Good day, everyone, and welcome to the Dow Chemical Company's Fourth Quarter 2010 Earnings Results Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Howard Ungerleider, Vice President of Investor Relations. Please go ahead, sir.
Thanks, Lisa. Good morning, and good morning, everyone, and welcome. As usual, we're making this call available to investors and the media via webcast. This call is the property of the Dow Chemical Company. Any redistribution, retransmission or rebroadcast of this call in any form without Dow's express written consent is strictly prohibited. On the call today with me are Andrew Liveris, Dow's Chairman and Chief Executive Officer; Bill Weideman, Executive Vice President and Chief Financial Officer; and David Johnson, Director of Investor Relations.
Around 6:30 this morning, February 3, our earnings release went out on Business Wire and was posted on the Internet on dow.com. We have prepared some slides to supplement our comments on this conference call. The slides are posted on our website on the Presentations page of the Investor Relations section or through the link to our webcast.
As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve both risks and uncertainties, and we cannot guarantee the accuracy of any forecasts or estimates, and we don't plan to update any forward-looking statements during the quarter.
If you'd like more information on the risks involved in forward-looking statements, please see our SEC filings. In addition, some of our comments today may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release or on our website.
Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons will exclude prior-period divestitures, and earnings comparisons will exclude certain items in 2009 discontinued operations. Our earnings release, as well as recent SEC filings are available on the Internet at dow.com. The agenda for today's call is on Slide 3.
I'd now like to turn the call over to Andrew.
Thank you, Howard. Good morning, everyone, and thank you very much for joining us. Our results in the fourth quarter were really the capstone for a very successful year for Dow, with significant top and bottom line growth.
On Slide 4, you'll see the results. Operating earnings were up nearly 3x. EBITDA grew 30%. We delivered a seventh consecutive quarter of year-on-year EBITDA margin expansion. We achieved double-digit sales increases across the globe, with growth in every segment and geography, including record sales in emerging markets. Our operating segments demonstrated their earnings strength, most notably, Health and Agricultural Sciences delivered record fourth quarter sales. Our Electronic and Specialty Materials segment posted its sixth consecutive quarter of greater than 30% EBITDA margin. Our transform plastics portfolio grew margin more than 500 basis points versus the same period last year. And our overall pricing discipline more than offset a nearly $700 million increase in purchase feedstock and energy costs. Our growth synergies run rate surpassed $1.1 billion. We lowered our net debt significantly. And finally, we generated $1.8 billion in cash from operations.
Those are the headlines for the quarter. The reflected company with a powerful and diverse portfolio, an expanding geographic presence and increasing investment in growth. Together, they reveal a company that is transformed and with a rising earnings profile. So what's driving this success, this forward momentum? The recovery in the global economy certainly helps. But as we all know, that alone is not sufficient. More fundamentally, our results are a reflection of our decision to change the direction of this company to reposition ourselves to address the megatrends that are redefining our world. The strategic actions we've taken over recent years to strengthen our company ultimately delivering higher and more sustainable earnings. This includes significant efforts to reduce our cost structure and shift our portfolio, notably through the acquisition of Rohm and Haas and with the growing investment in research and development. And perhaps most importantly, our human element, our Dow people who deliver this transformation everyday.
On Slide 5, you can see our 2010 achievements. 2010 was another successful step forward on our earnings growth trajectory. Over the past year, we achieved and in many cases exceeded our goals. Some of our highlights include sales, which grew sequentially each quarter throughout the year; volume growth of 12%, which was led by our combined Performance segments; sales in fast-growing emerging regions reached $16 billion in 2010, a record for our company; and sales in Asia-Pacific were also a record, topping $9 billion.
EBITDA exceeded $7.5 billion for the year, up 36% from 2009. We delivered cash from operating activities of over $4 billion, nearly double that of 2009. We exceeded our goal for divesting non-strategic assets, and we completed our goal of delivering more than $2 billion in synergy and restructuring savings related to the Rohm and Haas acquisition, a full quarter ahead of schedule. All of this enabled us to exit the year with tremendous financial flexibility. In a few moments, I'll discuss our strategy in action, our outlook and priorities for 2011. But first, let me turn the call over to Bill, who will provide more detail on the quarter.
Thank you, Andrew. Before I begin, I'd like to remind you that this information is on a year-over-year basis and excludes divestitures in certain items unless otherwise noted.
As Andrew mentioned, our earnings were $0.47 per share, excluding certain items, which were $0.10. These items consisted of asset impairments and related cost of $0.06, Rohm and Haas integration costs of $0.03 and asbestos-related credit of $0.03, a charge of $0.03 related to an obligation associated with our previous divestiture and a $0.01 adjustment on the Styron divestiture.
Now let me turn to volume and price trends. As you can see on Slide 7, we experienced demand growth in all our geographies with particular strength in North America and Europe, Middle East and Africa. Asia-Pacific volume grew 9% with strength in Electronic Materials, Building and Construction and Dow AgroSciences, all of which were up 20% or more.
Moving to price. We achieved a 10% increase year-over-year, with strong gains across all geographies in a most operating segments. Now turning to our segment overview on Slide 9. Electronic and Specialty Materials continued its strong performance with sales up 13%. Demand at Electronic Materials increased 19%, driven by strong demand from flat-panel displays and consumer electronics.
Specialty Materials also saw a double-digit demand increases in water, cellulosics and microbial solutions. Coatings and Infrastructure sales were up 6%, driven by price gains across all geographies. Coating materials achieved sales gains in architectural and industrial coatings. However, volume was down as the business focused on expanding margin in our epoxy envelope.
