Jan 29, 2008
Operator
Good day, and welcome to The Dow Chemical Company's Fourth Quarter Results Conference Call. Today's call is being recorded.
At this time, I would like to turn the call over to the Corporate Director of Investor Relations, Ms. Fothergill.
Please go ahead, ma'am.
Kathleen C. Fothergill
Good morning, everyone, and welcome. As usual, we are making this call available to investors and the media by a webcast.
This call is the property of The Dow Chemical Company, and any redistribution, retransmission, or rebroadcast of this call in any form without Dow's express written concerned is strictly prohibited. On the call with me today are Andrew Liveris, Dow's Chairman and CEO; Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer; and Jeff Tate, Manager in Investor Relations.
Around 6:20 this morning, January 29, our earnings release went out on PR Newswire and was posted on the Internet on Dow's website, dow.com. We have prepared some slides to supplement our comments on this conference call.
The slides are posted on our website available 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 risks and uncertainties. We can't guarantee the accuracy of any forecast 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 the SEC filings. In addition, some of our comments may reference non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release or on our website. Our earnings release, as well as recent 10-Qs, 10-Ks, and Annual Report are available on the Internet at dow.com in the Financial Reports page of Investor Relations section.
Starting with the agenda on slide three, I will start with a brief recap of the fourth quarter. Then Andrew, will take a look back at the actions we took in 2007, and ahead to 2008 and beyond as we continue to implement Dow's transformational strategy for delivering long-term shareholder value.
After that, we'll move on to your questions. As you can see on slide four, this was another solid quarter for Dow.
Despite the highest ever increase in purchased feedstock and energy costs, $1.7 billion year-over-year and $850 million compared with the third-quarter, we were able to ask that much of that impact with a focus on price/volume management and cost discipline. Compared with a year ago, we achieved higher price and higher volume in each of our operating segments.
Our geographic position served us well with strong organic growth supplemented in some cases by targeted bolt-on acquisitions in each of the geographic regions outside North America. As shown on slide five, joint ventures again made an outstanding contribution of 21% from fourth quarter a year ago including record quarterly earnings from EQUATE, MEGlobal, and Compañía Mega.
While 2007 was the first year our JV earnings topped $1 billion, equity income has been near that level for the last four years. And in addition to this equity income of $1.1 billion, joint ventures contributed over $800 million to Dow's cash flow this year.
Let me give you could rundown on the segment results for the quarter. Slide six, Performance Plastics posted record quarterly sales on higher price and higher volume, but EBIT excluding unusuals declined, principally because of escalating raw material costs and some weakness in the housing and auto sectors.
In an environment of rapidly raising raw material costs, it’s not surprising to see short-term margin squeeze in the Performance businesses. Pricing for these products is tied to the value they provide to our customers rather than to our cost.
So prices tend to be much more sticky in Performance businesses than in Basics. We saw the flip side of this pattern in the fourth quarter of 2006.
You may recall that feedstock and energy costs dropped during that quarter, but the businesses held price allowing for margin expansion. When raw material costs stabilize, we would expect these businesses to recover the margins they lost this quarter.
Nonetheless we were quite pleased with the volume strength in this segment, up 6% from a year ago. Outside of North America, all the geographies posted very strong growth.
From a business perspective, the growth was also broad-based with Specialty Plastics, Polyurethane Systems, and even DOW Automotive among the leaders. There was a similar story in Performance Chemicals shown on slide seven, with improvements in sales, price, and volume, but margins squeeze impacted by EBIT.
In addition, continued weakness in industry fundamentals for acrylics and acrylic latex as well as lack of product availability due to a planned outage at optimal hurt the bottom line. On the plus side, the integration of Wolff Walsrode into Dow Wolff Cellulosics is proceeding very well and the business is seeing good growth in pharmaceuticals, food, and industrial specialty applications.
Slide eight, Dow AgroSciences, had a good fourth quarter capping a record year. Supported by double-digit volume growth in Latin America and solid gains in Asia-Pacific, either excluding unusuals held steady with last year despite an increase as planned in expenses for the development and launch of new products.
Also as we mentioned last quarter, we saw some shifting seasonal patterns with some customers in North America selling tanks earlier than in past years moving business from the fourth quarter into the third. Slide nine, Basic Plastics, finished a very strong year with another solid quarter.
Double-digit price increases largely offset higher feedstock costs, and volume edged up 1% despite asset shutdowns and disposals over the past year. In fact, polyethylene reported higher volume in all geographic areas after adjusting for the divestiture of Safripol at the end of last year.
Strong performance in Basic Chemicals shown on slide ten was driven principally the gains in EO/EG. With very tight supply/demand balances due to a series of industry outages, including some at Dow facilities, ethylene glycol prices rose to record levels during the quarter.
In chlorovinyls, strength in caustic soda was offset by some weakness in PVC applications. Now, let me turn to you to some unusual items in the quarter now highlighted in the earnings release.
First, pretax charges totaling $582 million for restructuring activities. This amount includes charges totaling $590 million related to the decisions we announced in early December of 2007, partially offset by an $8 million adjustment to our 2006 restructuring charges.
More information is on these actions have included in the December 4 announcement, which is available on our website. These restructuring activities are a further evidence of our disciplined approach to portfolio management, shutting down or existing assets or businesses that do not meet our financial or strategic criteria.
We expect these restructuring activities will generate annual savings will generate annual savings of around $180 million when fully implemented by the end of next year. Second, there was a $2 million adjustment to the third quarter ’07 estimated IPR&D charge for the Wolff acquisition.
