Dow Chemical Targets Narrower Scope, Higher Returns
2018-11-08    [Source:Chemical week]

Dow Chemical set out near-term growth and shareholder return expectations at an investor meeting in New York 7 November, stating that a narrower scope and improved operating discipline would deliver higher returns and lower-risk growth. Near-term cost reduction and incremental expansions can deliver an additional $2-$3 billion in EBITDA, said company officials.

“We’ve been through a substantial change as we merged with DuPont and created three divisions,” Dow Chemical CEO-elect Jim Fitterling said at a press briefing before the meeting. “The scope [for the new Dow] is more focused and streamlined and we’ll show how that translates into higher shareholder remuneration and better total shareholder return.”

Dow has cut focus sectors down to three -- packaging, infrastructure and consumer care – from more than 10. The company will take further steps to “right size” its cost base following the shift of its more resource intensive agricultural operations to Corteva and roughly $4 billion in former Dow specialty assets to DuPont. New Dow will target administrative costs of less than 1% of revenue, down from around 2% under historical Dow. Organizational layers below the CEO level have been cut from as many as eight to no more than six, Fitterling said. The number of positions within the top three layers of management have been cut 25-30%, Fitterling added.

The company will hold near-term capital annual expenditures around $2.8 billion, a level below depreciation and amortization, down from roughly $4 billion/year between 2014 and 2016, which included massive investments for a US Gulf Coast cracker and downstream derivatives as well as its Sadara joint venture with Aramco in Saudi Arabia. Both projects offer significant potential for low-risk and low-capital incremental expansion to drive growth over next few years, Fitterling added. The company will target an internal rate of return of greater than 13% on growth investments.

Roughly 65% of net income across the cycle will be dedicated to dividend and share repurchase, according to Dow president and CFO Howard Ungerleider. At least 20% of net income would be targeted for share repurchase combined with a dividend payout across the cycle of 45% of net income.

“We have established a capital structure and balance sheet for the new Dow that will serve as a strong foundation to continue our profitable growth and increase shareholder returns,” Ungerleider said. “We have the strategy, portfolio, management team and mindset in place to capitalize on the significant earnings and cash flow upside opportunities in front us.”

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