Now moving to Health and Ag Sciences. This segment experienced growth across all businesses highlighted by Seeds, Traits and Oils, which was up 34%. The significant increase in volume was driven by continued share gains in cotton, with the success of Widestrike insect protection and a 24% increase in new Ag Chem product sales in the quarter. In Performance Systems, we achieved double-digit sales growth in more than a 400 basis point expansion in EBITDA margin. Volume increased in all geographic areas. In Performance Products, sales increased 23% with balanced gains in volume and price. EBITDA margins also improved, driven primarily by a significant expansion in epoxy margins.
Turning to Plastics on Slide 11. Polyethylene supply-demand fundamentals remain strong and customer inventory levels low, enabling the business to deliver significant EBITDA gains. In Chemicals Energy, sales were up 13%, and EBITDA was up due to our strong focus on margin management.
Equity earnings reached an all-time record of $313 million in the quarter. Our feedstock advantage JVs in the Middle East performed very well. And we are positioned for further growth with our expanded manufacturing presence in Thailand.
I'd like to close with a few additional financial comments. Cash flow from operations was $1.6 billion, up more than $430 million over the same period a year ago. Our net debt to total capital declined significantly, and our net debt to EBITDA multiple improved to 2.2 exiting the year.
I'd like to close with a few comments on the first quarter of 2011. Based on current conditions, our hydrocarbon energy costs will increase sequentially by approximately $500 million. We expect Plastics margins will remain strong as ethylene continues to be the favored feedstock, which will keep our U.S. assets advantaged. Volume will be down slightly, however, due to planned turnarounds in the quarter. Equity earnings will remain strong supported by high crude oil and naphtha prices. Our Performance businesses will likely see a little margin compression due to significant increase in propylene costs and the normal lag in prices. However, we expect this compression will only be temporary and that we will fully recover margins in the first half of next year.
Health and Ag Sciences will see their normal seasonal increase in the quarter. And finally, as we noted on our last earnings call, that we have planned to make about a $700 million contribution, voluntary contribution through the first quarter. Due to our strong cash flow we made a voluntary pension contribution of approximately $400 million in the fourth quarter. Due to improved asset returns, we are now anticipate contributing only about $200 million in the first quarter.
Now I'd like to turn the call back over to Andrew.
Thank you, Bill. As you can see, we are clearly executing and delivering on our strategy. Over the last several years, we have made significant steps to put all of the key elements of our transformation in place. Make no mistake. We have work yet to do, and our focus on execution must and will remain sharp. However, today, Dow is a very different company than it was even just a few years ago. Dow has changed. Dow has transformed, and this is because of the actions we have taken to realize our vision, and this is clear across the board. In the very focused and deliberate shift of our business portfolio to higher growth and higher margin sectors of emerging geographies, in our industry-leading investment and innovation and the products we are commercializing today and over the near term and in our financial results in 2010.
So let's move to 2011, a year in which we will stay the course and deliver on three objectives: maintaining our transformational momentum, continuing our sharp focus on execution and further enhancing the financial flexibility of the company. Today, our resolve to continue along the strategic path we began several years ago has never been stronger. We will not lose the momentum of this transformation.
So on Slide 15, to that end, we remain committed to our strategic agenda. And in 2011, we will further expand our presence in emerging geographies. For example, we recently started up our joint venture Solution Polyethylene train in Thailand, which provides in-region capabilities to capture fast-growing demand in Asia. This start up enabled us to increase Polyethylene volume in the region by 30% on a sequential basis. And we are driving our renewable plastics project in Brazil. We will also make additional progress in transforming our Plastics franchise. And on a related note, we still expect a favorable outcome this year from the binding arbitration with PIC of Kuwait.
We will continue our progress in rightsizing our chemicals footprint to align with growth in our downstream performance businesses, enhance our cost position and improve the profitability of our Chlor-Alkali envelope. We already took a significant steps on this front in 2010 as we finalized the Chlor-Alkali joint venture with Mitsui, and this year we will move forward with shutting down two VCM units, one in Plaquemine and one in Freeport.
Our transformational momentum will also continue as we drive progress with two additional megaprojects that will further expand our presence and growth in emerging regions. Our proposed project with Saudi Aramco and Jubail is in the final stages of the FEED study, and we expect to make an investment decision in the mid-2011 time frame.
And in China, we have taken important steps forward in our plans to build and operate a world scale integrated manufacturing complex together with The Shenhua Group. These megaprojects are in our equity-light model and will provide the capacity for the building blocks to support the growth of our performance in market-driven businesses, and they are all tied directly to the growth of our customers in emerging markets.
On Slide 16, you'll see that equally important is our continued drive to preferentially invest in our Performance businesses. We are enhancing our position in regions where rapid population growth and a growing middle class are driving significant demand for our products. For example, our new world scale Specialty Elastomers and HPPO plant in Thailand are both slated for start up this year. In addition, we've announced plans to build a Polyglycols facility at that integrated site. Our Electronic Materials business is investing in a new research center in Korea, as well as new manufacturing facilities in China, Korea, Japan and Taiwan to meet surging global demand for materials used in flat-panel displays, photovoltaics and consumer electronics.
We've broken ground on a new manufacturing plant in Vietnam to produce acrylic polymers used in the paint and coatings industries with a planned start up in late 2011. We are also making investments in Dubai and South China to enhance our capabilities and strategic footprint for acrylic polymers production and provide capacity for low-emission products.
