Dow Chemical Co And DuPont To Combine in Merger of Equals -M&A Call
Dec 11, 2015 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
DD - E I du Pont de Nemours and Co
Dow Chemical Co And DuPont To Combine in Merger of Equals -M&A Call
Dec 11, 2015 / 01:00PM GMT
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Corporate Participants
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* Jack Broodo
Dow Chemical Company - VP of IR
* Jen Driscoll
DuPont - Director of IR
* Andrew Liveris
Dow Chemical Company - Chairman & CEO
* Ed Breen
DuPont - Chair & CEO
* Howard Ungerleider
Dow Chemical Company - CFO
* Nicholas Fanandakis
DuPont - CFO
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Conference Call Participants
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* David Begleiter
Deutsche Bank - Analyst
* Jeff Zekauskas
JPMorgan - Analyst
* Frank Mitsch
Wells Fargo Securities, LLC - Analyst
* PJ Juvekar
Citigroup - Analyst
* John Roberts
UBS - Analyst
* Hassan Ahmed
Alembic Global Advisors - Analyst
* Laurence Alexander
Jefferies - Analyst
* Vincent Andrews
Morgan Stanley - Analyst
* Arun Viswanathan
RBC Capital Markets - Analyst
* Jim Sheehan
SunTrust Robinson Humphrey - Analyst
* Brian Maguire
Goldman Sachs - Analyst
* Duffy Fischer
Barclays Capital - Analyst
* Steve Byrne
BofA - Analyst
* John McNulty
Credit Suisse - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the Dow and DuPont announcement.
(Operator Instructions)
Also, today's call is being recorded. I would now like to turn the call over to Mr. Jack Broodo. Please go ahead, sir.
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Jack Broodo, Dow Chemical Company - VP of IR [2]
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Thank you, Jennifer. Good morning, everyone. I am Jack Broodo, Vice President of Investor Relations for Dow Chemical. Thank you for joining us on such short notice for today's call. DuPont and Dow are making this call available to investors and media via webcast. We will discuss the announcement made earlier this morning via a press release that was posted on DuPont.com and Dow.com.
On the call today are Andrew Liveris, Dow's Chairman and Chief Executive Officer; Ed Breen, DuPont's Chair and Chief Executive Officer; as well as both Company's Chief Financial Officers, Howard Ungerleider and Nicholas Fanandakis, as well as Jen Driscoll, DuPont's Director of Investor Relations.
On today's call, Andrew Liveris and Ed Breen will discuss details of the transaction, and then we will conduct a question-and-answer session following the presentation. We have prepared slides to supplement our comments on this conference call. These slides are posted on the investor relations section of Dow's website, DuPont's website, and through the link to our webcast. Now, let me turn the call over to Jen Driscoll. Jen.
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Jen Driscoll, DuPont - Director of IR [3]
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Thanks, Jack. I'm Jen Driscoll, Director of IR. I am standing in for Greg Friedman who unfortunately is unable to join the call today due to a personal commitment.
During the course of this conference call, we will make forward-looking statements, and I direct you to slides 1 and 2 for our disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance but involve a number of risks and assumptions. If you'd like more and information on the risks involved and forward-looking statements, please see our SEC filings.
We will also refer to non-GAAP measures. We request that you review the reconciliations to GAAP statements provided with today's slides, which are posted on our respective websites. Unless otherwise specified, EPS, EBITDA, and EBITDA margin are on an operating basis, which excludes certain items.
In connection with the transactions, the parties will be following registration statements and proxy statements for stockholder votes. These filings will contain important information and we advise you to read them in their entirety. These filings will be available free of charge from the SEC or our two companies.
And I will now hand call over to Andrew and Ed.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [4]
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I'll start. Thank you, Jen. This is Andrew and good morning, everyone, and thank you very much for dialing in today. Ed Breen and I are just delighted you could join us for this incredibly historic announcement in which we will create tremendous value for Dow and DuPont shareholders and represent a similar event for our employees and our customers.