And there was a $113 million benefit to the tax provision related to a change in the legal ownership structure of the EQUATE. We took this step in order to simplify Dow’s legal entity structure by placing all of the Dow's great joint ventures into a single holding company.
Detailed information about the pretax, after-tax, and EPS impact reach of these items as well as the related segment information is included in our earnings release. One final item for you, our operating rate for the quarter was 87%, up 2% from the fourth quarter last year.
And for the full year, the operating rate was also 87% compared with 85% to 2006. That wraps up the review of the quarter.
And now, I would like to turn the microphone over to Andrew for his comments.
Andrew N. Liveris
Thank you, Kathy, and good day everyone. Thanks for joining us as we review 2007 and we look ahead to 2008 and beyond.
2007 was a remarkable year for the Dow Chemical Company. We not only posted very good financial results, the third highest in our history, but we also took meaningful strides to establish ourselves as an earnings growth company.
In our view, we are now well on our way toward achieving our goal of providing consistent, reliable, and strong earnings growth for our shareholders. Before I further elaborate, let's take a quick look at our 2007 full-year financial performance.
As you can see, we posted record sales with gains in both price and volume. Sales were $53.5 billion, up 9% over 2006.
Price was up 7% with gains in all segment and geographies, and volume improved by 2%. During the year, we saw rapid growth in emerging economies, couple of examples.
Sales in Greater China were up 24%, Eastern Europe was up 30%. These emerging economies and others play an important part in our future.
In fact, they already make up 28% Dow's revenues, and our exposure to them through our joint ventures will only add to that. We had healthy volume growth in Europe of 5%, Asia-Pacific up 8%, and Latin America up 7%.
We saw volume fall in North America by 2% and in India, Middle East, and Africa where we had the divestiture of the Safripol businesses in South Africa volume fell by 9%. We also achieved record equity earnings of $1.1 billion, up 17% from 2006 and topping $1 billion for the first time.
Excluding certain items, earnings per share were solid $3.76 versus $4.25 last year. Given the very difficult conditions we faced, a weak US economy paid with purchased feedstock and energy costs that rose an 11% year-over-year, these results demonstrate yet another year where our strategy to mitigate these high input costs was proven successful.
Actually, what made the post year remarkable is that we believe we have decisively crossed the threshold to establish The Dow Chemical Company as a strong, reliable, and consistent earnings growth company. Those of you who have followed us in the past know this.
One of my goals since becoming CEO has been to eradicate the word trough from the lexicon of those describing The Dow Chemical Company. The strategic actions we've set into motion thus far when completed will allow us to fulfill that singular goal of avoiding future ethylene industry troughs.
Now, let me take a moment to step back and outline for you where we are with our strategy and illustrate how over the past several years we arrived at what I have consider the most important phase, the most exciting era in the history of our company as we move to an earnings growth company. There are two areas in particular where I want to focus your attention, two areas in which we asked you to hold us accountable, and over the next few minutes I want to review what we said, this is what we did.
We said we would actively manage our portfolio and we said we would continue to drive financial fitness. When it comes to actively managing our portfolio, we're focused on three broad areas.
We said we would actively manage our portfolio by divesting or shutting down non-competitive, unproductive, or non-strategic assets. Since 2003, we have announced 92 plant shutdowns, we have announced 42 site exits, and we've divested 38 businesses.
Second, we said we’d pursue acquisitions when it made financial and strategic sense. In 2007 alone, we completed the Wolff Walsrode acquisition, completed four acquisitions for Dow AgroSciences, completed three acquisitions in Epoxy Systems, and three more in Polyurethane.
While these are bolt-on acquisitions, they do build on and strengthen our selective and strong M&A track record, a record that includes earlier acquisitions such as Union Carbide Rohm & Haas’ agricultural business. Here is a reminder on this slide of the value created by those two examples of Dow's successful M&A activity.
When we announced the Union Carbide transaction, we’d committed… we committed to achieve $500 million in cost synergies, about 8% of Carbide’s sales. In fact, we captured more than $1 billion in cost synergies within two years of closing that transaction.
While some of Carbide's assets turned out to be less valuable than originally expected because of the dramatic change in US energy costs. The rise in energy costs made other carbide assets even more valuable through access to advantaged feedstocks in Canada, Malaysia, and the Middle East.
In fact, the EQUATE joint venture in Kuwait opened the door to significant new opportunities in the Middle East, including the joint venture we announced in December. The acquisition of Rohm & Haas' agricultural business was equally dramatic, giving us both cost and growth synergies, and it is now an important part of profitable growth in our Dow AgroSciences business.
The final comment I will make on portfolio management is on the actions taken in our Basics portfolio. We said we will pursue our asset-light strategy by joint venturing some of our Basics businesses with partners who had access to advantaged feedstocks or to growth markets or both.
We've said that we had a unique opportunity due to our globality, our technology, and our strong franchises, to do what no one else in the industry could do, which is grow these businesses in a new hydrocarbon reality and to lessen the cyclical impact on the rest of Dow. I'm sure each of you is aware of our December announcement concerning our joint venture with Petrochemical Industries Company of Kuwait to do just that.
We also pursued other new projects on our Basics side in 2007 with Saudi Aramco in Saudi Arabia, with Shenhua Energy in China, and Gazprom and SIBUR in Russia, just to name of few, that allowed us to take advantage of this joint venture model while also retaining the competitive advantage of site and product integration. The joint venture with PIC is an incredibly important part of our strategy because it gives new life and preserves global leadership to those businesses that were the most susceptible to the ethylene cycle.