Our Water business is expanding capacity for Ultrafiltration in China. And in Dow AgroSciences, we expect to gain final regulatory approval for POWERCORE in Brazil, an insect control product from the SmartStax family of traits. This new technology will enable us to grow our corn seed share in Latin America.
We are moving forward on our new R&D laboratory in Saudi Arabia, and we have recently announced plans to build photovoltaic encapsulant film capabilities in both Asia-Pacific and in Germany. So on Slide 17, our global leadership team recently met to focus on alignment and accountability. The key outcomes were our collective commitment to both growth and execution. Every individual on this team is aligned around the following priorities: continuing to drive strong price margin management, further leveraging our reduced cost structure to identify and drive additional productivity gains, gains that are sustainable into the future.
Turning to CapEx. We will modestly increase our investment this year preferentially invest in the gains in our Performance businesses. This will ensure we are maintaining the reliability we require and expect from our assets, as well as build on the momentum of our innovation pipeline, which will drive growth. The bottom line is this. Our leadership team is fully aligned and accountable for delivering against the detailed plans we have developed, the milestones that support our near-term earnings targets, the same milestones we shared during our November 2010 Investor Day.
On Slide 18, you can see that we have a robust agenda for 2011, and we will execute against it. Our Advance Materials division lies at the epicenter of Dow's transformation. This team is thriving as the world's largest Specialty Materials provider and is well on its way to delivering 25% EBITDA margins by 2012. In Dow AgroSciences, our team is singularly focused on growth by launching new products and building our share of marketing key row crops. In 2010, Dow AgroSciences exceeded its original goal of $400 million in new agricultural chemical sales. And looking ahead, 2011 plans call for delivering on key programs such as SmartStax and DHT to accelerate their portfolio shift to a more balanced position in Seeds and Traits.
On Slide 19, you can see that our Performance division expanded margins above the company average in the second half of 2010. These businesses are demonstrating that Dow's Performance businesses are performing, and we will drive further margin expansion here through capacity additions and new product introductions.
Our Chemicals and Energy business is squarely focused on fueling downstream growth. This team delivered higher earnings this year and forged new partnerships to bolster our integration strength. Moving forward, they will further enhance EBITDA margins through continued improvements in key end-use markets and improve cost positions due to the rightsizing of our footprint. And of course, our industry-leading Plastics franchise will continue to deliver. This business has also transformed and now has a tighter market and more specialties focus with superior financial returns.
Looking ahead, we plan to further enhance that business' integration strength by expanding our ethane sourcing and cracking capabilities here in the United States. Leaders of each of these businesses are singularly focused on execution, and you can expect to hear more directly from them as we progress in 2011.
On Slide 20, you can see that as we turn to our growth and innovation pipeline, which aligns with all four of the megatrends we've identified: energy, transportation and infrastructure, health and nutrition and consumerism. The addressable market opportunity represented by these trends is $350 billion, and our innovation pipeline is squarely focused on these opportunities. More than 500 project strong, our pipeline has the potential value of $30 billion and a risk-adjusted NPV of $12 billion.
In 2011, you will clearly see firsthand, our ability to monetize the power of our investments as we commercialize game-changing technologies that address these megatrends, including our revolutionary DOW POWERHOUSE Solar Shingles, which will be commercially launched, coating technology that improves indoor air quality and hiding capabilities, allowing formulators to reduce titanium dioxide, which will be available globally. Purification solutions that deliver clean drinking water will be introduced. Agricultural innovations that increase farming yield and reduce unhealthy fats from our diets are being commercialized. Heat transfer fluids that enable solar power are commercially available today, and new materials that enable leading-edge electronic devices are at various stages of commercialization, and this is just to name a few.
On Slide 21, one illustration of how we are delivering the pipeline to the bottom line is through our growth synergies. Our advances on this front reflect how quickly Dow people have materialized the gains from the Rohm and Haas acquisition and integrated these growth synergies into the company. You can see this cultural change actually in some of our recent successes. In electronics, our technology and commercial expertise enabled the development of next-generation wafer packaging technology. We launched a high margin solution for paint preservation in the Middle East and India. As we realized the cross-selling opportunity with a multinational consumer products company, which yielded new sales for a fabric care application. These synergies are real and are delivering results and are yet one more proof point in the value we are creating as a result of the Rohm and Haas integration.
We have strong programs in place to leverage the strengths of our broad portfolio, and our momentum in executing against our overall growth synergy goals will continue firmly this year. On Slide 22, through the combination of these elements that I've just reviewed, sustaining the momentum of our transformation, monetizing our innovation pipeline and a clear and crisp focus on execution, we will together deliver even greater bottom line impact.
The earnings power of our portfolio is tremendous. As you've already seen in our ability to drive EBITDA from $5.5 billion in 2009 to $7.5 billion in 2010. We are firmly on pace to reach $10 billion of EBITDA in the near term. And one point that is often overlooked in our results is the tremendous value embedded in our joint ventures. Consider this, our proportional share of revenue from principal joint ventures was in excess of $7 billion this past year, and these JVs earned more that $600 million of EBITDA in excess of our equity earnings. And while this additional value is not directly reflected in our top line or our bottom line, it demonstrates the inherent value and success of the partnerships we have in place and speaks to the benefits of the ones we are building in the future.
