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The Dow Chemical Company (NYSE:DOW)

Credit Suisse Chemical & Ag Science Conference Call

September 17, 2013; 02:20 p.m. ET


Andrew Liveris - President, Chairman & Chief Executive Officer

Doug May - Vice President of Investor Relations


John McNulty - Credit Suisse

John McNulty - Credit Suisse

Okay. So if you all take your seats, we’ll kick on with the next presentation. Before our next presentation we are very happy to have one of our top picks in the space, Dow Chemical.

As you know Dow is one of the premier chemical companies in the world with a large global ethylene platform that has low cost advantages in their feed fleet, as well as having a number of very high end specialty chemical and materials platforms like electronics, and ag to just name a couple of them.

With all of this, some cost cutting and significant restructuring programs in place, solid free cash generation and potential divestures. Dow has a lot of things going on, which has helped to drive earnings and creates some shareholder value going forward.

Now representing Dow today, we are very excited to have Andrew Liveris. He is the President, Chairman and CEO of Dow Chemical. Now I’m sure you know a lot about Andrew. Just to give you a little bit of his background, Andrew started his career at Dow back in 1976. Spent the bulk of his career in Asia running a whole host of businesses. He took the CEO role in 2004 and the Chairman slot in 2006. Among other things, Andrew is also the Vice Chairman of the U.S. Business Council, Vice Chair of the Business Round Table and a Member of the President's Export Council in the US.

Now also with Dow today we are also happy to have Doug May, the Vice President in charge of Dow’s Investor Relations platform.

With that, let me turn it over to Andrew Liveris.

Andrew Liveris

Thank you John. I’m pleased to be with you all and look forward to your questions.

Let me go though our presentation material in a timely way. I’m really here to update you on Dow’s substantial progress in 2013, principally the steps we have been taking to continue to drive positive forward momentum, delivering strong results and fundamentally an increasingly volatile, uncertain, complex and ambiguous global economy, and reviewing our consistent achievement against our committed to self-help measures that John alluded to in his opening presentation.

Today, I’m going to share with you our intense focus on execution and how we’ve moved to actually that next level of implementing our strategy, with a strong strategic and financial lends on how we view our very large business.

I will describe our different business models, and the different actions that are embedded in each one of these different business models, with the consequence of portfolio action. In addition, there are lots of things that we are going to talk about in terms of value and value chains. These three different business models, three of them, have very different market opportunities, very different margin opportunities embedded in their markets and in the value chains that constitute their markets and how we at Dow can extract value from our position in that value chain.

I will add the dimension of return on capital that we rolled out late last year and we really have been working very hard to improve the collective ROC of the company, by taking decisions on our growth businesses, our run for cash businesses and of course candidates for better owners.

I will also talk about our growth catalyst, such as our investments in Saudi Arabia from which I’ve just returned from in Sadara, as well as on the U.S. Gulf Coast, our substantial expansions down there; our innovation agenda; and of course a little touch on the upcoming ethylene cycle; and finally I’m going to wrap up with some views on general market conditions. Apart from Saudi Arabia, I was also nine days in Europe visiting four different economies there and maybe you’d be interested in some update there.

So moving right along, as you can see here, achieving our stated objectives. Our objective is to drive higher, less volatile earnings, and that remains intact. We began to see early signals of the market slowdown in early last year around April 2012. As a consequence of that, we were early in putting in place a series of proactive actions and interventions. We intensified as I already alluded to, our ROC focus.

We restructured our businesses, particularly in struggling markets such as in the construction area for example, and in geographic regions, such as in Western Europe. And we increased our attention to cost, cash and pricing, so that we can really fine-tune the pencil in a slowing global growth market.

Over the course of these past several months, we’ve also been putting a lot of work into driving progress against our plans, continually broadening the scope of these measures to address this ongoing volatility that we continue to see. Plus, we spent considerable time reviewing our entire portfolio and categorizing our businesses as already alluded to by different business models, based on their position in the markets and the value chain. As a result, I believe we have in our full control what we needed to upgrade, our earnings and keep repositioning our portfolio with these actions.

Before I go any further, I want to really reemphasize our complete focus on improving total shareholder returns. This emphasis remains our guide for each and every one of the actions I’m about to go through

You should think about Dow’s portfolio as the graphic shows, in the following manner. More than two-thirds of our portfolio is currently located in high margin attracted sectors. Value chains where we are doing well and we can continue to grow.