By joint venturing these assets, we give them access to advantaged feedstocks and new opportunities to grow in emerging and mature geographies, a win-win for Dow and our partner. The main point here is that we have actively managed our portfolio over the past several years with the goals to improve and strengthen our performance businesses through acquisitions and to provide profitable growth opportunities to our Basics businesses.
Active portfolio management is only part of the financial discipline institutionalized by this management team. We also made a pledge to our shareholders that we will drive financial discipline fitness, and we have followed through on that promise.
Our balance sheet is as strong today as it's ever been. As an example, I draw your attention to our commitment to reduce our financial obligations.
Over the last five years, we spent $7 billion to reduce on and off-balance sheet debt and to make voluntary contributions to our pension funds. Today, our total debt-to-capital is a healthy 32%, down from 59% at the beginning of 2003.
We feel comfortable with that leverage ratio and we are now using cash to invest for growth and to enumerate our shareholders. On the issue of cash for growth, you heard about the acquisitions we have made so far.
I want to point out that we have been extremely disciplined. We have in fact walked away from many, many deals available to us, why, because they were over-priced, they didn't add value, and we could make better use of the cash, better use such as the dividend, which has been maintained or raised for 95 years, that's 385 consecutive quarters.
Since January of 2006, we've also raised the dividend by 25%, or our share buyback program where we have repurchased 50 million shares since January of 2006 and we are committed to at least cover dilution going forward, perhaps small. I'll get to that in a moment.
We are also using cash to fund our capital program. Since 2003, we have invested 80% of our new capacity capital in our strategic performance and new market facing businesses.
And as mentioned earlier, we're still growing our Basics franchises too, but we are doing so through our asset-light model. The key takeaway that I'll leave with you is that this management team has shown a consistency of intent and consistency of action that is showcased by our discipline and clinical approach to managing our portfolio and driving financial fitness throughout the company.
We have been very deliberate with the overriding intent to grow value, not consume it, and to be patient and preserve our options so as to transform the portfolio. I want to point out that as a result of all the strategic actions and discipline I just mentioned, in our view we're now poised to move away from the ethylene driven troughs that have plagued our earnings profile for so long.
In fact we believe we are now moving to an earnings growth company. To be an earnings growth company, we have to have huge earnings power at the industry trough.
Let's review why trough earnings are in our view no longer an issue for Dow. Last year, we committed we would at least earn the cost of capital, which is between $2 and $3, at the next industry trough.
Well, we believe we are there based on all the actions taken so far and with the deployment of funds from our PIC joint venture, plus new earnings from innovation that… short of a major meltdown in the global economy that our earnings will be positioned well north of the cost of capital in the near future with significant upside going forward. We'll either live share buybacks and/or accretive acquisitions, so that we do not experience the ethylene trough.
Instead what you'll see is the company delivering consistent earnings growth over the long-term. What does that mean?
It means that our earnings reach has been lifted to well north of $3 per share and that we will not experience the trough in 2010, '11. The PIC joint venture may well be the most dramatic and exciting deal in Dow's storied history.
Why, firstly there will now be new growth potential for those businesses we're putting into the joint venture. Secondly is the aforementioned new financial flexibility for the remaining core of our company.
By building on the strength of PIC's parent company, the Kuwait Petroleum Company, the company mainly is positioned as a top ten global energy company with advantaged feedstocks, will give new life to our polyolefins franchise with the ability to grow in both developed and emerging geographies. This JV remains on track to close by the end of this year.
When the JV with PIC closes, and we have absolute confidence that it will, we expect it to deliver to Dow $9.5 billion in pretax cash. Combined with our already strong balance sheet, that provides us with enormous financial flexibility to complete the next step in our transformation.
Now, the next question, and again a fair one, is how will we wield this financial strength and flexibility so as to deliver growth and transform the earnings profile of the company. Well, my answer is this, with the same disciplined approach we have in the past.
Expect nothing less than a commitment on our part to continue evaluating every option against our ultimate goal of growing shareholder value. Second, and in particular, we will continue to look for and pursue smaller bolt-on acquisitions as well as medium and large transactions, but, and this is an important but, we will proceed only if they fit the disciplined set of criteria we established several years ago.
First, they must fit our strategy to be a performance market facing company with businesses that are truly margin and value add as articulated in December, our four broad areas of focus, our human health, energy, infrastructure and transportation, and electronics and communications. More on this topic at our Investor Day.
Second, any acquisition we make must be accretive to earnings by the end of its second year of operation. And third, we will measure any potential acquisition against the yardstick of a share buyback and the value that represents.
With a dividend yield of 4.5%, almost a full percent above the ten-year treasury bond I might point out, we feel our stock is an exceptional value and an attractive option given our strong balance sheet, given our strong dividend, given the fact that the three best earnings performances in our company's history have come in the last three years, given our ability to do what we say we will do. Given all of that, we believe that current stock price is definitely undervalued.
This is especially true, given my statements on the earnings profile going forward. And please note that after the PIC JV closes, we will have a very strong cash position to fuel a share buyback if we want to versus our other options.
Repeat, we will do share buybacks if we cannot find accretive M&A. As I've said earlier, we have already crossed the threshold and are on the path to that transformation.
Our Basics businesses are moving to a new JV model and our Performance market-facing portfolio, which has delivered earnings growth above 8% over the last cycle, is rock solid and we are adding to it organically and vie bolt-on M&A. Therefore, the only question now is, how quickly can we complete our transformation.
As you heard me say, I believe 2008 will be a transformation year for us, as share buyback and continued investment in organic growth gets us to that transformation in one time frame. If we find the right acquisition target or targets, and I want to stress the word if, it would only accelerate the transformation and accelerate the value creation for our shareholders.