This merger of equals, which is creating Dow DuPont, was unanimously approved by both Boards of Directors yesterday evening. Following the close of the transaction, we plan to separate the combined company into three independent public traded industry-leading companies focused on agriculture, material science, and specialty products.
Our rationale is clear. Each Company will be a leader in attractive segments with global challenges are driving demand for these businesses' distinctive offerings. Overall, this transaction represents a tectonic shift in an industry that has been evolving over the last many years and is a combination of a vision we've had for more than a decade to bring together these two powerful innovation-driven agricultural material science leaders.
I want to underscore that this transaction is more than just creating a leading agricultural company. We also intend to create a leading global pure play material science company as well as an innovation focused, high-margin specialty products company. The synergies deep, clearly achievable cost synergies that will be rapidly realized and the potential growth synergies are extremely strong accretive value drivers for our owners.
These synergies also represent the minimum amount that we expect to achieve and as with many transactions, we believe that there are additional opportunities we will realize as a result of the integration process. The merger of these two highly complementary companies and correlative spinoffs is a real game changer and going forward it will bolster the growth profile for each. We will expand the potential to serve our customers and release significant value for our shareholders. Now, let me turn it over to my new friend and partner, Ed Breen.
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Ed Breen, DuPont - Chair & CEO [5]
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Great. Thanks, Andrew. We are very excited about this transaction and the value that can be created for shareholders by bringing together our companies to create three industry leaders. When I look at DuPont and Dow, I see businesses that fit together like hand in glove, which gives us the ability to create three highly focused companies because of the combined assets, capabilities, and scale.
We operate in a dynamic global environment and this is the right plan at the right time. It gives us the strongest possible foundation for where our industry and our markets are headed. It's a unique opportunity to bring together two great highly complementary companies each with a long history of innovation.
Each of the three businesses we create will be a leader in its industry, will be able to allocate capital more effectively, apply its powerful innovation more productively, and expand its products and solutions to more customers worldwide. Each company has a legacy and heritage of science and innovation and they will have greater capacity to invest and target those resources as productively and effectively as possible.
And each will have a talented, aggressive management team focused on unleashing the full value of these new independent companies. This deal is extremely strategic, but also provides cost synergies in the near term and also creates enormous potential for growth over the long term.
Now, let's provide a top-line picture of what each of these three businesses is expected to look like and why the industrial logic is so compelling. First, we will have a $19 billion agriculture company that brings together DuPont and Dow's strong seed and crop protection businesses.
This will create a world leading agriculture company with the most comprehensive and diverse portfolio and the broadest footprint. The portfolio will be uniquely balanced between the seeds and crop protection businesses with broad and attractive product offerings that will result in exceptional value and choice for growers.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [6]
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And the new material science company is going to bring together the two company's performance materials segments as well as Dow's performance plastics and infrastructure solution segments and consumer care and Dow automotive businesses, and it's going to create a $50 billion revenue industrials leader. The combination will bring both synergistic science and engineering capabilities to our targeted markets and the result will be the combined technology offerings that can provide innovative solutions for many of our packaging, transportation, construction, and durable goods customers.
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Ed Breen, DuPont - Chair & CEO [7]
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And the specialty products company will be a highly innovative company with unique businesses that share similar investment characteristics and specialty market focus. It will consist of DuPont's safety and protection, nutrition and health, industrial biosciences, and it will combine DuPont's electronics and communication businesses with Dow electronic materials business. Specialty products will have combined pro forma revenue of approximately $13 billion.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [8]
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Each of these businesses are going to be focused on core competencies and they are going to have a very clear investment thesis and be in a stronger position to create differentiated solutions for customers, and if you turn to slide 5, we are providing an overview of the transaction on this slide. This outline is the base structure that will be executed as part of the initial merger of equals.
This transaction is truly a once-in-a-lifetime opportunity with both companies having virtually the same market cap which has only really happened on a few occasions over the last decade. We were able to execute this merger of equals in a very clean manner. And most importantly we've ensured value creation for all shareholders without diminishing return on our combined strategic initiatives. Next, following the close of the transaction, we expect to pursue a separation of Dow DuPont into three independent publicly traded companies through tax-free spinoffs.