As part of our strategy here, we are enhancing our leadership position via customer market led innovation at the intersection of sciences. In fact, Dow is in our view uniquely positioned in to use all these sciences without fail to grow these businesses.

In our definition, these businesses have a customer intimate model and are focused on markets where the demand drivers are strong and our competitive advantages enable us to compete and indeed lead in many of them. Importantly, the actions we have taken have already resulted in strong returns for Dow in these businesses. So our growth businesses actually have delivered strong growth and adjusted EBITDA since 2009.

Now, looking at other portions of our portfolio. We have roughly $10 billion in revenue represented by a group of good, solid businesses that operate in what we define as a products offered business model. These businesses have some competitive advantages, but are commoditizing and they need repositioning.

We are putting new plans in place and seeing positive outcomes already in these groups of businesses and in addition then, the remainder of the company, roughly $6 billion in revenue are in businesses that are traditionally operationally excellent, have already commoditized under a run-for-cash mode. It is highly likely that we will move to different ownership models for these businesses.

Lets take a closer look at each on of these, starting with our Customer-Intimate businesses. Agriculture, packaging, electronics, water and other specialty advanced material businesses with a strong technology and highly competitive cost positions are driving gains in attractive parts of the value chains and end use markets that continue to grow.

These areas of our portfolio are poised to continue growing earnings and revenues well above GDP, fully benefiting from our scale, our reach, our brand and our integrated science capabilities.

Let me give you a closer look at how we are enabling strong returns in a few of these key growth markets, starting with agriculture. Agriculture is basically a $100 billion addressable market. AgroSciences is large, with very attractive growth rates between 6% and 8%.

With our unique position as a global leader in both chemistry and biology, we are commercializing differentiated solutions that address the next generation of unmet needs; farmers who need better answers. Dow leverages its strong size in chemistry position, as well as our scale, our integration and our resources to enhance our competitive market position. Our focus on this business model is delivering strong results and we have a strong track record of outperforming every benchmark in our industry.

For example, our nearly $5 billion Crop Protection business achieved 10% sales revenue growth in 2012. Our seeds, traits and oils business a strong $1.5 billion franchise, has realized 23% sales growth so far this year. Both businesses performance exceed that of their major peers.

Different parts of the world need different components of what our Agricultural Sciences portfolio brings to the table and both portions of this portfolio need Dow. Our scale, our integration and our capabilities are very set at the intersection of sciences, but fully realize their potential.

Take for example the topic of glyphosate resistance. Our Enlist weed control system is the next generation solution that combines innovated traits and novel herbicides in corn, cotton and soybeans, demonstrating how the technologies and expertise in the our crop protections and seeds businesses are both intersecting to deliver high performing deferential solutions that farmers need.

This is a clear example of why, and as we continue to examine our portfolio and the strategic markets where Dow can deliver maximum value, while we are excited about the unique capability that we bring to this sector.

We are an investor in Agro Sciences and we have doubled the value of this business in the last five years and importantly, we can see that same value upside in the next five years, based on our portfolio and our technologies.

Turning next to the Packaging Market, where we are addressing – have an addressable market of more than $100 billion that is grow at 4% annually. Over the course of our history in plastics, we have changed the business to that of a more customer intimate business, working closely with brand owners across our value chains and leveraging our competitive advantage to deliver innovative solutions that meet high value market needs.

Dow has completely reshaped our plastics portfolio since the withdrawal of KDOW in 2009. We have exited the commodity portions of the portfolio and are aligning with market sectors that value technology driven solutions such as packaging. Our ability to deliver consistently strong returns based on this participation strategy is clearly illustrated by the businesses attractive return on capital performance, well above 20%.

Electronics has an addressable market of more than $95 billion. In this value chain we have been working closely with our customers, locating our stores where they are located and investing the immerging technologies that satisfy consumer demand for lighter, brighter and more efficient electronics. This customer intimate approach and short cycle innovation capability, together with Dow’s scale and innovation expertise, are enabling Dow to deliver needed solutions in a timely manager to a market that’s growing at more than 5% per year.