The disciplined employment of cash is the key to the speed of the transformation. We will be disciplined in our stewardship of our cash as we have shown to be over the last several years.
With either option available to us, our trough earnings look different. We are on average north of $3 per share, and either of the above two actions takes us well north of this number.
Before I close my comments, let me address in as crisp a way as I can what you have been telling us over the past month or so. What we're hearing is that you have uncertainties about Dow's path forward and therefore the stock.
You're concerned about the ethylene cycle and about whether we will make a major dilutive acquisition. You're concerned with a possible impact to our earnings due to a weak US economy, as well as the continuing high cost of hydrocarbons and energy.
And finally, we have heard concerns about our ability to close the joint venture with PIC. What I’ve tried to do today in these 20 minutes or so is to address each of those black clouds and give you our response.
Concerning the ethylene cycle, we believe we have given ourselves immunity. We have a new portfolio, we have announced numerous joint ventures on our Basic side especially the PIC joint venture, and we have taken several significant actions on our Performance side since the last cycle.
Concerning the possibility of doing a major dilutive acquisition, I've demonstrated our past M&A track record and shared with you our strict criteria for any future acquisitions, which have already led us to walk away from to walk away from numerous deals. On the question of the US economy, if it deteriorates I'd remind you that we have two-thirds of our sales outside the United States.
Combine that with our strong portfolio and joint ventures, layer on top our demonstrated financial discipline and plan or deploy cash, and you can see that we are in very good shape to weather a US economic downturn. High hydrocarbon energy costs are of course on everyone's minds.
Here, I would again point to our joint ventures such as the one with KPC/PIC, which give our basis of joint businesses advantaged feedstocks, while also allowing Dow to redefine its portfolio. Actions like this help us alleviate those high hydrocarbon energy costs.
And finally, as I’ve said, we will close on the KPC/PIC joint venture. The fact that the major issues have already been addressed in our MOU paid with strong commitments from our partner give me the confidence to say that we will close that deal.
The key takeaway I want to leave with you is that we hear your concerns, and we believe we have the right strategy in place to answer and dismiss each one of them resulting in a Dow Chemical Company with significant earnings and valuation upside. So I will close by giving you a view of what to expect from us in 2008.
First, you can continue to expect us to run a tight ship, just as this management team has always done. And naturally, we are watching the US economy.
Housing, employment levels, energy, are all ongoing concerns that suggests the US economy could go further south, especially through the first half of the year. My belief however, this is more a crisis of faith and not a crisis of markets, and as I stated the last week to the media, there are no signs of a recession in our production chains.
Plus right now, we're seeing almost all the weakness limited to the United States, and I'd remind you that our company has great geographic diversity with two-thirds of our sales outside of the US and growing. While a continued downturn in the United States is definitely not a positive, we are well positioned to weather that storm.
This is still a no-excuses company and we will manage our day-to-day business to deliver solid financial results. I think we have proven that.
Second, in 2008, we will close on our venture with PIC and move forward toward implementing our other joint ventures. But that progress will not be affected or interrupted by our joint venture with PIC.
I am really heartened here as I talk with our other partners, both our long-term partners as well as our newer ones. But they remain very positive about our mutual futures working together and see the PIC JV as an enhancer of our position.
Note, the Saudi Aramco JV is relatively unaffected by the product mix in that joint venture with PIC. Thirdly, you can expect us in 2008 to finalize the transformation of our earnings profile, and just to repeat and to reassure, we will not rush into a bad deal.
The last time I checked, cash didn't have an expiration date. In summary, I am committed that by the end of 2008 we will have taken another major step to transform our earnings profile.
We will close on our joint venture with PIC this year, and if there is not an acquisition target that fits in our criteria we reserve the right to initiate a share buyback. Either way, my stake in the ground to our shareholders is that with the next industry trough The Dow Chemical Company will have an earnings profile that is well north of $3 per share and we will provide steady earnings growth beyond that point.
Last year at this time, I said that 2007 would be a defining year for The Dow Chemical Company. Well, I want to be on record to say that 2008 will be a transformational year for this great company, on par with our move to Texas in the ‘40s, the moves internationally in the ‘60s, and the move to Plastics in the ‘70s and ‘80s.
This powerful company has been and will continue to be a growth company, and now it is positioned towards to also be a consistent earnings growth company. Thank you very much.
Let me turn this back to Kathy and then open it up for questions.
Kathleen C. Fothergill
Thanks, Andrew. That wraps up our prepared remarks.
For your reference, a copy of these remarks will be posted on Dow's website later today. Now, we'll move on to your questions.
Before we do though, I'd like to remind you that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and to anything that may come up during the Q&A. Michelle, would you please explain the Q&A procedure?
Question and Answer
Operator
Sure. [Operator Instructions].
And we’ll take our first question from Don Carson at Merrill Lynch.
Donald Carson
Yes, thank you. Andrew, a question on future earnings growth.
I can certainly understand how you've removed the… I guess we don't want to use the word trough, but certainly you have improved your earnings at the bottom of the cycle. But if you look at the growth in your Performance businesses, particularly if you strip out some of the JVs like Dow Corning, I mean, A, the margins have not been that strong, and B, are your products really differentiated enough to give you that kind of topline growth that will enable you meet your 10% earnings growth goal?
Andrew N. Liveris
We… thank you, Don. Yes, we… as you know and you have it in your slide there, we showed a slide last year that showed the contributions of all the actions we’d taken even before the PIC joint venture was announced, on the Performance portfolio.