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Ed Breen, DuPont - Chair & CEO [9]
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The merged Company will have a market capitalization of approximately $130 billion at announcement. Upon closing of the transaction, which we expect to occur in the second half of 2016 subject to shareholder and regulatory approvals, DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in Dow DuPont for each DuPont share, and Dow shareholders will receive 1 share of Dow DuPont for each Dow share.
I will transition into the role of CEO of Dow DuPont and the CFO of Dow DuPont will report directly to me. Andrew will serve as Executive Chairman and be responsible for the material science company.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [10]
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And Dow DuPont will have 16 directors consisting of eight current Dow directors and eight current DuPont directors, including of course Ed and myself. We will also include two independent co-lead directors.
And additionally, immediately following the close, advisory committees will be established for each of the independent standalone companies. These committees, which will be run by myself and Ed, will oversee the respective businesses, including working with management to prepare for being standalone public companies in the future.
Now, if you turn to slide 6, we break down the approximately $3 billion in anticipated cost synergies across these three businesses. The cost synergies will be realized in four main functional buckets, SG&A, COGS, leverage services, and R&D.
The Dow and DuPont teams spent significant time evaluating and identifying cost efficiencies separately and then came together for over 4,000 man hours of work to closely to define the plan synergies. These synergies are real, achievable, and enabling for future growth.
We see an opportunity for significant growth synergies and as I said earlier, these synergies represent the minimum amount we expect to achieve. The combined team's evaluation indicated that 100% of the run rate cost synergies will be achieved within the first 24 months after closing.
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Ed Breen, DuPont - Chair & CEO [11]
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Now, on slide 7 is a high-level outline of how we expect to achieve the cost synergies across business and functional areas as well as lowering corporate cost. This is obviously a big driver of value creation in the deal and we want to give you as much clarity as we can about the sources of these cost savings.
In agriculture, we will gain significant synergies through seed production cost efficiencies by maximizing the R&D programs of the two companies and through the optimization of our production and supply chains. In material science, we will realize benefits from feed stock, hydrocarbon synergies, production cost efficiencies, and the merger of our global networks.
And in specialty products we see opportunities to optimize manufacturing, sales, and R&D facilities, and process chemicals manufacturing synergies, particularly in electronics and communications. Corporate synergies will naturally come from reduced corporate overhead and procurement synergies.
I want to clarify that these cost synergies are in addition to the respective cost savings programs that the two companies already have underway. In that regard, today DuPont issued a press release and filed a Form 8-K reporting on its new 2016 global cost reduction and restructuring plan which will reduce $700 million in costs compared with 2015.
Now, we'd like to give you a more detailed picture of what each of these three businesses is expected to look like. I will cover ag and specialty products, Andrew will cover material science. So let me turn to agriculture.
As I said, on our last earnings call, consolidation in the ag industry is a natural step and this transaction is the most logical and compelling combination. Simply put, we are creating the world's leading agriculture company by bringing together DuPont's unrivaled market access and industry-leading germplasm and breeding capabilities, and Dow strengths and traits and crop protection, we will have the most complete portfolio of any Ag company. The combined enterprise will be approximately 50% germplasm and traits and 50% crop protection, leading to one of the most comprehensive and diverse agriculture portfolios in the industry, able to serve a wide array of issues that face today's growers in production agriculture.
Let's move to slide 9. This shows the breadth and strength of our combined current offerings and pipeline. Merging DuPont's industry-leading seed business with Dow's strength and traits will create a very exciting lineup of innovative products across corn, soybeans, cotton, and other crops. Our crop production business is also greatly enhanced by this combination of two strong insecticide and herbicide portfolios with an emergent fungicide pipeline.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [12]
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So, on slide 10, through this transaction we are combining our highly complementary capabilities in material science across key industries to create a pure play industrial leader with competitive offerings for customers in high-growth, high-value sectors. This complementary nature of our two business is one of the extremely attractive aspects of this transaction. In particular, we are expanding our leadership in packaging innovation as well as in performance plastics, elastomers, fibers for engineer applications in transportation and construction.