We are a preferred supplier of material sciences solutions to all the major OEMs. Overall Dow will continue to be disciplined in allocating our scarce resources, to organically grow businesses with strong competitive position and attractive markets, applying our customer intimate business model and market driven focus, and as we move ahead you can think about our participation strategy narrowing to a few markets, to address a fewer set of markets. And as we preferentially select the investment and resources in these attractive businesses, we’ll be deselecting areas that no longer fit our strategy.

Further to grow the portfolio, we have put in place a series of game changing investments that will provide short to medium term catalysts. Let me quickly highlight a few of them. First as I’ve already said, our differentiated innovation engine. We have targeted directly what very few can do, use these section of sciences, material science, chemical sciences, biological sciences and enable sustainable growth at those intersections.

Of course, we are also leveraging the boom of the U.S. shell gas dynamics, demonstrated by our named investments on the U.S. Gulf Coast. The restart of the St. Charles ethylene project came online in December 2012 and is running very well. Our incremental EBITDA contribution from this facility has recently ramped to a $250 million annual run rate and is heading higher. Our second project in Louisiana, an Ethane flexibility project will contribute another $250 million in EBITDA when it’s fully operational in 2015.

Construction continues to move forward according to plan on our new propane dehydrogenation unit in Texas, which would deliver an annual EBITDA improvement of $450 million from increased margins and lower raw material volatility, when it comes online in the first half of 2015, less than 18 months away.

In 2014 we expect to begin construction on our new world-scale ethylene facility in Texas and together with the expansions of our industry leading performance plastics franchises, we expect $1.5 billion in incremental EBITDA at its full year run rate. In total, our collective Gulf Coast projects will deliver incremental EBITDA of approximately $2.5 billion went online and fully operational in the 2016, 2017 timeframe.

And as already mentioned, further there is Sadara. Our huge investment in low cost feed stocks in the Middle East, that will serve growth investments and demand in the emerging world, where we already have a strong franchise with 34% of our total company revenues in this last quarter coming from the emerging world.

We completed the major project financing in June and construction as I witnessed myself a few days ago, it’s about 25% complete. Sadara is on track to start up in 2015, transitioning from a use-of-cash right now to a source-of-cash and in fact increasing our average general equity earnings to Dow by $500 million per year over the first 10 years.

These strategic catalysts are mostly independent of macro conditions. Of course with improvements to global demand growth and further tightening in ethylene operating rates, Dow’s earnings growth accelerates on top of the investments that I’ve just outlined for you. Collectively, this combination of actions I just highlighted are focused on further driving value creation and enabling strong returns.

Let me now pivot to a portion of our portfolio, where commoditizing markets are driving us to apply what we have defined as a more product offered approach. Let me give you some granularity on our less differentiated products of the businesses. Beginning with this $10 billion of revenue in these businesses that I mentioned earlier, where we are really seeing improving market conditions and the opportunity for Dow to reposition itself, especially on its cost position and also innovation expertise and those particularly apply to our polyurethane’s and coatings business.

In these businesses, although we see the return of attractive market growth, which we have seen now for these last several quarters, we have intervened and put in place and initiated self-health programs, and are aggressively managing the portfolio to accelerate near term returns.

Our committed to cost and cash actions are ahead of our targets, with 19 of the 29 previously announced shutdowns in these areas completed, including assets aligned to this group of businesses in a large way, especially in Europe.

Our workforce reduction trends are ahead of schedule and will continue to quiet hardly prioritize our investments in these businesses, selecting only those that we see as critical to returning maximum value.

Looking ahead in the medium term for these businesses, these businesses will strongly benefit from the investments that I outlined in propane dehydrogenation and Sadara, further enhancing the competitive positions once those projects start up. As a result, we believe these businesses will demonstrate meaningful improvement as a result of these proactive measures we have taken in these last many months and will continue to put in place over the next 24 months.

Let me now turn to the remaining, nearly $6 billion in revenue, where on our second quarter earnings conference call in July, many of you heard that we announced the need for additional aggressive portfolio actions, as these operationally excellent businesses in our view are increasingly commoditizing and as a result being run for cash and therefore potentially have better owners.

In these businesses, it is clear that the market structure will remain challenging and ultimately our position in the value chains that they represent will no longer generate the high returns that drive our resource allocation decisions and the value that we expect that meets or exceeds our expectations. Therefore applying a best owner mindset, we have identified epoxy and chlorine derivatives in some portions of our building and construction business as areas of our portfolio, where we are actively exploring broader, more aggressive options.