Our assessment is that especially in businesses like Polyurethane, Epoxy, Specialty Plastics, of course, Dow AgroSciences, and the market facing businesses that we have been launching like Dow Water and others, not counting any of the new ones, that we actually are creating a part of the Performance business mix that is now more in the Specialties side than on the hydrocarbon sensitive side. And we have taken very conservative assumptions in the buildup to get us north of $3 on what those Performance businesses will do.
As we added built-on acquisitions to some of them, like in design polymers and Cellulosics Wolff for example, the Epoxy was also ones I mentioned, we have been adding those in as we have been doing them to show that actually we have a very conservative topline assumption on the Performance businesses for the so called industry trough in 10, 11, actually that is the only variable there, but a very conservative one compared to history and a very conservative one compared to what we have been able to demonstrate these businesses can do at the true value add-in like Urethane Systems, like Water, like Epoxy Systems and all those. So frankly, we believe we have a conservative set of assumptions, and compared to '01, '02, it's almost an irrelevant comparison.
All those other businesses at costs inclusive of Dow Corning were not contributing at all, that were fairly broken, and it's really all the actions we have taken to fix some and to add to them that give us the confidence to answer your question affirmatively.
Donald Carson
Just as a follow-up, what percentage your performance businesses have you considered truly Specialty versus… I mean there is a still a lot of what I would call differentiated commodities in there like some of your building products offerings?
Andrew N. Liveris
Yes, for sure we have, the $24 billion, $25 billion that is core performance in both the segments. I've been on record to say that a year or so ago, it split itself about a third, third, third, a third true specialties, a third neither true specialty nor true differentiated commodity, and the other third more being intermediates.
That number of a third is rapidly moving to a half with all the organic stuff we're doing. If you look at slide 23, you'll see that we actually haven't taken much credit for innovation for these 600 products we have in R&D, most of them in that first third and second third.
We believe by 2010 or '11, two-thirds of that portfolio will be true specialty without any big M&A.
Donald Carson
Fine. Just a question on that quarter, the ag earnings were not much above last year, and I know there was a bit of shift in the Q3.
But given the strength that some of your competitors reported in South America in Q4, I would have expected a somewhat stronger number of… what happened in Latin America, did Dow AgroSciences lose competitive position?
Andrew N. Liveris
No, quite the contrary, Latin America was very strong for us. I think it was really what you nailed in your question, which is the forward buying in North America that mitigated the impact in the fourth.
You can the second half combined, Dow AgroSciences had a great second half, and I'd say that was true North America and Latin America. In fact, the real issue… not issue, the real opportunity at Dow AgroScience is the organic growth I just mentioned in your previous question, which is we're putting new R&D resources and new selling resources to gain extra share, especially as SmartSpecs comes around the corner and other innovative things that they are doing.
So we've just increased size, that's why the earnings were down, but overall we're quite fine with where Dow AgroScience is on its topline.
Donald Carson
Thank you, Andrew.
Andrew N. Liveris
Thank you, Don.
Operator
And we will take our next question from Mark Connelly with Credit Suisse.
Unidentified Analyst
Good morning. This is Neils Watson [ph] for Mark Connelly.
Andrew N. Liveris
Hi, Neils.
Unidentified Analyst
Hi. This morning you also announced… Dow also a major capital investment program in it's chlor-alkali business at Freeport.
Freeport is obviously one of the big… your biggest chlor-alkali sites around. So I was hoping you could tell me exactly how much of this site will be sort of coming down?
I know that there is going to be some net capacity closures. And then also, would you explain to me how this expansion for… excuse me Brownfield buildout fits in with your asset-light strategy?
Andrew N. Liveris
Yes, I think again your question frames the answer pretty well, which is that there are some end-of-life assets in Freeport. The new chlorine [inaudible] project we announced today has been in the works for sometime to support our Performance businesses.
In essence, the net is we’re down 430,000 tons of capacity. So all of that is in the commodity side of the chlorine equation.
But having said that, we have also struck this new deal with Shintech. We are very excited by it.
And frankly, it does really continue the multi-decade relationship we’ve had with them, but also allows us to build new chlorine for our Performance businesses. The energy equation in Texas, and for that matter, the United States, means you can't really export.
So we're not in that game, but [inaudible] for market consumption here in the United States for the value-add specialties.
Unidentified Analyst
Thanks. And then just on the Polyethylene side, North America in 2007 almost looks like it is heading into the trough and it's certainly been helped by exports, 20% to 30% export growth in polyethylene.
What do you see sort of happening in 2008 with capacity coming on in the latter half of 2009, given your 2010, 2011 trough model?
Andrew N. Liveris
Yes, we've always seen '08… even with more information from a market point of view, '08 has been a year, which is still strong for Polyethylene. And I would tell you, we haven't changed our view given all these current market circumstances.
When we look at the granularity of the end-use markets in North America such as packaging for food, etcetera, agricultural uses, in fact we see actually strong growth. So there may be some downs in some markets, but it's mitigated by ups and of course as you just said, helped by exports.
But even market consumption in North America was truly reasonably good. And we view that '08 will not be a supply exceed demand year on a global basis.
Unidentified Analyst
Thank you very much.
Andrew N. Liveris
Thank you, Neils.
Operator
And we'll take our next question from Jeff Zekauskas with JPMorgan.
Jeffrey Zekauskas
Good morning.
Andrew N. Liveris
Hi, Jeff. Good morning.
Jeffrey Zekauskas
I thought the results in Basic Plastics were remarkably strong given your raw material cost-push. Is it the case that those results would've been down materially if it weren't for the improved profitability of your Canadian operations.