In addition, we continue to unlock value from our portfolio in other ways. For example, just this quarter, we expect more than $100 million in cash flow related to our divestment and partial equity stake in Styron. This is just one more illustration of the benefits we are gaining as we execute against our strategic agenda and enhance our financial flexibility.
As a result of all the work we are doing, I am pleased to say that we are well ahead of our schedule in our plan to deliver 40% net debt to total cap, and we intend to stay ahead of this schedule. This financial flexibility will only strengthen our ability to remunerate shareholders while investing for growth.
Now let me turn to Slide 23, outlook and priorities. Turning now to the outlook specifically for 2011. Our view continues to be that global economic recovery will gain further momentum this year. We are optimistic about continued growth in North America and Europe, particularly with signs of improvement in industrial markets and continued strength in growth areas such as electronics and packaging. And demand dynamics in a high-growth emerging geographies such as China, India, Eastern Europe and Brazil remain robust across a broad range of leading end markets such as infrastructure, transportation, agriculture, electronics, appliances and other durable goods and packaging. From Dow's perspective, our world balanced portfolio of businesses, our presence in faster growing emerging geographies and our leadership in developed markets positions us very well for the recovering economic climate.
We expect to deliver further earnings growth as volume and margins increase in our combined Performance segments. In our Basics businesses, we'll continue to benefit from advantaged feedstocks in an improving demand environment. Overall, we have delivered a transformed portfolio that is increasingly targeted to growing geographies, sectors and markets while remaining well balanced to mitigate against uncertainty.
So that brings me to our priorities for the coming year and into 2012 on Slide 24. We remain resolute, and we'll not stray from the strategy that has brought us this far. Our entire leadership team is squarely focused on execution. We are committed to shifting our portfolio even further to Specialty Chemicals, AgroSciences and Advanced Materials, and we will continue investing in and commercializing our innovation pipeline. We will continue to transform our Plastics portfolio, as well as rightsize our chemicals and commodity footprint to align with the growth in our Performance businesses, while also improving our cost position. We will maintain Dow's hallmark reputation for safe and reliable operations. And finally, we will continue strengthening our balance sheet, building even greater financial flexibility moving forward.
In summary, we are on the right trajectory. Over the last year, I visited with many of our customers and employees in 30 different locations around the world, and I'm extremely confident that Dow's best times and strong earnings performance lie just ahead of us. We will move even farther down the path toward realizing the full growth potential of our transformed enterprise in 2011, and we will do so with diligence, with focus and with a mindset of flawless execution. We are more focused than ever to deliver on our commitments.
Thank you, and I'd like to now turn the call back over to Howard.
Thanks, Andrew. Now we'll move on to your questions. First, however, I'd like to remind everyone that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and to the following Q&A. Lisa, would you please explain the Q&A procedure?
[Operator Instructions] We'll take our first question from John McNulty with Crédit Suisse.
John McNulty - Crédit Suisse AG
When I look at the cash flows that you generated, they were clearly significant. You seem like you're in a much better financial position at this point. Can you give us a little bit more color as to what that financial flexibility means for you, given where you are right now? And also maybe your thought on the potential for debt refinancing going forward, given the decent rate environment?
John, this is Bill Weideman. You're exactly right. We did have a very strong cash flow generation in the quarter. As you know, we generated $1.8 billion from cash from operations in the quarter. And that was driven from strong results. You'll also notice once you have a chance to review the financial statements, we actually had a positive $700 million in cash flow due to the specific actions we took in the quarter. So, John, you're right, we do. And also when you get a chance to look at, you'll see we ended the year with $7 billion of cash on the balance sheet. Part of that was due to the fact that we issued, as you know, $2.5 billion of bonds in the fourth quarter, and that was to take advantage of the low interest rates. And as we stated then, it was to pre-fund debt that's maturing in the first half of this year. And then we also had additional cash that are really strong cash results in the fourth quarter. So as far as our priorities, John, as we've said before, our priorities for cash remain the repayment of debt, shareholder remuneration and also funding our innovation and growth. And you will see us take significant action this year on the debt paydown. And just for planning purposes, if you want to think, as I mentioned, we ended the year with about $7 billion of cash and our year-end target is to end the year somewhere between $2 billion and $2.5 billion of cash, so you can see we have a lot of flexibility in 2011.
John McNulty - Crédit Suisse AG
Andrew, in your comments, you indicated in 2011, one of the goals is to continue shifting the platform further to a specialty chemical platform. Can you maybe flesh that out a little bit and should we be thinking about further asset divestures in 2011?
Certainly, the portfolio management we've done to date as we build the portfolio through specialties, plastics is very heavily transformed already with our Styron divestment. That's incredibly important statement with respect to the performance. Their performance is not just the oil to gas ratio. It's also the shift to higher market value and uses as we shed a low EBITDA return business like Styron. We will do more of that. We have some other businesses that are in the Plastics portfolio that we will shed and/or JV depending on the opportunity with strategics or financial buyers, depending on who comes to the table. So we'll be active there. In addition, the bolt-on M&A, the financial flexibility that Bill talked about, there will be some of that as we go through. We're very keen on expanding in seeds and electronics, in particular, and our water platform to speak to the company's future positioning. But these are high-margin bolt-ons, ones where we can maybe buy small regionally and scale up globally so we can get synergies immediately. And we can see the opportunity to keep, as Bill said, putting some of our extra cash into innovation and growth. We've got to launch our POWERHOUSE Solar Shingles. We've got a titanium dioxide replacement out there that is going to be a big winner here in the next six to 12 months as titanium dioxide continues to be short. And I can go on and on, but you can continue to see some working of the portfolio, but nothing as dramatic as last couple of years. We are now in execution mode to use that financial flexibility the way Bill talked about.