We will continue to provide granularity to all of you as we work through these options, but today I want to share with you that you should think about our transaction or transactions as likely, including a joint venture, a sale and particularly in the epoxy and chlorine derivatives areas. And from a timing perspective, you can think about these additional actions taking place over the next 12 months or so.

Importantly, the value we expect to realize from these measures will be on top of the $1.5 billion in divestments that we have already announced. As the case with any portfolio action, we are taking a carefully orchestrated surgical approach and as we look at the potential divestments, we also are looking at other ways we can reduce the complexity of our portfolio, while understanding the complexity of the divestment and the carve out itself.

So therefore additionally, as we are looking broadly across the company and ensure that we are optimizing the value for all of our assets, we are looking at different parts of our portfolio and the first one I want to talk about is our joint ventures.

You may not realize this, but we have 75 joint ventures in our company. This is a complex portfolio. We are well on the path of evaluating each and every one of these joint ventures, to ensure it fits within the hither 2-4 mentioned strategic approach I outlined for you today and that is generating full value for our company and its shareholders.

These are valuable assets and we want to make sure they are positioned for success and maximum return. This is a discussion that is and will continue to take place with every single one of our partners in these ventures and one which will have more to say in these coming months and quarters. The second group of assets are our non-direct assets, including rails, pipelines, caverns, etcetera, where we really have about $5 billion of replacement asset value in these assets.

Here we are taking a look, a very close look to make certain that each one of them its realizing its fullest value within the portfolio. We will be pursuing options for those that maybe more value to a better owner. Again, an action taken specifically to ensure our focus on ROC and that our investors are getting full value for these properties, while we do not loose strategic control to operate the company.

In addition as noted earlier, our cost and actions – cost and cash actions are reducing corporate and structural parts to liberate further low return resources and to drive efficiencies and ongoing simplification. We are making considerable process in our previously communicated target of approximately $1.5 billion in proceeds, from divestitures that we announced earlier this year for mid to late 2014, and as we continue and re-evaluate those assets and businesses that are not strategic to us, wherein you expect us to add to that number.

Now I want to disclose something very critical. This is not a fire sale. This is to extract maximum value, to enable us to make sharper portfolio decisions against our resources to grow the business so that we can grow. So therefore, if we cannot receive full value, we will walk away from an offer that does not provide our shareholders that maximum value. We are focusing our portfolio on these high value businesses by returns, but we do not need to sell business that do not meet these expectations. We can just simply run them for cash.

A case and point is plastic additives. This is a valuable business that is currently being undervalued by buyers in the market. As a result, we are pulling the transaction off the table and we are quite comfortable with running this business for the next several years.

All of these actions that I’ve just outlined, show that we are committed to significantly increasing the returns of our total portfolio, even in a potentially slow economic recovery environment. In fact these aggressive actions that I’ve just outlined to you today, along with their expected impact, will unlock shareholder value in the very near term in the next 24 months. So importantly just to repeat, we are intensively defining our business models, approving business strategies based on those models and they are positioned in the value chains.

Deselecting lower ROC businesses and slow to no-growth markets, while reducing complexity, liberating cash from the non-strategic line to performing assets; maintaining our growth momentum in key investment projects and value drivers; and above all, strengthening our balance sheet and rewarding our shareholders.

We have not and will not waiver from our relentless execution against our priorities for cash as evidenced by our recent application of the paid out proceeds from the arbitration award to reduce debt, and now we have debt ratios at levels not seen since prior to the crisis.

As I wrap up, lets go to outlook and our view on outlook is as follows: As we look at how the third quarter and the back half of 2013 is playing out, I would like to share with you some notable shifts with the perspective I provided in July. China continues to experience slower than expected growth this year, but we expect the strategic growth area to be back on its growth trajectory in late 2013, albeit at lower than prehistoric growth levels.

Coming out of Europe, I can definitely endorse the next statement. We feel Europe’s recovery period remains uncertain. However, in our view the market is down bottom and is now bouncing along bottom and depending on the week of the month, more positive signals coming out of Europe that we’ve seen in the previous three years.

Finally we see the United States as the world’s only bright spot, continuing along the positive path that we describe in July, albeit still not at full speed. However for Dow as we continue to move forward, we maintain our prudent approach as once again to repeat, we continue to operate in a volatile, uncertain, complex and ambiguous environment. We believe that the new normal evident this quarter by the chemical events in Syria and their impact on the hydrocarbon costs.

