Dow Chemical CEO Wants to Redeem Berkshire Hathaway's Stake

HFA Padded
HFA Staff
Published on
Updated on

The Dow Chemical Company (NYSE:DOW) CEO Andrew Liveris spoke with FOX Business Network’s (FBN) Liz Claman about Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) Chairman and CEO Warren Buffett’s investment in the company and about the future of The Dow Chemical Company (NYSE:DOW). Liveris said that Buffett’s $3 billion in preferred shares is “a pretty high expense item” and that “we want to liberate that expense.” Liveris discussed how the United States is the best place to do business right now, saying, “This country is on the beginnings of a recovery.  Let’s not squander it.”

Dow Chemical CEO Wants to Redeem Berkshire Hathaway's Stake

Excerpts from the interview are below.

On when he expects to be out of the Buffett preferreds position:

“So our balance sheet has now gone down to debt levels pre- the Rohm and Haas acquisition.  Our net debt is the lowest it’s been since the ’06-’07 time frame.  So we’ve ingested all that.  The only part of the balance sheet is the part you just referred to, which is the so-called Buffett preferreds.  And he’s cashed them out of other companies.  We had, actually, a cheaper version of the ones we had at Goldman Sachs Group Inc (NYSE:GS) and General Electric Company (NYSE:GE). Having said that, they are, as you say, a pretty high expense item.  We want to liberate that expense.  We said as recently as last week – we’re talking to Warren over time to see what’s the best way of doing that. As interest rates go up, they’re worth less. So you know, interest rates are moving up.  So we’ll see what time frame that becomes. But I would tell you, balance sheet focus, taking down the debt, rewarding shareholders, generating the cash, rewarding shareholders in the near-term is a focus you get, not just out of science and innovation like this.  Science and innovation like this can only be gotten because you’ve got the short-term results. So people like me, we have to solve for every shareholder, whether it’s Mr. Buffett or any shareholder, the short-term to generate the long-term.”

On what place is best for his business right now:

“The United States of America.  And it’s an amazingly strong statement.  I’ve said now for three quarters in a row that we’re on the path.  We’ve just got to keep at it.  Let’s not – the politics of dissent and partisan politics, put it to one side.  Get the corporate tax reform.  Get the trade agreements with Europe and the TPP in place. Let’s get the good things done. This country is on the beginnings of a recovery.  Let’s not squander it.”

On whether he falls under the manufacturers section of the corporate tax rate:

“Clearly.  Clearly.  And, look, the President is doing all the right things with manufacturing.  He’s made it a core part of his policy.  Advanced manufacturing is not industrial policy.  Advanced manufacturing is doing what you said before about the stem.  It’s really kindling innovation. If you have manufacturing, you get innovation.  If you have innovation, and you don’t have manufacturing, you’ll lose innovation. And that’s what the Chinese have figured out.  That’s what other countries have figured out. How do I get manufacturing of the advanced kind and alongside that, put in facilities like these? And the President gets that.  That’s why he’s putting these policies in place to not only go at the corporate tax rate for all of us, but to actually do a special for manufacturing to get the jobs here, the high paying jobs you talked about.”

On whether he likes the 25 percent level of the corporate tax rate:

“Sure.  I mean, look, it has to be revenue-neutral.  All of us understand that corporate tax reform is revenue-neutral.  We all get that.  The Business Roundtable, the Business Council, all of us get that. So taking it from where it is to 28 or 25, if it ends up being the same tax rate for all of us, I also get that.  But if there has to be a special incentive out there to actually get these jobs you just talked about, manufacturing has the best multiplier. For every job I create here, there’s five trade jobs created around me. That’s a great multiplier.  Really good high paying jobs in the supply chain.”

On what economic changes he needs to see to start hiring more employees:

“Well, I mean, the economy, clearly, the U.S. economy, but the global economy needs to be back to where it was.  It’s not there yet.  It’s a slower recovery than all of us would like.  What we want to do at The Dow Chemical Company (NYSE:DOW) is use our science, the science here, to validate the business case that you just talked about, which is a greater share of wallet where growth is. So smarter coding solutions, smarter electronic materials, higher value to our end-users means we get in a bigger share of wallet, so to speak, of what the customer value proposition is by having these scientists work with customers to get a bigger share. So the jobs will grow as the profits grow.”

On whether the specialty chemicals market has higher margins:

“I want to dismiss the word specialty chemicals to history, because our industry has gone through lots of definitional changes.  Terms like commodity and specialty dumb us down. What you’re in here — what you see here is a creative material science company that actually helps customers get smarter coatings, smarter foods, smarter housing and actually there’s more profit in that because you save money at the customer end.”

On whether he has heard of any activist investors trying to get in on Dow:

“Well, so the shareholder base of all of us, we have to pay incredible attention to. Shareholders have to have a return, otherwise they put their money somewhere else. Returns get defined over time frames –short, medium and long.  Today’s world gives you no optionality.  You’ve got to do all three. And so a facility like this is for medium to long-term returns.  $2 billion of EBITDA coming from our innovation engine in the next three years, that’s imminent.  That’s around the corner. But for some shareholders, that’s not imminent enough. So what can you do to be the most efficient profit producer in the short-term? Have you got your mind to detail on self-help, on restructuring?”

On what he plans to shed next at Dow Chemical:

“Well, we said in our earnings call last week that we’ve been very rigorous on return on capital as our metric.  We want to go deep and not as wide.  We want to go deep in markets while shedding lower return on capital assets.  But we can’t make a difference in the marketplace with our science, so we talked about our chlorine derivatives.  We talked about our epoxy business as examples of businesses that you know what, even though we’ve been in them for 50 or 60 years, we can grow the return on capital and therefore shed those so we can go deeper in higher profit pools.”

On whether he will increase Dow’s dividend:

“So our focus for the entire company is generate cash, bring our balance sheet down to the levels that it needs to be – and by the way, our debt to total capital is 36 percent – and reward our shareholders. Dividend policy, we’ve had a dividend policy for 100 years in this company, or more.  And at 3.6 percent, it’s a good yield. As we grow earnings, we grow dividend.  As we look at our balance sheet, we can look at other ways, like share buybacks.  We are very cash-focused, very cost-focused, very driven by shareholder remuneration.  We have a great balance sheet and we know we can grow from here in terms of our earnings stream, as we do the decisions we talked about, shed lower return on capital businesses, invest in high growth businesses, our shareholder gets more rewards.”


HFA Padded

The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

Leave a Comment