Our next question comes from Andrew Cash with UBS.
Andrew Cash - UBS Investment Bank
Given the surge in drilling activity over in the Permian Basin, which is close proximity to your plants, [indiscernible] plants. It looks like you guys will realize your opportunity to do 20%, 30% more in NGL consumption. But how are you guys going to consume that? I mean, are you going actually build one new world scale cracker, you're going to convert a naphtha cracker, how are you going to consume it?
Andy, I think the shale gas dynamics in the United States we've talked about with many of you over the last 12 months and clearly, Dow's announcement to go further into ethane cracking capacity. It means that we will do some of the things you mentioned such as substitute heavy, so we have still the ability to do that with naphtha here in the U.S. in particular with some of our crackers. We already are pretty good. We can go up to 80% LPG cracking. We can substitute even some of the propane with ethane as we extract more and more ethane out of the gas that you're talking about that there's not all that far from us actually. So with such a high ethane off take 80,000 barrels a day, we're about a third of the U.S. market. We are talking to all of the people we should be talking to and we'll have a lot more to say about that in the next six to 12 months. If we had to do some de-bottlenecking put some incremental capital into some of our existing plants, we will do that to release efficiency and release more capacity, and I think that's a good way to think about it that we can do it. And we can couple it with our PDH deal, which is indicative of our ability to take on purpose propane, so you can expect us to be quite active on both ethane and propane utilization this year.
Andrew Cash - UBS Investment Bank
It just kind of lead to my next question the PetroLogistics that you guys have 530,000 tons per year propane dehydrogenator. There's been I think some operational issues and how's that plant running and do you think that will help relive some of the propylene pressure by the second quarter?
Yes, so it's had its normal start-up challenges. It's actually, as you know, the world's largest PDH facility. There were some maintenance in January and so once that's over and done with, January is over and done with, it will be running at full operating rates. And we feel very good about what they've done. They were at the 70% operating rate straight off the start up and so that was a pretty good deal, and so they've gone down for some maintenance and they'll be back up in normal time.
Our next question comes from Paul Mann with Morgan Stanley Smith Barney.
Paul Mann - Morgan Stanley
Just looking at raw material inflation in you're Performance businesses, a third of Q1 has probably been booked already and you probably got good visibility over another third of the quarter. So how are you handling the raw material inflation. Is pricing in the Performance division keeping up with inflation?
Yes, so as you saw in the fourth quarter, we actually did keep up. And I think that's not only in our Plastics business, but in our Performance businesses. And we're pretty happy with the way they've gone out there on pretty much, we're pretty sold-out in almost all of our Performance businesses or running at high rates. So there is price power, as much as through cost push, but also through operating rates being high. So what we've done is, of course, got across-the-board price increases in most of the Performance businesses that have price sensitivity, and especially those in the chains like MDI, like acrylic acid and esters and epichlorohydrin epoxy. We also have that going in, of course, the Plastics businesses. But sequentially, it's about a $500 million rise, so that's going to be topping Q1 time frame. But we don't look at it that way. We look at it as what's the momentum, and the momentum is good. And we expect the momentum with some typical lag will be good for margin recovery in the first half in particular, and we will see continual tight operating conditions, which we believe we'll see margin expansion as a whole for the Performance businesses for 2011.
Paul Mann - Morgan Stanley
Just in 2010, agrochemical pricing was fairly weak for the whole agrochemical industry. How was it looking in 2011? Do you expect pricing to be up or flat to potentially down a little bit?
Yes, flat to a little up. I think there's definitely now more affordability in the farmer pocket as their corn prices and others have gone up. And clearly, it's not going to be back to where it was. But we believe 2010 was likely the bottom for Ag Chem prices. So they'll be up about 2% versus prior quarter and 2011 I think will show stability and moderate recovery, not just on volume but on some price power.
Our next question comes from Bob Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc.
Andrew, you mentioned shutting down some VCM plants and I guess one of your big VCM customers maybe starting up their own capacity. So can you help me with the balance where does that chlorine go? And then secondly, could you give us the milestones on getting a K-Dow resolution?
Yes, so certainly the balancing between Shintech's start up and now shutdowns is very much geared to our strategy and theirs. Our strategy is to take more of our precious chlorine and feed our Performance businesses. So we use that number before where 70% of our chlorine goes into our downstream businesses. That number will pop up to 80% or more. And that means that you'll see the result and the economic cost power if you like in our Performance businesses, Polyurethanes and Cellulosics and all the ones you're familiar with like Ag Chem. That should help mitigate the increase capacity from Shintech who still remains our very large customer, by the way. So we're not growing any share of market there. The merchant side is going to be dropping down from our perspective but going up from their perspective. On K-Dow or whatever you want to call our Plastics equity-light deal, as I said on my statements, Plastics is doing great. It's been because we did lots of clean up there. We shut down assets. We did Styron. We're committed to a strategic shift to specialty plastics. We're putting that in place. We are in no rush to do any deal. We will do a right deal with a right assets at the right price that I've already indicated to a previous question. We'll be at the commodity end of the portfolio, and we mentioned that at our Investor Day as well. But I really don't see a need to go out there and do a K-Dow replacement from here.
Robert Koort - Goldman Sachs Group Inc.
Is there a time frame for a resolution of arbitration though?
