Carbide savings critical to Dow peak performance

02 May 2001 16:30  [Source: ICIS news]

Do you write off Dow for 2001 as one analyst has suggested? Probably not.

The Union Carbide merger is making a huge dent in the company’s profitability this year. The costs associated with the merger will total $1.4bn (Euro1.6bn), under half in asset write downs and about 55% to cover the cost of job losses. The cash impact of the charge, roughly 40%, will be taken over two years.

But Dow is fighting back. The company says now that it can more than double its original cost saving targets. The savings will start to take effect later this year. The synergies identified since the merger announcement in 1999 will now total $1.1bn by the end of the first quarter of 2003. They will involve the loss of close to 4500 jobs across the company, or more than 8% of the combined workforce.

Having made so much of the Carbide synergies – not just on the costs front, certainly - Dow will be held to its word over this year and next. In hindsight, it probably is better that the merger process was delayed for such a long time awaiting US Federal Trade Commission (FTC) approval. And, given the dire straits of the US petrochemical industry at the turn of the year, there is more opportunity for business to get better as 2001 progresses.

Dow will be taking costs out of the business at a time of easing raw material prices and, hopefully, rising margins. The company says that if it can recoup this year just half the additional cost burden of higher raw material costs in 2000 then it can meet its target of earning above the cost of capital – or a return of greater than 10% - in what it believes is the trough of the current cycle.

Chief executive Mike Parker says the Carbide merger is a very low risk transaction for Dow. He also says it is part of the company’s seven year journey to lift profitability over the cycle and latterly to focus much more clearly on growth. The growth part of that strategy has been seen recently in the acquisitions of Angus Chemical and the bid for UK firm Ascot.

The Carbide merger gives Dow the big boost in basic chemicals – a proportion of the Carbide business identified as speciality has been re-designated by Dow as basic, namely olefins and solvents. It gives access to ethane fed joint venture crackers in Kuwait and Malaysia, definite manufacturing and technology advantages and certainly, as identified now, the opportunity for further integration led manufacturing and feedstock cost savings.

Dow was clearly pleased with what it found at Carbide when the merger was completed in February. Work started straight away to integrate the two companies’ operating systems, first e-mail and information systems then the enterprise resource planning network. Parker says the merger gives Dow tremendous upside potential. It is expected to be adding to earnings in the first half of 2002, lifting both top line growth and in terms of cost savings. In just one product, polyethylene (PE) for instance, Dow expects to lift operating rates at Carbide plants from 85% to 95%, the Dow average. This will give the new Dow an extra 600m lb/year (about 270 000 tonne/year) of potential production for little capital cost. A grass roots plant of similar capacity would cost something like $150m. Employees across the company are being given incentives in their compensation packages linked directly to cost saving schemes.

Parker says Dow will be moving much faster than was thought possible at first. The integration plans put in place at the start of the merger bid are the key here and the speed with which they are implemented is vitally important.

Dow won’t be tardy. It can’t afford to be. The merger with Carbide has cost a lot – and taken a long time to release from the starting blocks. The company has now to move that much faster to show that Carbide will help the new Dow grow.

Dow is looking towards a chemical industry cycle peak in 2003/2004 and says it wants to be making earnings per share of $6 then. Its earnings per share performance at the last peak in 1995 was $2.76; earnings per share in 2000 were $1.87. The cost savings, productivity boost and growth synergies captured from the Carbide merger will be the driving force behind Dow achieving this level of performance.

By: Nigel Davis
+44 20 8652 3214

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