As a result, the way we are planning is that long-term outlook will be uneven at best and you have to run it with an agility like never before, to attenuate to the environment that presents itself in the moment.

Companies like Dow, those are the strong technology positions, marketing and innovation expertise applied to specific attracted markets, the geographic diversity and competitive cost positions. We are going to be able to actively manage our way through this and deliver long-term earnings growth.

Our strategy has been to run our portfolio based on a series of deliberate investment choices, and maintain our earnings growth focus with company specific catalysts and targeted portfolio actions fully in motion, including the accretive innovation high return investment that I’ve outlined, such as Sadara and the U.S Gulf Coast; our customer intimate approach that I’ve outlined for you today in key growth market sectors; and our self help on cost and cash actions, which continue to ramp, lifting from $500 million in 2013 to an expected $1 billion run rate in cost savings and $750 million in cash saving by year end 2014.

Collectively as catalysts, together with our business model and ROC focused approach, lead us to broad based growth opportunities, each offering a sort of risk hedge against the other. Further, we expect to receive an additional boost from accelerators such as the upcoming ethylene cycle and rising interest rates, which could lead to lower pension expense in 2014 and a positive earnings tailwind for Dow. Therefore, even as this near team volatility and medium term uncertainly persists, our company, our earnings profile and our momentum will continue.

In short, we’re a company that has navigated the chemical industry for more than 100 years. We have demonstrated many times that we know how to adapt to changing tides and changing environments. We are confident we have the right levels in place and are taking additional aggressive actions within our portfolio and our business model to further accelerate returns. We are steadfast in our efforts against generating strong earnings and cash flow, and above all to consistfully and increasingly reward our shareholders.

With that, please let me move to your questions. Thank you.

Question-and-Answer Session

John McNulty - Credit Suisse

Thank you Andrew. Maybe I’ll ask the first couple of them. With regard to the $6 billion of revenue, it looks like you may be selling or putting into JVs. Can you explain to us what the cash generation of those assets are right now, just to help us put in perspective, how to think about that going forward.

Andrew Liveris

Yes, you should think about these as low to medium ROC businesses and therefore EBITDA as a proxy in the 10%, 12% range and so the consequence of that is not bad, but they don’t attract into the high returns, like the 20%, 25% in the packaging business for example and the agriculture business.

So, they drag down the average returns for the company and these are businesses that are commoditizing, so their price power is not there, and so unless you have a different business model, in the case of Chlorine for example.

Chlorine is a CBC and PBC. If your in PBC And you have PBC compounds, you can make money out of that part of the value turmoil, having someone else supply you the raw material or the higher capital location, then the returns on the upstream is lower than the returns on the downstream. Fully integrated people will see that as a source of access to Chlorine and we believe those sort of people as out there.

Unidentified Participant

Expanding on that divesture then, can you just talk a little bit about it. It kind of looks you guys have gone through your strategic revenue and you got these assets that you like to do something with. As you look at transacting and you have been very forward about the fact that if it’s not for an opportunistic transaction you are not going to do it. How is that effective, capturing value in these assets and the process that you’re going through?

Andrew Liveris

So as I really intimated, I mean and this is not rocket science. I mean sometimes we have a simplified, over complicated business. You have your growers and you have your run for cash and you have the run for cash that eventually are going to be in the off ramp, but you can still run it for cash until they get on the off ramp. So even the returns I just gave to John, we can actually minimize the investments, run them for cash and of course make sure they run safely and reliably and all the things that Dow standards make you do.

But when you get to the growth side of it, they are not going to get the capital, so they won’t grow. And frankly, if you look at the employment envelope, Dow’s been employing 100 years, since the beginning of the company. We are by far the biggest, but at the end of the day the downstream use of Chlorine are commoditizing very quickly and epoxy resin is a good example of that.

We know how to run business for cash, and epoxy is a good case and point. Epoxy for all of us who’ve been following that molecule for a long time now in collective histories, Dow (inaudible) Shell. Well [Steven Shell] (ph) sold this many years ago and through private equity owners and different types of business models, those are decent businesses in the new portfolios, but the real value is in the downstream value added specialties compounds and composites and all those things.