Additionally, by being able to bolster our innovation and expand our solutions provider leadership position in key industries, we are positioning ourselves to win with our broad material science expertise, enabling us to provide even larger competitive offerings and advantages for our customers. The combination will result in even more reliable earnings and even higher margins in both the near and longer term.
Turning to slide 11. Many of you will recognize the version of this graphic from many other Dow presentations; however, we have modified it now to show how the new edition of DuPont's application development and other science engineering strengths will fit very nicely into the existing Dow platforms which are fueled by our integration, innovation, and low cost positions globally to provide expanded science engineering solutions to our customers.
A full 70% of our revenue is driven by three key markets, packaging, transportation, and construction. We have strong leadership positions in all three. The world's largest packaging material supplier with the ability to be in virtually every layer in multi-layer packaging solutions.
The leader in automotive for under the hood and inside the car, which we will speak to in the next slide. A growing leadership position in polyurethanes with our focus on polyols in the Americas and Europe.
We are excited that our new facilities are beginning to start up in Sadara, which had first products out of our new polymer resins plant just this week. On slide 12, we highlight two prime examples in packaging and transportation of how the Dow and DuPont combination is expanding our current customer offerings and putting us in virtually every layer in multi-layer film solutions.
The first is in packaging which is a key growth market as more of the world desires more sanitary food packaging and medical device packaging with increased functionality. By taking an integrated approach to customer design needs, we are going to deliver enormous value to our customers.
The multi-layer films, which are very popular in food and beverage products due to unique properties, is often a combination of DuPont and Dow products, and through this combination we are going to be able to bring these products under one roof, widening our offerings, and innovative customer specific solutions.
And in automotive, we are combining Dow's core position on audio exteriors and in the car with DuPont's significant presence, specifically under the hood, to become a more complete solutions provider to our customers where more of our products will get [specked in] to new designs than ever before. And from an innovation standpoint, we will be able to offer a more complete solutions for multi-materials platforms at OEMs. This combined business will be a force to be reckoned with.
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Ed Breen, DuPont - Chair & CEO [13]
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On slide 13, now turning to specialty products where we are creating a leading global specialty business focused on attractive secular growth markets where our distinctive innovative science capabilities give us a clear competitive advantage. In each of these businesses, electronics and communications, nutrition and health, industrial biosciences, and safety and protection, we will be in a better position to focus our capital allocation and build on our proven innovation record.
As a result of the anticipated [spin], these businesses will have a much more compelling investment thesis and will provide opportunity for multiple expansion. DuPont's nutrition and health, industrial biosciences, and safety and protection businesses already have plans for growth and these will be enhanced by the new specialty focused structure. The electronics and communications businesses will benefit from the integration of two strong players in this space. So let me now provide a little more detail on that.
On slide 14, our combined electronics businesses will be the clear industry technology leader with the broadest offering in the industry. We will have leadership in four markets that have high growth potential, semiconductor materials, advanced packaging, solar photovoltaic materials, and display materials. By bringing together our strength across these businesses, we will have best-in-class innovation capabilities and scale to compete quickly and effectively. We see tremendous opportunities to grow in adjacent spaces and to leverage customer relationships to offer a broader set of offerings, so this transaction represents a very exciting growth opportunity for this business.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [14]
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Let's now turn to slide 15 in the financial profile of the transaction. The combined Company will have significant financial wherewithal and resilience, as the slide summarizes. The collective results, based on 2014 financials, over $80 billion in revenue and $15 billion in operating EBITDA, and 18% margins.
The current dividend policies for each Company will continue through closing. The merge Company Board will determine the best capital structure, including the dividend policy for Dow DuPont as well as the three intended new companies we expect to form. The intention is to remain shareholder friendly and return cash to our owners in line with today's actions.
We will continue to target investment grade credit rating and anticipate that the merge company and the anticipated spins will rest on solid financial footing. Of course, this is in part enabled by the attractiveness inherent in the merger of equal structure we've agreed to today.
