Dow Chemical 3Q15 Earnings Call Notes

Expect ongoing weakness in Ag to continue for the next 1-2 years

“Overall, the ag market continues to be challenged with high inventory levels and currency pressures, more than offsetting higher volume gains in Europe, Middle East, Africa, India as well as North America. We do expect ongoing weakness to continue over the next 12 to 24 months’

Important to be vertically integrated in polyolefins because its hard to predict where value will be captured

“we want to illustrate the importance overtime of owning the full polyolefin value chain. As you can see, the source of income has shifted overtime. It’s hard to predict, which bucket value will come from in any given period.”

“In the 2002 trough, for example, the ethylene to naphtha spread was high in very weak markets, with some contribution from the oil to gas spread.”…”In the strong markets of 2005, there was virtually no oil to gas spread. In 2009, Dow retained market share and decent trough margins due to product differentiation, while competitors that didn’t own the differentiation or the feedstock flexibility struggled to the brink of insolvency.”…”In 2014, the oil to gas spread was the main driver of margins, but full chain integration and differentiation played an important role…differentiation for Dow is based on unique polymers, catalyst, process and comonomer combinations.”

Polyethylene and elastomer balances are tight today

Integrated polyethylene and elastomer balances are tight today and the outlook indicates these balances will stay tight for at least the next several years. Additional, tightness is likely to come from an industry operating reliability issues, both at the monomer and polymer stages of the value chain.”

Portfolio work has been to exit commodity businesses

“Dow’s portfolio work of these last five years has been to methodically exit commodity cyclical value change, such as those in styrene, butadiene, chlorine and all their derivatives.’

This company is going to be a cash flow machine

“I think the way we should all think about the company is that it’s going to be a cash flow machine these next several years. As you can already see, our cash flows are being boosted substantially.”

People in China are starting to look for different quality products

“if you think about where China is, they’ve exited this heavy industry phase, and it really is all about light industry/consumer. So you think about our materials, whether it’s RO membranes in water, whether it’s our elastomers, whether it’s our architectural paints, where 10 years ago you would sell very low-end paint to a developer who would look to spray an entire building. Today you’ve got people in China who have been in their apartments or their homes for 10 years, they are making the choice, and their value proposition is going to be very different from a developer.”

“This company has delivered”

“This is a company that has delivered on its promises…Those who worried about low oil, look at our results. Those who worried about China going away, look at our results. The results of the company and the consistency of performance enables us, as a Board, and management team to continue to deliver that growth in terms of earnings and cash flow. We are strong cash flow machine, getting stronger back to you.”

Dow Chemical at Bernstein Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

” there has been an enormous amount of change in our sector probably as many as any sector out there in a context of the names that were there in 1990 and the names that are there in 2010 and even since 2010 has been further changed and I think to notice, there has been about a 40% survival rate, eight companies will come out on the other end which Dow is one.”

“chemistry and the material that comes from chemistry are foundational to everything we do”

“We’ve gotten out of me too businesses that subsidized companies can go win at…I can do a lot of things, I can’t get subsidies like…state owned companies”

“We have worked very hard to go downstream into markets and work at the intersection of sciences…material science, chemistry, biology, that’s where discoveries occurring in today’s world”

“BSF is the other one that’s most like us and DuPont little less like us these days that are integrated diversified across key markets’

“In our sector to be a player in all the sciences and the key markets with an integrated proposition on technologies, products and processes, is a domain of a few”

“I would remember meetings in the hotel rooms like this where the Chinese issue was over here trying to figure out whether the U.S. is going to be good on all the money that China had over here in terms of its banking system, financial system, that’s over with and the Chinese are quite happy to put money in the United States.”

“I think Europe was a big wakeup call for the Chinese and about a year or so ago there were transition in the leadership, they pretty much decided that they can no longer rely on an export led economy.”

“[China] fundamentally took a very profound decision with the new leadership…very focused in on trading demand drivers in China that solved China’s needs as an urbanized, modernized economy that looks after its people removes pollution, addresses food safety, addresses health concerns and really if you like distributes well in a much better way than what they’ve seen”

“I’m a China head, I’ve been going there since the 70s, I do six trips a year, I’ve lived through the remake of China. I think the profound remake of China is to move their economy to 70% or 80% domestic demand drivers…That means not the property speculative world they’ve seen that means not the bridge to nowhere type infrastructure builds that means sustain consumption and to do that they’re focusing it on the service sector.”

“they are creating insurance sectors, health sectors, pension based sectors if you like mutual funds or alternative uses of capital, trying to liberate liquidity inside their economy so smarter choices can be made on how capital is allocated”

“If we’re going to live in a deflationary world and volatile and China’s remake is on the worse end more than a year or two then the capacity is not required in the world.”

“These are short cycle based on consumers. I think our industry needs to get short cycle at the consumer end.”

Dow vs. S&P 500 Since 1957

As the Dow inches closer to a new all time high, the S&P 500 is still about 1% away from a new high of its own.  Part of the reason for the divergence is that the Dow has outperformed the S&P 500 by that amount year to date.  However, the Dow did underperform the S&P 500 by almost 6% last year and actually has a history of underperforming the S&P 500.

Below is a chart of the historical performance of the $DJIA and the $SPX going back to 1957, the year that the S&P 500 was created.  Since then the S&P 500 has outperformed the Dow by 452%, although each index has given investors solid returns.  The S&P 500 is up 3390% while the Dow is up 2937%, which means that an investor that put $100k into each index in 1957 would have $3.39m vs. $2.93m.  The largest performance spread between the two indices happened in the early ‘oughts when at one point the S&P 500 had outperformed the Dow by 1000%

Dow vs. S&P 500