Yes, sorry, midyear or thereabouts. And it's on schedule, and we've always said second quarter, probably the back end of the second quarter or the start of the third.
Our next question comes from Don Carson with Susquehanna.
Donald Carson - Susquehanna Financial Group, LLLP
Andrew, another question on raw materials and this is more strategic. I know you've talked about getting more propane or doing more propane sourcing. But right now, it appears that PetroLogistics will supply about 25% of your merchant propylene needs. Where do you want that to go because it would appear that not only is propylene going to remain high versus ethylene but more importantly U.S. propylene could be disadvantage versus Asia and Europe. So where do you want to take that number and is it going to be more sort of PDH type deals?
Yes. So I think you should take from -- actually I answered the previous question on NGL extraction. It's not residual to ethane. You should consider us that what we're doing is to do more PDH-type deals to find more ways to get propane near to the cost of natural gas than the market minus formula that exists today with refinery propylene. And because of our merchant by being one of the largest in the industry, if not the largest, certainly the largest in the U.S. We are an attractive customer with a baseload NGL plants to get on purpose propane as we are with on purpose ethane. So we will intend to keep lifting that up, that percentage that you talked about so it's more and more, if you like, back integrated. And we believe the timing of that is pretty good. The next couple of years will be perfect timing to lock in some propane deals. So you can expect that to be a strategy that we'll execute against.
Donald Carson - Susquehanna Financial Group, LLLP
And just one follow up on feedstock flexibility. You talked a lot about your feedstock flexibility in the U.S. but rising naphtha costs in Europe didn't seem to have any effect on your fourth quarter Basics margins. What did you do there? Was it hedging, was it just feedstock flexibility there? Perhaps explain what you're doing in Europe.
Yes. So I think you would know, we have our crackers in Europe, which are liquid crackers but they also have flexibility. They can take LPGs and they can take condensate, and we have great deals. We've had them for over two or three decades to physically hedge with LPG and condensate to bring them in, to keep inventory. We have contracts with people like the Algerians and others. And so we do run those crackers with feedstock flexibility that gives us a slight cost advantage against pure naphtha guys in Europe.
Just to add to that, don't forget on our equity companies also that, as I mentioned in my prepared comments, we have fixed contracts there on the raw materials. So again, as naphtha and oil goes higher, that's a good thing for our JVs in Kuwait.
Our next question comes from Hassan Ahmed with Alembic Global.
Hassan Ahmed - HSBC
Quick question around the Basics side of the business. There seems to be increasing chatter coming from the Middle East around feedstock cost escalation there, be it in Saudi because of possibly the dirth of natural gas there or potential, sort of, privatization of NPC in Iran. Now specifically to your own joint venture in Saudi Arabia, how should we be thinking about the feedstock side of things? I know you discussed earlier that you're at the feedstock sort of phase off of thinking about that facility and more generally speaking, how should we be thinking about the broader cost cuts in light of potential Middle Eastern feedstock cost escalation?
So the top line point on the Middle East and in general the new capacity across the board, not just Dow's, is actually, Hassan, and I've seen others right about this including yourself. There's now a combination of three things going on in the Middle East, which have been additive to supply disruptions. They're structural operational and mechanical with some of the new capacity that's been coming on. So a lot of the capacity came on last year. 2010 was the big year for capacity. A lot of it didn't actually make its way to market and one of the new reasons is the one that you asked about, which is the real limitation on the structural side on NGL extraction and ethane availability. And why is that? Because most of the gas in contained ethane embedded in the gas is now going to power. And in fact, as the Middle East grows and gets wealthier and builds more infrastructure and builds other facilities, builds aluminum smelters, builds a lot of things, they need power as much as any petrochemicals were value added. So I think you're going to see a natural cap occurring in the Middle East even inside Iran with the move by NPC as you indicated. So I believe that what's going to happen is the cost curve is going to change with time and the U.S. producers will continue to be advantage as the second lowest cost on the planet after the Middle East. And if the shale gas thing keeps working the way it is, that will start to overcome the freight point as well, and so the U.S. can continue to export to Asia. And I think that dynamic is a new dynamic, it will unfold, speaking to our project in Saudi yes, it is the last tranche available of low cost NGLs, and that's why we're doing the project with our partner, Saudi Aramco. We certainly expect that to have a feedstock advantage in the low end of the cost curve. It will crack some liquids as well. So that is a big part of the feedstock flexibility point, so we can make more value-add products, more Performance Products, more Advanced Materials, which is why it's so key to our strategy. And we will continue to work on making sure that, that economics on the low end of the cash curve gets delivered against our ultimate decision here in the middle of the year.
Hassan Ahmed - HSBC
I was looking at one of the slides, which showed your Dow-wide operating rates and they seem to have come down from Q3 levels, let's call it, 86% to 81%, which essentially broadly and more in line with Q2 sort of operating rates. Now was this predominantly sort of seasonal factors or was there anything beyond it?
This is Bill Weideman. Yes, that -- seasonally our fourth quarter comes down a little bit. Actually 81% versus a year ago is up 5 percentage points. So actually 81% is very strong for us, and to be honest with you, the comment I made previously on managing working capital also. So we slowed our plans down a little bit from a working capital standpoint also. So overall, I would say from an operating rate standpoint and as Andrew mentioned before, we're still seeing very strong demand, which is supporting high operating rates.
Our next question comes from David Begleiter with Deutsche Bank.
David Begleiter - Deutsche Bank AG
Andrew, the last time propylene spike, you saw an impact in some of your U.S.-based exports to Asia. Any impact this time?