Turning to slide 16, we outlined the governance structure of Dow DuPont and the intended standalone companies which we touched upon earlier. I will assume the role of executive chairman of the combined company with a focus on the material science company. Ed will become CEO with focus on both the agriculture company and specialty products company. The CFO, when named, will report directly to Ed.
The Dow DuPont's Board of Directors will consist of 16 total directors, eight current directors from each company, including myself and Ed. It will also have co-lead independent directors, one from each of Dow and DuPont. Advisory committees will be established to agriculture, material science, and specialty products businesses at the time of the transaction closing.
Ed will head the agriculture specialty products committees while I lead the material science committee. The advisory committees will also determine CEO and leadership teams of each new standalone company following the intended split. Together, we have significant experience executing integrations and we feel confident that we can build the right management team to make this historic transaction very successful.
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Ed Breen, DuPont - Chair & CEO [15]
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In closing, both Andrew and I have enormous confidence in this merger. Each of these companies has an amazing history of science and innovation and that will help drive an equally amazing future. This transaction is all about the value that can be unleashed by creating focus, independent businesses with the ability to allocate capital efficiently and make targeted productive investments in growth.
I'm confident that this will create great opportunities for employees and drive innovation and value-added solutions that benefit customers over the long-term. When we look at each of the businesses that we intend to establish, they all will have a clear focus of distinct and compelling investment thesis, scale advantages, and the ability to deliver superior solutions and choices for customers, and exciting career opportunities for employees. We have a talented committed team and I know we can deliver.
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Jack Broodo, Dow Chemical Company - VP of IR [16]
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Thank you, Ed. Now we will move on to your questions. First, however, I would like to remind you that my comments regarding forward-looking statements, non-GAAP financial measures apply to both our prepared remarks and the following Q&A. So now we will move to Q&A. Jennifer, would you please remind the audience of the Q&A procedure?
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Questions and Answers
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Operator [1]
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David Begleiter with Deutsche Bank.
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David Begleiter, Deutsche Bank - Analyst [2]
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Thank you. Good morning. Andrew and Ed, on the ag side do you expect any divestitures on either the seeds or the crop chemical parts of the portfolio?
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Ed Breen, DuPont - Chair & CEO [3]
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You're probably asking maybe for antitrust reasons also, and it's interesting. It would be very limited where there's product overlaps in almost all geographies. We've been through this.
We've analyzed it in detail, so it would be very minor if there is any, but I mean the key to this is I think we showed it on that one chart, David, these are highly complementary businesses and really it's going to give our end consumer, our farmer a lot of product choice here and diversity of choice which is going to be just a real advantage from a market share standpoint for us. So, no, we don't see much real significant overlap here which is pretty incredible.
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David Begleiter, Deutsche Bank - Analyst [4]
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Thank you very much.
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Operator [5]
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Jeff Zekauskas with JPMorgan.
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Jeff Zekauskas, JPMorgan - Analyst [6]
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Hi. Thanks very much. Both companies have significant pension liabilities. Is there a particular funding of the pensions that has to take place upon the close of the transaction, and does the tax structure of the combined companies more or less resemble the individual companies, and when there's a split, does that change the tax structure?
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Howard Ungerleider, Dow Chemical Company - CFO [7]
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Jeff, this is Howard, and then maybe Nick. Nick and I have been spending an awful lot of time together in these last few days. I'm becoming maybe part Greek if Andrew and Nick would allow me.
Look, it's early days I would say and I don't want to speak for Nick's pension liabilities. You know our pensions overall are around 80% funded, but you know also based on our past discussions that you get about 100 or 125 basis point increase in rates and that funding goes completely to fully funded. So let's see what the next period of time between now and [merge co] close between where we are today and then we will see what happens from there. Nick?