Andrew N. Liveris
Yes, Canada like some other companies talked about helped us a lot, but I would tell you Jeff, bottom line what you saw in fourth quarter for Dow is what we've been doing for three or four years. Our sales people, our marketers, especially on the basic sideway, the linkage between input and output is so close, have blocked and tackled all the way through the quarter to get the price coverage of raw material increase, as Kathy said in her remarks, the highest in our history.
And so I am very proud of what our team has done to get the Basics margin intact despite that massive surge.
Jeffrey Zekauskas
I guess if I can… just my second question, there was the $113 million tax benefit for EQUATE by changing its legal structure, can you explain what that is?
Geoffery E. Merszei
Yes, Jeff. This is… your namesake Geoffrey here.
It just simply represents a simplified legal structure. I guess this is an opportunity to combine these JVs that are located in Kuwait for the future.
That's all.
Jeffrey Zekauskas
So where does that tax benefit come from, in which geographic jurisdiction, and why?
Geoffery E. Merszei
The tax benefit comes from more efficient uses of future tax credit… foreign tax credits.
Jeffrey Zekauskas
In the US?
Geoffery E. Merszei
Well, ultimately in the US, but we get the benefit via our legal structures in Europe.
Kathleen C. Fothergill
The holding company for the joint venture is now a European company.
Jeffrey Zekauskas
Is it Swiss?
Geoffery E. Merszei
No, it's Dutch.
Jeffrey Zekauskas
Okay. Thank you very much.
Operator
And we'll take our next question from PJ Juvekar with Citi.
Prashant Juvekar
Yes. Hi, good morning.
Andrew N. Liveris
Good morning, PJ.
Geoffery E. Merszei
Good morning.
Prashant Juvekar
I was wondering if you could make some comments on the chlorine complex or chlor-alkali complex? Chlorine is weak due to PVC, but caustic seems to be going up.
So how do you see that playing out in 2008?
Andrew N. Liveris
Well, I think you summarized it quite well, but the caustic side of it is very strong and continues to exhibit strength. But when we look at all the markets that consume caustic aluminum, notably pulp and paper, they're still showing great strength, PJ.
Chlorine from a consequential point of view is showing some weakness because of housing here in the United States and pipe in particular, but of course the weak US dollars is helping US-based producers do some exporting, of course notably our partner, Shintech. So I would tell you that the prognosis on the caustic side is good and prognosis on the chlorine side, I mean its good volume but it's not high margin.
Prashant Juvekar
Okay. And secondly, if I look at your contribution from commodities and specialties, today it's about 50:50 if you fold the PIC deal.
Andrew N. Liveris
Yes.
Prashant Juvekar
And that will change after the deal, but to eradicate the word trough, what do you think should be the earnings contribution from commodities? Is it more like 25% or less?
Andrew N. Liveris
Yes. At the topline it's a very deceptive breakdown.
There is analog to what we're doing because of that joint ventures. I’d like to think of that new joint ventures on the Basic side as Specialty companies of their own right, because of their low-cost position.
So these are super commodities. Some new term we have to invent for them because their equity earnings… the equity earnings increase you are seeing in our company is coming because we have an ability now to factor in from these new joint ventures, of which there's more of them coming.
As you know in our inventory what we're going to bring on in the next five years. So as we look to the 11, 12 and see continual increase on the bottom line coming from there, it is a little bit hard to go to the topline where they are not consolidated and say, well, what's the basic performance split.
But if you stay on a non-consolidated basis, PJ, and do an analog and if we’re two-thirds, one-third post PIC, I think we're very, very close to that range. Anything north of 70% as a kind of analog to give you a kind of an indicator shows you this company would look more like a specialty company or let's call it earnings growth company rather than giving a term like specialty.
Prashant Juvekar
Okay. Thank you.
Operator
And we'll take our next question from Peter Butler [ph].
Unidentified Analyst
Hi. I just have one I guess several-part question.
Looking at your joint ventures and your equity income, it seems that you really haven't had a normal quarter off late. You’ve had outages, maintenance, etcetera, etcetera, etcetera, and you're also in the process of starting up your EQUATE too.
So I'm wondering, what will a normal quarter look like after you EQUATE up and running?
Andrew N. Liveris
After the new Kuwait joint venture, Peter?
Unidentified Analyst
No, after your EQUATE II.
Andrew N. Liveris
Oh, Olefins II, okay. Yes, well normal is an interesting word to use around these days.
I don’t know if I can define what a normal quarter looks like any more, but if you take the last four years or three years and have a look at the way we've been running on the equity side, you'll see we've been close to $1 billion and now we are over $1 billion. So with EQUATE II or the second expansion of the QUATE, Olefins II, I think you can start to see numbers well north of $1 billion paid on an annual basis.
Now, dividing that by four you start to get into the issues that you just started talking about, which is there is going to be an outage year of plan one there, etcetera, etcetera. In the fourth quarter, as you read, we had optimal.
Unidentified Analyst
Okay. What… in your discussions with EQUATE, it seems to me that you probably have some opportunities to incrementally expand EQUATE I and II.
And I think also is an EQUATE III something on the back burner or front burner, so where do you think the Kuwait investments are going to go?
Andrew N. Liveris
Well, I think our relationship in Kuwait Petroleum, PIC, of course we took the Carbide relationship as you heard me say in remarks, and we’ve posted to second project. EQUATE has been working on their north gas fields.
There is no question that there is a possibility for a third. And then if you take out Kuwait joint venture we just announced, which is of course oriented to not just in Kuwait, but beyond Kuwait with refinery streams and feedstock liquids place, we think out Kuwait expansion will come two ways.
