Dow Trims Marginal Operations to Deliver on Ambitious Goals

Dow Chemical (DOW) CEO Andrew Liveris has stated his goal of ridding Dow of marginally profitable businesses to focus the company on its specialty ones. Liveris said

Today's announcement reflects our commitment to prune businesses that are not delivering appropriate value and tackle tasks more efficiently across the entire organization ... freeing up capital and resources that will be re-directed toward value-creating growth opportunities.
Our focus on financial discipline and low cost to serve remains as sharp as ever, and we will continue to seek ways to refine our organizational structure, asset base and business portfolio to ensure Dow's competitiveness on the world stage.

The moves, which will result in a Q4 cash expenditures of $150 million include:

º Due to overcapacity within the industry, a disadvantaged cost position, and increasing pressure from generic suppliers, the Company will record an impairment charge related to its agricultural products manufacturing site located in Lauterbourg, France. As required, the Company has launched an information/consultation process with local employee representatives on the closure project.

º The Company has assessed the long-term profitability of its participation in the automotive sealers business and has determined that the projected results are inconsistent with the financial performance expected of a market-facing business. As a result, the Company will exit the automotive sealers business in North America, Asia Pacific and Latin America within the next 9 to 18 months, and will explore strategic options within Europe.

º The Company will write down its investment in a joint venture - Petromont and Company, Limited Partnership - due to an unfavorable financial outlook, reflecting significant long-term economic challenges.

º The Company has evaluated the economic and financial feasibility of its styrene plant in Camaçari, Brazil, and due to raw material competitiveness, the age of the facility, as well as the ready availability of styrene within the global marketplace, the Company will recognize an impairment charge related to this facility.

º The Company will close its hydroxyethyl cellulose manufacturing facility located in Aratu, Brazil, due to a number of factors, including capacity limitations, high structural and raw material costs, and older technology. After studying several options to improve the profitability of the facility, the Company decided to close the plant during the first quarter of 2008.

º Due to a number of factors, including the inability to secure a source of economically sustainable propylene and the use of older technologies at the plant, Union Carbide Corporation (a wholly owned subsidiary of Dow) has decided to shut down the polypropylene facility at St. Charles Operations in Hahnville, Louisiana, by the end of 2007.

The total charges including the above expenditures are expected to be $500 to $600 million. If all the charges are taken in Q4, the total comes to about 62 cents a share. Dow will save about $180 million per year from the moves. While not a huge number, the real advantage for shareholders here is the availability of cash for other uses. The move will allow Dow to now redirect millions of dollars into operations whose return on that investment is far higher than those bring shuttered. Other use could include dividend increases or additional share repurchases.

All in all this is a rather mundane event as far as earnings go, but its importance is in Dow still delivering on the ambitious goals it is setting for itself.

Disclosure: Long DOW