New Dow highlights capital, strategic discipline

Source: ECN

2018/11/08

The new Dow rolled out a strategy dramatically different in its approach to capital spending and strategic discipline. Highlighting the changes in approach between the “old Dow” and “new Dow” at Dow’s investor day, CEO Jim Fitterling unveiled a streamlined, focused enterprise that will have lower capital spending but much greater bang for the buck.

The new Dow plans capital expenditures (capex) to be at or below depreciation and amortisation (D&A) compared to above D&A for the old Dow. Annual capex for the old Dow from 2014-2016 was around $4bn. The new Dow plans annual capex of about $2.8bn.

The new Dow will aim for projects with an internal rate of return (IRR) of over 13%, with a faster payback. These will be incremental growth projects rather than mega projects which have had lower IRRs of 10-13%.

Fitterling calls this disciplined capital approach a profound shift in thinking. “The things hitting my desk have numbers around 20% [for IRR]. If we continue this methodical growth we will keep driving IRR higher,” he said.

Dow CAPX

NO NEW CRACKER

This means no new cracker on the horizon. The age of the mega project for Dow is over. “Wave 2 will not have a new cracker. We will be adding capacity at existing sites,” said Fitterling.

Dow’s “Wave 2” investments, taking place from 2021-2023 in its packaging & specialty plastics (P&SP) segment, will add around 1.4m tonnes/year of polyethylene (PE) capacity and also involve higher alpha olefins and elastomers in the US, he noted.

On the PE front, this includes 600,000 tonnes/year on the US Gulf coast, 450,000 tonnes/year in Europe and 350,000 tonnes/year of global debottlenecks.

Dow sees potential incremental $600m-1.1bn in annual earnings before interest, tax, depreciation and amortisation (EBITDA) from these Wave 2 investments.

Dow also plans silicones, polyurethanes and ethylene oxide (EO) derivatives investments in the next three years, adding another $200m-400m in annual EBITDA.

The new Dow sees capex driven by consumer demand rather than the old approach where Dow would build a new complex and then try to fill the demand, with some product going to the merchant market.

The disciplined approach extends to mergers and acquisitions (M&A) strategy. While not on the front burner, Dow may do bolt-on deals in polyurethanes systems, silicones and coatings.

NARROWER FOCUS

The new Dow will be much more focused than the old Dow, with the number of businesses going from over 15, to just 6 within three segments – plastics & specialty plastics, performance materials & coatings, and industrial intermediates & infrastructure.

Answering a question on how Dow plans to stay on course without veering into other areas as it has done in years past, Fitterling pointed out that essentially what you see in its portfolio is what you are going to get.

The disciplined investment will go into its core businesses – not into things like solar shingles on houses, he said, referring to a previous Dow business initiative.

ASIA GROWTH OPTIMISM

On the demand side, Dow expressed confidence in Asia growth, population growth and consumer trends providing long-term tailwinds for its business.

In the packaging market, Asia and Africa are leapfrogging rigid plastic packaging, going from paper cartons to flexible packaging, noted Diego Donoso, business president for the P&SP segment.

“In an Indonesian supermarket, you will not see rigid [plastic] packaging anywhere. In every color and shape, they are shifting to flexible,” said Donoso.

The same trend is happening in India, where demand is growing at 12-14%/year from a lower base than China, he noted. India introducing pouched milk created 200,000 tonnes/year of demand “from nothing”, while water pouches in Nigeria represented a 100,000 tonne/year opportunity, said Donoso.

“The world is growing at a faster rate than we can see [from within the Western world],” he said.

For Dow overall, sales into China in the third quarter of 2018 was up 20% year on year.

Excluding volumes from the Sadara joint venture in Saudi Arabia into China, the figure was close to 10%, noted Howard Ungerleider, Dow’s president and chief operating officer.