No. Well, of course, you may have seen a little bit of it, in particular, our businesses that are more sold out and if you look closely at our China volumes, they were a bit down in some of our Performance businesses and that's because we chose not to export for the reasons you just talked about, the propylene arbitrage. That particularly applied to epichlorohydrin liquid epoxy resin where we could value maximize here in the United States rather than sell at lower margins in the Pacific. And with low propylene costs out there, they could keep our prices lower. So we believe that's already on the way to being corrected. Chinese New Year slowdown in January, that arbitrage is starting to close already. And it's not giving us any concern. The pressure to raise prices out in Asia is already there, we're actually seeing good price traction. And the bright spot is that despite all that, we still had exports increase, our volumes grew 4% sequentially in the Performance and Plastics divisions anyway.
David Begleiter - Deutsche Bank AG
Andrew, just on your polyurethane strategy in relation to both Saudi Arabia and China, where might your capacity next and do you need to wait 'till the JVs come on stream to add new MDI capacity?
Yes, so MDI, which is tight, as you know, I mean that clearly is something that we won't build anything new. I mean, they take a long time to build and they're tricky facilities. so Saudi is our next big tranche. So between now and then on MDI, in particular, we're working with others in the industry. We're not losing any ability to grow because of our arrangements that we have out in the industry. But having said that, we know we'll have to put an MDI tranche in the Saudi facility in particular and ultimately, the China facility. Of course, on PO and propylene oxide in general, we're in decent shape there because of our facility in Thailand.
Our next question comes from Kevin McCarthy with Bank of America.
A couple of questions on pension. You mentioned you made a -- or will make a cash contribution of $200 million in the first quarter. Is that expected to be it for 2011? And could you comment on the level of anticipated pension expense and whether that might be a headwind or a tailwind in '11 versus 2010, please?
Sure, this is Bill Weideman. For the full year, our pension contribution -- we'll be filing our 10-K here in February 18. But for the full year and 2010, our pension contributions were approximately $700 million and a rough break down of that is roughly $300 million of that was required contributions and about $400 million of that was voluntary, which we contribute in the fourth quarter. You should assume for planning purposes that in 2011, we'll contribute about the same amount. So you should assume from a pension contribution about the same level as 2010. So $700 million to $800 million range. From a pension expense standpoint, there again you should assume that 2011 will be about the same as 2010, which is about $500 million a year. So 2011 versus 2010 will be very similar, both in terms of pension expansion and pension contributions.
Andrew, if I may follow-up on the subject of utilization rates. You have volumes up 12% here in certain product lines like epoxy is, for example, running triple net rate or better. As you survey the portfolio, are there any major product lines where you would foresee the need to de-bottleneck or even add brownfield or greenfield capacity incrementally in 2011?
Yes. And I do think you talked about one already. So clearly, anything in the acrylic chain I mean, just so you know, our Deer Park facilities, we're finding new pounds there because of the decision we took last year to shut it down and de-bottleneck and have it as a safe and reliable operations facilities is a good example. Epichlorohydrin is another one. MDI is another one. Our Plastics chain, especially polyethylene here in the United States, given the new found cost advantage, our ability to export from here will be another area including the crackers in that earlier question I've got. We will be increasing our CapEx budget, which is $2.4 billion as we indicated on the script. We, Bill, I, the businesses are working hard on high return quick de-bottlenecking hits on the products that I just mentioned and others that are running pretty tight.
Our next question comes from Jeff Zekauskas with JPMorgan.
Jeffrey Zekauskas - JP Morgan Chase & Co
I have a question on Slide 7, the year-over-year volume trends in that the pro forma volume was up 12%, at least as I understand this slide. But Coatings and Infrastructure is bigger than Health and Ag and one was up 20% and one was minus 1% and then some of your other growth rates are relatively low. So how does all of this roll up and get to 12%?
So your math is going to, obviously, be faster than ours because you just spent time analyzing it. But we'll get back to you with specifics. But I think what you've got to do is look at the impact of Styron in particular on our Hydrocarbon segment. If you take a look at that segment, which is where we now report the kind of feedstocks to Styron because we put in place the carve out and of course, they have arrangements where we supply them ethylene and aromatics and other key building blocks for their businesses. Fundamentally, we now report that volume in the hydrocarbon unit. I think that's probably why you're seeing what you're seeing, but we'll get back to you with specifics. Remember, on Styron, the key part of that deal was to shed low return Plastics businesses, so we've unlocked the value of integration there by now showing it in our hydrocarbon unit, of course, as well as the gain we had on that business.
Jeffrey Zekauskas - JP Morgan Chase & Co
And then just to follow up in Performance Systems and Performance Products where you touched a little bit by propylene. Would you expect the volume growth rates in those businesses to be higher in 2011 than they were in 2010 or lower?
Well, I think they'll be higher. I mean, I think the nature of your question, you kind of got the reason why. In fact, I just by coincidence was with one, which on its leadership team last night and they reviewed to me, they would be meeting the last few days was on technology integration, which is a new term for the Performance businesses. What we're doing is we're cross fertilizing the ability to bring a-mean chemistry, epoxy chemistry, urethane chemistry, acrylic chemistry and a whole lot of other chemistry that's embedded in those two big units to the market and things like enhanced oil recovery in new products and things like new automotive products and new systems. And what you're seeing is now we have a technology synergy embedded in the two performance divisions that will give us new commercialization opportunities in the near term our product line extensions, and whether it's launching new products in automotive like BETAFOAM and our Adhesives businesses and we just won a deal with Fiat or one we have in Korea with one of the auto manufacturers there, this is all volume growth that's commercializing innovation above and beyond asset optimization.