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Nicholas Fanandakis, DuPont - CFO [8]
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Nick I would echo that. I would support that. You've got to look at the discount rates, have such a big factor as to what that unfunded balance is at any point in time. Rates are starting to move upwards, so that's going to have a favorable impact on that unfunded balance. We got to look at where it is at the time. We'll obviously be working with the PBGC to determine what the value is and what, if anything, needs to be done in that regard.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [9]
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Maybe just a part, not to give three answers to the same question, but the employee cut needs to be thought about as well. These are well-funded pensions. Both companies have done a great job, and we are going to need a lot of good people to get this job done, so we've taken this all into consideration.
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Operator [10]
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Frank Mitsch with Wells Fargo Securities.
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Frank Mitsch, Wells Fargo Securities, LLC - Analyst [11]
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Can you hear me?
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Ed Breen, DuPont - Chair & CEO [12]
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Now we can.
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Frank Mitsch, Wells Fargo Securities, LLC - Analyst [13]
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Alright. Great. I was going to say congrats on the deal of the century, but given your respective histories, I should say the deal of three centuries.
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Howard Ungerleider, Dow Chemical Company - CFO [14]
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I smell a headline, Frank.
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Frank Mitsch, Wells Fargo Securities, LLC - Analyst [15]
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That's a layup, Howard. Look, gentlemen it's been no secret that Andrew has coveted this transaction for at least eight years by my clock. Ed, you've been in that chair for just a few months, and I understand it's very logically and compelling on the ag side, no doubt there, but I'm just curious, did you look at combinations -- this is a question for Ed.
Did you look at combinations of the other parts of DuPont? How did you come to the realization that combining the entirety of the companies was the best path forward for DuPont, and if I could just ask, is there a breakup fee involved in the transaction?
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Ed Breen, DuPont - Chair & CEO [16]
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I've also coveted this deal for about two months, but the answer to that actually is I was looking at this very seriously as a Board member since I joined the DuPont Board back last February and was doing a lot of my own work along with the Board but getting very excited about, wow the combo here could be unbelievable, and obviously we looked at every other variation after could be around the world. So we studied this hard for a long time. And it always was so compelling that it would be more than Ag because it's really putting the Dow business with the right assets from DuPont.
We're creating a specialty company that I think is going to have a very nice profile with a different multiple on its stock, and then we get to be the leading ag company, so it really strategically took care of three nice leading companies. And what was amazing about this deal is our stocks were trading almost identical so the 50/50 was very easy to get to, and don't forget the whole structure of this is very, very tax efficient and one of the reasons we are doing it this way, so very beneficial from that standpoint to the shareholders. When I looked at every other strategic option to DuPont, there was nothing that came close to this.
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Nicholas Fanandakis, DuPont - CFO [17]
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On the break fee, it's a standard break fee of a transaction of this magnitude and you'll see the details in the regulatory filings that will be coming out momentarily.
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Operator [18]
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PJ Juvekar with Citigroup.
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PJ Juvekar, Citigroup - Analyst [19]
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Yes. Hi, good morning. I have a question on ag, but before I get to that, I just have a clarification on your cost-cutting slide, which was a good slide, but these new goals that you announce today, are they in addition to what you had announced, particularly for DuPont?
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Ed Breen, DuPont - Chair & CEO [20]
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Yes, this is in addition. So what we announced today is that in 2016 we will save $700 million and that is in addition to the $3 billion we are announcing for merge co.
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Nicholas Fanandakis, DuPont - CFO [21]
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PJ, a couple of points. The other part of your question you might be asking about addition to the prior targets that we had out there of the [$1.3 billion and $1.6 billion] and so if you know and remember those numbers were all based away from a 2013 base point. What we're talking about now is this $700 million is going to be a year-over-year savings in 2016 and when you look at the other things going on in this environment in 2016, obviously you have got to take in the macro challenging environment that we have, the weakness in ag right now, particularly in Brazil, and there is some additional currency impacts that are going to happen in 2016. We're going to see probably another $0.25 of currency impact and may be anywhere from $0.05 to $0.10 of tax changes because of geographical mixes, so all that has to be dialed in as you are thinking about 2016 sort of numbers.