One will be onshore Kuwait with a for potential further expansion based on gas, and offshore Kuwait in terms of liquids.
Unidentified Analyst
Well, that offshore Kuwait really hasn't paid too much attention to exploring offshore because you had so much onshore.
Andrew N. Liveris
Yes.
Unidentified Analyst
But that is right in between the offshore Iraq and the gas fields in further south at Iran and… I forgot, that Qatar has?
Andrew N. Liveris
Yes, I'm not [inaudible] offshore gas. I'm talking, in India, in China, with refinery products, you’re right about that gas, it’s onshore mostly.
Unidentified Analyst
Okay. Well, thanks for that help, guys.
Andrew N. Liveris
Thank you, Peter.
Operator
We'll take our next question from Frank Mitsch with BB&T Capital Markets
Frank Mitsch
Good morning, Andrew.
Andrew N. Liveris
Good morning, Frank.
Frank Mitsch
Thank you for that rousing state of the Dow union.
Andrew N. Liveris
Thank you.
Frank Mitsch
You mentioned in the beginning that the fourth quarter was record in terms of hydrocarbon costs. How do you see that trending into 2008?
Andrew N. Liveris
We basically like everyone else have our crystal ball going in major scenarios, and we see the stubbornly high numbers staying in the 85, 95 band into the first quarter, second quarter, and then tailing off into the third and fourth. So the average for the years in the 80 to 85 range, but we have got scenarios around either aside to that.
That scenario speaks to continual US softness eventually affecting commodities.
Frank Mitsch
And as you monitor your efforts to offset the stubbornly hydrocarbon cost… I'm not wanting to put words in your mouth, but would it not be… would it be surprising or would it not be surprising to see margin improvements on a sequential basis as you implement price increases to offset these hydrocarbons?
Andrew N. Liveris
Well, we have always said that if we have stable inclines, we can raise prices more consistently. It’s the ups and downs that kill us on the performance side and on the basic side too to an extent.
So if the incline is as I just said, then you are not putting words in my mouth, but I guess the bet is we’ll have volatility or we’ll have an incline.
Frank Mitsch
Okay. And coming back to the discussion about Dow being an earnings growth company, and you clearly outlined the case that we shouldn't see the sort of fall off that we have seen in the past.
Is that something that we can look to into 2008, 2009 time frame in terms of earnings growth?
Andrew N. Liveris
Short of a major meltdown in US recession, that's the way we are talking.
Frank Mitsch
All right. Terrific.
Thank you.
Andrew N. Liveris
Sorry, what Frank said… what I wanted to make show you understood is that we are talking north of $3 in the context of the next several years.
Operator
And we will take our next question from David Begleiter with Deutsche Bank.
David Begleiter
Good morning. Andrew?
Andrew N. Liveris
Yes.
David Begleiter
I'm sorry. You’ve kept most of your ethylene crackers within the company.
I obviously believe in the value of integration. Would you ever consider either monetizing a proportion of those ethylene assets to draw some cash out or maintain the value of integration in the company?
Andrew N. Liveris
The infrastructure aspect of the multiple streams out of our liquids crackers makes that very difficult day when I’d say the gas crackers were relatively aligned to the ethylene molecule. So how we have done it is trying to fundamentally allow that to be more of an infrastructure leverage point, but that we control how the integration occurs rather than putting it into a joint venture.
So I think the opportunity to monetize is fairly limited because most of the other product streams are very key to our performance businesses.
David Begleiter
Understood. And just on the question of M&A versus share buybacks, how long will you wait to deploy the cash if you do not find an accretive acquisition?
Is it '08, is it '09, or is it later?
Andrew N. Liveris
Well, I think I was very clear in my prepared remarks. I think this year we are going to have to cross the river, so to speak.
It really… we've been very disciplined on the share buyback and dividend increases. We’ve had lots of organic growth that we are funding.
You can see that in our expense increase. We’ve done some bolt-ons.
We have targets we are interested in, but frankly if they are not at the right price, then we will just go to the deep old strategy and just keep increasing remuneration of our shareholders and that won't be several years out, that will be this year.
Geoffery E. Merszei
And in the mean time, we will continue our buyback program. We spent in 2007 about $1.4 billion and I indicated earlier last year that our target to complete the $2 billion program is by mid-next year, and we have about $850 million still outstanding on that program.
So that's the… for this year, so that's the minimum that you can count on.
David Begleiter
Thank you very much.
Operator
And we will take our next question from Sergey Vasnetsov with Lehman Brothers.
Sergey Vasnetsov
Good morning.
Andrew N. Liveris
Hi, Sergey.
Sergey Vasnetsov
It seems with excess security, it takes time just like at the airport, we need to check a couple of hours earlier, it’s true. So I noticed that you started with appropriate term for definition of your very specialty… I mean recent events and products.
So, Andrew, I have a few names for you, I could license them on very reasonable terms without canceling.
Andrew N. Liveris
Thank you, Sergey.
Sergey Vasnetsov
My question is on slide 22. I think Geoffery just mentioned a second ago that you still have about $1 billion program, which was authorized last year and which presumably you’d be looking to, actually given where the share price is right now.
The option number one here, share buyback, in addition to existing program I understand that you are not going to make an announcement today as far the size and timing was. Can you give us some rough idea, is it going to be on the order of… $29 [ph] or it's larger?