Do you need to be in the base building block to be in the value ad? No. You can go by the liquid epoxy resin. But while you are in the manufacturing of liquid epoxy resin, be low cost, run it for cash then some day you might decided to divert it, but you shouldn’t go invest it in the downstream just to stay in the upstream.

You should only go in the downstream where you can differentiate based on IP and innovative solutions that your customers will pay you for. And sometimes people in the commodity businesses, standard commodity businesses are going downstream to justify their position in the commodity business are not being competitive in the upstream.

And so frankly these are the sorts of things we’ve done, we’ve done a lot of it and $6 billion of revenue in the company, we believe its up for better owners as a result.

John McNulty - Credit Suisse

Yes. So as we think about the Chlorine assets, you mentioned that and then you mentioned (inaudible) also. Everybody knows, you have the Mitsui Chlor-Alkali plant JV starting this year. If you are going to maximize value for shareholders of which I am one of, are those two assets then need to be packaged together. So you are not having the two assets competing against each other in the market or do you think you can sell them separately. Thanks.

Andrew Liveris

So, thank you for being an owner and thank you for the question. So we are so big in Chlorine, okay. We do have a lot of optionality on how to configure assets and market position. So you can’t, you are not getting out of all of Chlorine, you are keeping a lot of Chlorine for your downstream value adds, especially because we can be competitive in the downstream, like agriculture chemicals for example. Dow Mitsui was structured, so that we would actually do that.

The 50% of the up tick will be for our value added specialties. Their 50% will go into the commodity market. That’s actually a perfect solution for what I’ve just talked about. You’d do a lot of more of that. We would operate the assets, and in that case we do. We would actually make sure we don’t have any negative synergies through stranded costs of dislocating from the assets from the infrastructure and the utilities and all of the things that go, like energy for example Brian, that’s all very important to do.

So we know through Dow Mitsui Chlor-Alkali as a great poster child for doing it. We know how to actually run an integrated asset, but separate the business. And I think we got another great example of that in terms of managing complexity, which has gone very, very well, that’s Tyrin. I mean not chlorine, but certainly a related point, which is the aromatics. In that case very integrative of Dow’s naphtha crackers are the styrene units, but we separated them. Enabled the new owner, in this case its (inaudible) to really run those businesses, but we can integrate the assets without loosing any of the cost synergies that go with having this part of the integration.

This is a complex carve out. I don’t want to deminimize it. It’s easy for a CEO to stand up and give five sentences and answer, but this is going to be a lot of work. It’s going to take us six to 12 to 18 months to get it right. But we believe we can still have our cake and eat it too; keep the integration, keep the value add parts, stay competitive in chlorine, but for the commoditized down streams find different owners.

John McNulty - Credit Suisse

Andrew, with the potential $6 billion of revenue being divested or put into JVs and the $1.5 billion you’ve already talked about in terms of divestures, potentially some additional JVs that you are looking to maybe clean in-house around. How should we think about the dilution effect of that and what you may do to counter that?

Andrew Liveris

Yes, so look, we have accretion in our future, because it’s just the balance sheet alone. I mean, we are reducing interest expense; we have the pinch in headwind that I touched on in my remarks, that was an increasing interest rate environment it should get better and better.

We have the retirement of the preferreds, which is one of our highest priorities off the balance sheet. We have a lot of EPS caught up in the balance sheet that will be accretive okay as we do all these actions, some of these that we’ve already done through the application with KDOW that I talked about earlier.

So loosing earnings power, okay, it has to be replaced by – and once you’ve done all that by accretion somewhere else. We believe that the company has the fire power in this current portfolio with these actions announced, to get north of the $10 billion EBITDA number, $10 billion, $12 billion, $13 billion that we’ve been talking about for a while in a slow growth world.

If you have any economic tailwind here, okay, just to give you one number that’s relevant to Dow, at our current operating rate, every percentage point of operating rate that happens because of macros is $250 million in new EBITDA, but I’m not talking about it here at all, because we’re assuming the continuation of a slow growth world.

What you’ll be hearing from us for about 18 months is this is the world we are living in and we faced the reality last year that you actually have to deselect businesses, deselect markets and hopefully the dilution in the earnings can be replaced by the accretion from your actions.