Our next question comes from Frank Mitsch with BB&T Capital Markets.
Frank Mitsch - BB&T Capital Markets
Just a quick clarification. You're talking about the $500,000 of raw material inflation sequentially into the first quarter, and I thought Bill had suggested that, that you'd be able to offset that with pricing by the end of the first half. And I thought he said next year, which I'm sure I heard that wrong. When do you anticipate getting pricing through in your Performance businesses to offset this $500 million cost push?
Yes, Frank, Bill Weideman. I think what I said was we might have a slight, and I think the key word there is slight, margin contraction on our Performance businesses. But as Andrew mentioned, we have a lot of pricing momentum in both our Basics and also our Performance businesses and so we do believe that we will cover most of that increase in the first quarter. And if there is any lag there that we will certainly cover that in the first half of the year. So I don't know if that helps but again, if there is any margin compression in Performance, we believe it will be slight and temporary.
Just to build on something most of us are seeing a typical January slowdown in some of these businesses because of the early Chinese New Year, so this will be a strange first quarter because it will be backloaded, it will be February, March quarter versus a more typical mid-quarter slump. And so the price power that Bill's talked about is there's a little lag is because volumes are little slow in January. But we have across the board price increases in most of these products because of the earlier question, which is we're running pretty tight on some of these chains.
Frank Mitsch - BB&T Capital Markets
And switching gears, you guys had a record fourth quarter in the Ag side and here we are a month into the new year. What is your outlook look like on the Ag side and how is your order book and what's your expectations on SmartStax? Can you give some color there?
Yes, I mean, we said on the last call that SmartStax for us is doing great, and we have both above and below ground seen everything we wanted to see. We've seen reduced refuge delivering additional 11 to 16 bushels per acre and we're seeing considerable yield gains and even under additional insect pressure. And when you put our elite genetics combined with SmartStax, we have actually seen our ability to increase market share in corn, for example, sitting in around 5% in the U.S. and we've got 15% down in Latin America, which is the reason, by the way, fourth quarter did so well, with our Latin American business was pretty strong 15% share in corn in Brazil, and we're basically very, very happy. We're ahead of schedule in SmartStax, and we will see this year that will go from 10% of corn hybrids in 2010 to 30% in 2011 and 70% in 2012 with SmartStax. So it's going to do what we said it would do and then some. Look, how do we feel about Q1, Q2? The earlier question price power in the Ag Chem space is not quite back, but it's coming up. We said up 2% versus prior quarter. Farm income is good. The commodity prices are up. So we believe that the first half of Ag will be a very good half, and we'll start to get back to where they were a few years ago.
We'll take our last question from P.J. Juvekar with Citi.
P.J. Juvekar - Citigroup Inc
Andrew, in Coatings, you saw some volume declines in industrial and architectural was up. I was wondering if you can break that down differently by products, so acrylics and epoxies and if acrylics are holding their share.
Well, yes. So as you just said, our volume impact in industrial coatings was due really because for us driving price hard and so epoxy was the kind of direct correlation there. So it really wasn't a customer-oriented thing. It's the fact that we're tied on epoxy. Our architectural side where the acrylics mainly play we do have, in fact, good volume growth and good price power, volume expansion in Asia of about 4%, North America about 3% and also our new product introductions, the titanium dioxide, say, very particular. So outlook-wise, we continue to see that we'll keep having good volume growth and good price power in coatings and that epoxy will be the issue for us going forward, and that's because we're tied and now get back to the earlier question that's where we're putting some discretionary capacity capital in place to release some capacity.
P.J. Juvekar - Citigroup Inc
One quick question for Bill. Bill, any thoughts about buying back preferred as you generate good free cash flow?
Yes. I mean, certainly P.J. with our strong cash position and from a liquidity standpoint, certainly I believe those discussions that you referred to regarding preferred will occur sooner than later. I don't know what the final outcome of those will be, but certainly I believe we have the flexibility going forward to have those discussions.
That ends the Q&A portion of the call. Andrew, you like to make any closing comments?
Yes, thank you for your great questions. And as you can see, we closed out the year. We've had now seven good quarters of increasing margins in a row, while we continue to increase R&D and fund our R&D that strong cash flow, and we have price power in the market place with good price momentum going into this quarter and the whole year. Also the shift of the company, sometimes we talk about a balanced portfolio. Really, the way you should think about our portfolio going forward is an integrated portfolio that like the chlorine feeding the downstream Performance businesses, like the plastics being reorientated to specialty plastics and high market value and uses like packaging and hygiene and elsewhere. We really feel good about the portfolio we now have, so it is about execution. It is about taking the momentum of last year as we outbounded 2010 into 2011 on our way to the $10 billion EBITDA number. And we've said that as we go from $7.5 billion towards that $10 billion number, the 2011 will be a year of implementation, execution. We feel very good about the year. We feel very good about the future. We feel very good about the economic recoveries going on out there. But we remain prepared if there's any turnaround or downturn or any unforeseen circumstances. So we appreciate your support, and thank you for listening.
Thanks very much for joining us today. We appreciate your interest in the company obviously. And for your reference, a copy of our prepared comments will be posted on Dow's website later today. We look forward to speaking with all of you soon. Thanks very much.
And that concludes today's teleconference. Thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!