Geoffery E. Merszei
Well, I mean we will… as we complete our current program, we will obviously, I would say, by the… again depending on how rapidly we execute the existing $800 million, $850 million, so between now and middle… mid-year we will announce another program. I think when Andrew was referring to our priority is as an accretive M&A in order to complete our strategy… our transformational strategy, in the event that does not happen, then I think you can count on a sizeable buyback program, which you can relate to the proceeds of our asset-light ballot.
Sergey Vasnetsov
Understood. And a related question, what would be appropriate range for Dow Chemical debt leverage in light of the new vision of the company more stable, faster growing, etcetera?
Geoffery E. Merszei
Well, I mean, we have historically said, Sergey, that 40% is kind of the level from a historical perspective. But I think that with a profile… a business profile that is less cyclical, more consistent, more predictable, then of course you earn yourself the right to have a more leveraged kind of a capital structure.
So I would say that by the time you had… but you’ve got to earn it. So by the time you get to that new business profile that Andrew was making reference to, then I think I would be more comfortable with a level slightly above that 40.
But I think first we have to get that profile.
Sergey Vasnetsov
Understood. Thank you.
Andrew N. Liveris
Thank you, Sergey.
Operator
We will take our next question from Kevin Mccarthy at Bank of America.
Kevin Mccarthy
Yes, good morning.
Andrew N. Liveris
Good morning.
Kevin Mccarthy
Question relates to the cyclical trajectory of your Basic Chemicals segment. Profitability peaked here fairly early in 2004 and it's been eroding in a very gradual fashion each of the last three years.
But today, you alluded to strength in ethylene glycol, we've seen strength in caustic soda, and this morning you are obviously taking capacity out of the Gulf Coast on a net basis in a fairly meaningful fashion. So as you look ahead over the next two or three years, Andrew, do you think we're presently above levels of normal profitability, below, and what's your outlook for the cyclical path in that peace of the portfolio?
Andrew N. Liveris
Yes, I have used this key analogy several times. I think we've gone on the commodity downcycle.
We've got a prolonged ridge. So it's a gentle green, not a double black diamond.
So that suggests… I’m sorry for who [inaudible] I am not, but anyway it works you. Hopefully, you will see then that the reason… what you just said is driven mostly by overseas growth, strong growth, the emergence of the Chinese consumer as well as the Chinese exporter.
And I think that overseas growth as witnessed by our own results is keeping commodities… petrochemical commodities fairly strong. And I would say… I think the gentle green, not abrupt declines.
Kevin Mccarthy
And then, a follow-up question if I may on research and development. It looks like it was up about 15% year-over-year in the fourth quarter, so stable as a percentage of sales, but rising fairly significantly in nominal terms there.
Can you update us on the components of your spend, some of the more interesting things you're working on, and what the outlook is for that line item in '08?
Andrew N. Liveris
Yes, clearly the… you’ve noticed the absolute dollars rising, we’re proportionately of course increasing it to businesses like AgroSciences and our Performance Specialty businesses, our market-facing units. We have some interesting stuff going on in alternative energy such as our building integrated photovoltaics program, which is a new way to get solar into our house.
We have added diesel particulate filter project, which is a new material that decreases backpressure and reduces diesel emission, and actually not to take much more time in the call, we detailed about 600 of these projects, most of them in the performance area. On slide 23, you'll see that yellow part of the chart, that's $2 billion of new EBIT on a risk-adjusted basis from that pipeline by 2011.
But the time we get to our Investor Day, we'll have a lot of things to say about those specifics.
Kevin Mccarthy
Great. Thank you very much.
Andrew N. Liveris
Thank you, Kevin.
Operator
And we will take our next question from Hassan Ahmed at HSBC.
Hassan Ahmed
Good morning, Andrew.
Andrew N. Liveris
Good morning.
Hassan Ahmed
How are you doing?
Andrew N. Liveris
Good, thank you.
Hassan Ahmed
Quick question on the PIC deal, now clearly valuations for chemical companies globally have come down fairly steeply over the last couple of weeks and months and this clearly has been the case in the Middle East as well. Now, is the pricing for the PIC deal fairly iron clad?
Meaning can we assume that despite what global valuations have done the deal price should not change?
Andrew N. Liveris
Exactly you should assume that, and we took out time to get this deal done mostly because the discussion was long cycled, not instantaneous. I mean our partner is very knowledgeable on petroleum and long cycle investments that are in petrochemicals already of course through us.
They understood that this wasn't a point-in-time valuation. This was a valuation based on returns that this new enterprise will give over the long cycle and it's a win for them, a win for us, and a win for the JV.
So you can assume that, yes.
Hassan Ahmed
Superb. Thank you so much.
Kathleen C. Fothergill
And I think we will have to take our last question. We are over time a little bit.
Operator
And we will take our final question from Scott Burk at Bear Stearns.
Scott Burk
Hi. [inaudible].
I just wanted to ask about the timing of the price increase that you talked about for the Specialty Plastics and Chemicals businesses, when can we expect those margins to improve over the next few months, quarters?
Andrew N. Liveris
The year-on-year comparisons in both performance businesses were hard, because fourth-quarter of '06 had a hydrocarbon decline and so the margins expanded and of course in fourth quarter of '07, we have had this massive run-up and the performance businesses, it just did not have the time to get the prices to stick as Kathy said in her remarks. With the high hydrocarbon number staying around, Scott, we can expect that in the first quarter and second quarter those prices to start sticking unless hydrocarbons drop.
Scott Burk
Okay, thanks.
Kathleen C. Fothergill
Okay. Well, thank you very much.
I'd like to thank all of you for joining us on this call. And we look forward to talking with you on our next conference call in April.
Good-bye.
Operator
We thank you for your participation, and have a nice day.