Dow's Carbide Integration Running Ahead of Schedule

12 November 2001 00:00  [Source: ICB Americas]

Dow Chemical Company is running ahead of schedule on cost savings from the Carbide integration and emphasizes its commitment to achieving its financial and strategic objectives through the cycle.

Speaking at its institutional investors meeting in Midland, Mich., Dow Chemical president and CEO Michael D. Parker cited the need to "manage cyclicality." He reemphasized Dow's financial goals of achieving a 20 percent return on equity, earning 3 percent above the cost of capital, earning the cost of capital at the trough, and achieving annual 10 percent peak-to-peak earnings per share growth. On achieving these goals in 2001, Mr. Parker indicates that the company will not be able to "achieve break-even economic profit at the end of this cycle."

Mr. Parker emphasizes that Dow's goals are lofty. Only 10 percent of the industrialized S&P 400 reach this level of performance. Mr. Parker says there are no additional foreseeable labor reductions other than those previously announced relating to the Carbide integration.

Mr. Parker believes Wall Street is underestimating Dow's growth potential. "We are an undervalued company," he says. "The decision is not if one should invest in Dow, but when." He projects that Dow will achieve "sustainable earnings growth" before the trough of the ethylene cycle, which is projected to last the next one to two years. Mr. Parker also projects that the styrene and chloralkali's segment downturn will be shorter than ethylene's trough.

Basic chemicals accounted for 45 percent of Dow's $31 billion in 2000 pro forma sales. Performance chemicals accounted for the remaining 55 percent. Within its performance segment, Mr. Parker cites polyurethanes, epoxy products and engineering plastics as becoming "more commoditized," and suggests that the company is refining its goals within these segments.

Strategically, Dow will continue to seek productivity and growth through the continued implementation of Six Sigma and through acquisitions. By the end of 2001, Mr. Parker estimates that the company will achieve 40 percent or $600 million in cost savings out of the targeted $1.5 billion to be achieved by 2003.

The Carbide integration is exceeding its 2001 cost synergies schedule. As of September 30, according to CFO and executive vice-president J. Pedro Reinhard, Dow has achieved $550 million in cost savings. The goal was to achieve $650 million in savings by the end of the first quarter 2002.

Mr. Parker stresses that, "In 2001, our goals were, "One to integrate, two to integrate, and three to integrate." The $550 million cost savings achieved this year is comprised of $390 million from labor reductions, $100 million from supply chain operations, and $60 million from feedstock purchasing.

Dow will continue to seek value-added acquisitions that are less capital intensive and less cyclical, particularly within specialties and biotechnology.

Illustrative of this are Dow's recent acquisitions of Ascot plc, Gurit-Essex and Collaborative BioAlliance. Mr. Reinhard says Dow's $2.8 billion in acquisitions over the last five years has generated $2 billion in revenues, and their aggregate net present value has tripled. Mr. Parker indicates that the company does not have any short-term interest in agricultural acquisitions.

"We are redefining Dow from a traditional chemistry manufacturing company into a science and technology solution company," he says.

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