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Howard Ungerleider, Dow Chemical Company - CFO [22]
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From a Dow perspective I would just add, and it's on slide 7, but the $300 million that Dow is going to realize in 2016 is also on top of these synergies. And maybe just add just a little bit of color. The Dow and DuPont teams have been working really hard under the cloak of darkness here in New York for many days. We've got about 4000 people hours' worth of effort rounding these numbers, so I would say that on behalf of all of us on this call we feel really good about the ability to deliver these synergy numbers on top of both the DuPont and the Dow programs separately.
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Operator [23]
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John Roberts with UBS.
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John Roberts, UBS - Analyst [24]
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Andrew, earlier you had indicated it could be hard to de-integrate Dow segments. I realize you have preserved much of the integration here in the way you sliced it. Is that why the specialty company -- specialty companies kinds of seems like all other, like the materials company was put together focused, but when I look at the specialty company, only DSM crosses anyone's segment when you look the peers?
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [25]
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Ed, I'm sure, is going to want to add a perspective. Remembering, John, that the Dow view is natural owners on ag needed to be discussed with the industry and we have been consistent on that for over a decade and you've also shadowed that there will be another round of consolidation. Of course the Monsanto bid on Syngenta triggered a lot of conversations that then became possible because it was very important that the integration of crop chemistry and seed and traits and the hand-in-glove fit that the two companies today have announced was always there in our eminent future.
Your point on the materials versus the specialties, I've got to give credit where credit is due. That's come from Ed and the team. Obviously some of the people who are out there thinking about how the DuPont businesses faired.
Dow has always had integration breakup the dissynergies. Ed and I spent considerable hours looking through what was that the dissynergy of a breakup versus the synergy of a standalone, and I would tell you I would not characterize specialty products left over. I would say these have incurred three powerful pillars of new businesses that have their own destination and their own right. Ed, maybe you want to pick up on that?
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Ed Breen, DuPont - Chair & CEO [26]
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A lot of specialty is emanated from DuPont and as many of you have already told me quite a few times, and investors, it's hard looking at the pieces of DuPont. They're very, very different. They would normally trade very different, and so what's really happening here is the parts that belong with performance and material sciences are going where they belong and we get the bucket a lot of DuPont's businesses in the specialty, which they have been, and then they're not tied to ag because we are now the pure play ag business.
And then we get that to create this nice world leading platform on the electronic side by putting Dow's piece in with ours I think becomes very attractive. And don't forget, this specialty business is high R&D across all these businesses and what it really is it has a lot in common. It has high application development with end users and end customers that we are very, very good at. So I think this set of businesses will trade well and these businesses will do very well moving forward.
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Operator [27]
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Hassan Ahmed with Alembic Global.
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Hassan Ahmed, Alembic Global Advisors - Analyst [28]
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Just wanted to go back to the cost synergies question, specifically on the R&D side of things. Obviously, you guys have guided to $3 billion in cost synergies, 10% of which would be R&D, right? So around call it $300 million.
Now, as I take a look at the cumulative R&D spend between Dow and DuPont, we're talking something to the tune of $3.6 billion and a disproportionate amount of that is in Ag. So I'm just trying to get a sense that that $300 million number for R&D-related synergies to me seems a bit on the lower side, so how should we be thinking about that?
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Ed Breen, DuPont - Chair & CEO [29]
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You did detail that properly. The biggest component of that is in the Ag side because of the duplication on the trade side is one big area. So we get a big piece of that there, but what Andrew and I and the teams are being very careful on, one of the key benefits here is these are science and technology-driven innovative companies and what we don't want to do is affect the future growth of these businesses and so we were very careful.
We took out the duplication and that's what we took out. We did not take out anything that could help these companies for growth in the future. And the nice thing about it is we still got the $3 billion of synergies in the businesses, so I like where we came out.
