billion in sales. The businesses in the new Dow would have racked up $44.8 billion. The old Dow had 56,000 employees. Fitterling will manage 37,000.

“Obviously, the scope of the new company is different,” Fitterling told reporters. “It is focused and it is streamlined.”

The new company, Ungerleider promised, will be generous to shareholders. Dow will pay out 45% of its net income in dividends over time. Another 20% will go to buy back shares. The old Dow was a famously reliable dividend payer, but it wasn’t in the habit of buying back shares at large scale.

And Fitterling and Ungerleider have plans to expand the pile of cash that Dow’s shareholders get their cuts from. A lot of the money will come from reducing overhead. Since the merger, the Dow piece of DowDuPont has generated $650 million in savings. It plans to cut another $700 million over the next year.

Another change for Dow will be in how it invests. “We have to be more disciplined capital allocators,” Fitterling said. “We hear that message loud and clear.”

In the years before the merger, Dow had been spending $4 billion annually on capital projects. They included an ethylene cracker, polymer plants, a propane dehydrogenation unit, and cracker expansions on the U.S. Gulf Coast. In addition, the company built the massive Sadara Chemical joint venture in Saudi Arabia with Saudi Aramco.

The new Dow will spend about $2.8 billion annually. It is working on a bunch of what it calls “wave two” investments in smaller projects over the next five years. Announced in 2017, these include a cracker expansion in Freeport, Texas, and new polyethylene capacity on the U.S. Gulf Coast and in Europe—a comparable amount of capacity at half the capital intensity of the earlier round of investment, Fitterling claimed.

The projects will thus be more profitable, he added. The company aims to generate a 13% return on the capital it invests. Most of the earlier investments didn’t meet that threshold. All the new ones do. “The investments that I’m getting across my desk today all start with 20% return on capital numbers,” Fitterling said.

For the first time in more than a decade, Dow isn’t planning any new ethylene crackers. This includes in Argentina, where the company had been mulling a cracker project to take advantage of local shale gas.

The new Dow will not be as research intensive as the old, in part because the businesses that are leaving Dow are higher tech than the ones it’s retaining.

The old Dow spent $1.6 billion on R&D in 2017, 2.9% of its sales. But that figure was bolstered by the agriculture and specialty businesses that are transferring to Corteva and DuPont. Together, these departing businesses spent $850 million on R&D, 6.8% of their sales. The businesses that will constitute the new Dow spent $820 million on R&D, 1.8% of sales.

And the Dow executives don’t want to see that number grow much. Ungerleider said the new Dow will set R&D spending at or below 2% of sales.

This new attitude is also a consequence of the merger. Earlier this year, Ed Breen, the current DowDuPont CEO and the future executive chairman of DuPont, said he favors short-term R&D over what he called “moonshot” projects. He pointed to DuPont’s $200 million cellulosic ethanol plant in Iowa, which closed last year after the economics didn’t pan out.

Fitterling’s R&D stance is also conservative. “It is very focused on the near term,” he said. The company will emphasize projects that help customers solve specific problems and develop new products. “Most of the product innovations typically have a one-to-three-year time frame,” he said.

Fitterling will also shun moonshot projects outside the company’s focus. “Batteries, that wasn’t a Dow core discipline,” he said. Dow walked away from battery and electrolyte joint ventures a few years ago. Fitterling would undertake longer-term projects, such as chemical recycling of plastics, but only if they are strategic.

An example of big-picture R&D that will continue is hybrid chemistry, in which Dow is combining silicones with other molecules, such as olefins and acrylics. A silicone-polyolefin hybrid can enable plastic lumber with 95% recycled content instead of 75%, Fitterling said. “I see long-term potential from an R&D standpoint in the hybrid space,” Ungerleider added.

The new Dow will face challenges. It will derive half its sales from plastics at a time when the public, moved by images of marine animals tangled in the stuff, is turning against them. Officials in Europe and elsewhere are considering bans of some single-use plastics.

“Bans are not going to solve the problem,” Fitterling insisted, “because the things that people are banning are a very small fraction of what is happening.” A better solution is to address the lack of infrastructure in parts of Asia that can’t handle plastic waste, he said.

Dow, he pointed out, has been partnering with governments and nongovernmental organizations and exploring plastics-to-fuel technology to deal with the problem. However, Fitterling said he won’t follow the lead of competitors such as LyondellBasell Industries and Borealis, which have acquired recycling firms. “I don’t see us becoming a recycling company,” he said.

Overall, Fitterling downplayed the impact plastic bans might have on business. “We’ve seen these challenges since the ’80s, and we are still growing at 1.4 times GDP in very big markets,” he said.

Financial analysts liked what they heard from Dow at the investor day. “We are positively surprised, and we are genuinely excited about the company New Dow is turning into,” wrote Jonas Oxgaard, an analyst at Sanford C. Bernstein.

David Begleiter of Deutsche Bank was nearly as positive. He liked the emphasis on cash generation and frugality. “Dow presented a compelling case as to why the ‘New’ Dow Chemical will be different and better than the ‘Old’ Dow Chemical,” he wrote.