One of the most important actions is the lowering of our cost curve, not just the hydrocarbons path, where 70% of our ethylene assets will be in low cost jurisdictions, but the structural cost path, by doing tax efficient structures to take out some of the structural costs of the company that hitherto were hard to do and not easy to implement it with the chlorine equation, but on infrastructure, on structural cost in general, the JVs, we can be more transparent on how we earn from the owners.

Another way of saying all of that is we’ll grow the growers and more than replace any earnings stream we’ll lose from divestment.

Unidentified Participant

As you are divesting assets, you’ve also been paying down a lot of debt. Is there a leverage target that you have in mind for the next one to three years maybe?

Andrew Liveris

So we’ve always historically answered that in our old portfolio, where we were 50% commodities, 50% specialties, which I dismiss both those words. I find those words yesterday’s words. So if you are using them, please forgive me for being brazen there, but I don’t think you can actually tell what a commodity is anymore based on competitive behavior. I think you’ve got to have market positions that extract value.

But in the old definition, 50/50, that target was roughly 35% to 45%, but remember how that target came about, because we were cyclical. So as you brought it up and as you brought it down in the cycle, you had to have balance sheet flexibility and your doing a lot of cash; if you didn’t spend it wisely, you know you’d end up on the wrong side of that balance sheet target.

As you become a more predictable earnings grower, as we are striving to be and we believe we are becoming, you can actually be a little tight on that range. So right now we are sitting at roughly 36%, which is on debt to cap and with the debt to EBITDA target commensurate with that. We believe that’s about right. I mean you wouldn’t want to go much north of 40 in this sort of environment.

I don’t know how many of you are in the forecasting business, but it’s not a very good business these days. I mean so things happen and its another way of saying that, which I won’t say in a big audience. So as a consequence of that, you got to be really capable of absorbing the shock. Maybe not the shock of ‘08, ’09, but certainly a shock that comes out there from the world of destruction and trauma and as a consequence of that, you’ve got to be able to attenuate that your balance sheet.

That’s another way of saying that liquidly is king and cash is queen. I mean you really got to be careful here. We are taking a very prudent approach to the balance sheet, but what we do what to do, I want to repeat it, because it may or may not the last question. I do want to repeat that our complete focus is returning to the shareholder, the patience that they’ve had for the last five years as we rebuild the portfolio.

And we had to rebuild it in a very tumultuous time and we had to do it in a slow growth environment in the last year and a half. By returning cash to our shareholders, the debt to total cap is around 36%, 37% is our singular focus.

Unidentified Participant

Hi Andrew. You mentioned in your remarks about other remains and uncertainty you are seeing, more positive signals out of Europe than maybe you have seen in the last couple of years. I don’t know if you want to refer to the old Dow heat map or just kind of risk a little bit in terms of where you are seeing any signs of green shoots; whether its geographies or end markets or products, any commentary from your recent tour will be helpful.

Andrew Liveris

Yes, I mean green shoots and maybe that’s a term we should use. If you do a comparative to July and a comparative to prior to that April, and trends off load bases, you have to say Germany and Japan and as a consequence to that, these are two very large world economies and then the beginnings of signs of action in China. I said that in my remarks that we think should be stabilized by the end of the year and we should start to see China back at the 6.5%, 7.5% growth rates as the more of a domestic sector economy in 2014.

Look, if you have got the U.S. in a good spot and you have got Germany and Japan starting to feel decent green shoots to use your term, and China stabilizing, that’s a lot of the world and the U.S. on its own is not a good thing, but as you begin to see these things happening, its not a big enough up tick to declare any sort of victory and that’s why your term I think applies and we have – I’m not going to count on it as I’ve already indicated in my remarks. But look, these are trends and these are better terms than expected.

There’s some downside. India is not in good shape. South America is suffering and I think there’s a lot of political action that needs to occur, certainly fiscal and monitory, but they will come through that.

So look like there’s a lot of positive energy in Europe right now that I did not expect to see and its coming from all sorts of quarters, customers, partners, even government leaders. So if Europe can come back in some sort of way in 2014 – none of us are counting on that. In fact many of us, as recent as a year ago would have said Europe is a 10 year rework and I don’t want to go away from that statement, because unemployment, more of the issues they have, but liquidity risk, euro break-up, that’s all gone. So rates coming down, I mean there’s a lot of good signs there, so...

John McNulty - Credit Suisse

I think with that we’ll have to wrap it up. Thanks very much Andrew.

Andrew Liveris

Thank you.

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