When I do cost cuts over the years, I am always in very careful not to over effect the person that is selling the product to the customer and the people inventing in making the product, and everything else in the middle is a little more fair game and I think that's what we were able to attack here and come up with nice synergies but again not effective growth engine.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [30]
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I just want to amplify, Ed and I, two like-minded individuals that have never met but felt like I had known him from his reputation and what he has done, that was the meeting of the minds at the very beginning that, Hassan, handled with care, a light touch, err on the side that you may not get it right at the beginning but go and detail the growth that the R&D engine provides you and frankly we did that at Rohm and Haas. We were very careful when Dow did Rohm and Haas to not rip out the application development in the sales engine and the innovation engine. So, look, we are saying that we got the cost synergies and we've got a great amount of growth synergies and we created three growth companies, and I think that is a powerful value driver to the market.
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Howard Ungerleider, Dow Chemical Company - CFO [31]
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I would agree that we have lots of additional opportunity and potential upside. If you just look at some of the numbers, we've got between the two companies on a pro forma basis we've got north of $5 billion of leverage services to Ed's point on the back end and we are going to spend north of $55 billion on cost of goods sold. So, it's an opportunity-rich environment.
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Ed Breen, DuPont - Chair & CEO [32]
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And that's the areas you really want to attack over time because we're not affecting our growth and it is just making the Company more efficient.
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Operator [33]
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Laurence Alexander with Jefferies.
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Laurence Alexander, Jefferies - Analyst [34]
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Good morning. Could you clarify between the three businesses how you see supportable leverage ratios and where you see which ones have the most opportunity for working capital efficiencies longer term? Thank you.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [35]
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Howard?
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Ed Breen, DuPont - Chair & CEO [36]
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As we look at the three entities and take about post spend, you're looking at three entities that we intend right now to be investment grade entities, so you'd have the appropriate leverage with that investment grade rating. There's opportunities I believe in working capital improvement certainly in the Ag side of it where you have the synergistic fit now with those channels access and utilizing the world-class channel access that DuPont pioneer business has built over the many years. There will be opportunities for working capital in that space and maybe want to talk about the materials, Howard?
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Howard Ungerleider, Dow Chemical Company - CFO [37]
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I just think it's early days on the working capital side. I don't think those numbers are included in these synergy numbers in terms of actual cost, so that would be on top. So, we are going to dig into the details as we get the implementation teams lined up as well as the clean teams to share additional layers of data and as we do that, I'm sure will get some additional working capital savings not just in ag, which I agree with, but also in materials and perhaps specialty (inaudible) in electronics.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [38]
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The question is very much like the previous question. We are not going to hobble companies here. We're going to create strong companies. I think guiding principles around like the R&D question, we have some guiding principles and we've got work to do to make sure what comes out at the other end mimics what goes in at the beginning in terms of the strength of these two great companies.
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Operator [39]
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Vincent Andrews with Morgan Stanley.
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Vincent Andrews, Morgan Stanley - Analyst [40]
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Thanks. I have a question on the separation but before that, could you just clarify there was also a Dow Corning announcement this morning that included synergies. Are those synergies within that $3 billion number?
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [41]
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No, absolutely totally not. The Dow Corning thing which coincided exactly the same time, don't ask us if we can ever plan that, we cannot. That's a separate transaction, separate synergies, and will inbound into the Dow DuPont deal with that hopefully in-flight as we get the deal done, but we're very proud of that deal but not for this call.
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Vincent Andrews, Morgan Stanley - Analyst [42]
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Okay. And if you could just talk a bit about when it comes time to separate the assets, presumably some of those -- I'm guessing agriculture could be separated faster than the other two so, one, is that correct? And, two, is there any limitation either from an IRS perspective or any other type of structural perspective that means you've got to wait 18 months post-close or how should we be thinking about that?
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Ed Breen, DuPont - Chair & CEO [43]
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No. This is Ed. There is no issue with that. You could separate one faster if you wanted to. I would say to you if I looked at the timeline, and Dow has looked at it, too, you might get one there a quarter earlier, but you're probably doing them all at the same time, and having been through this multiple times in the past I try to do one a little earlier it usually doesn't work, so I would just assume they're all going to be together for planning purposes.
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Operator [44]
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Arun Viswanathan.
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Arun Viswanathan, RBC Capital Markets - Analyst [45]
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Hey, guys. Thanks and congratulations on the deal. My question is just around value and how you came up with 50/50 split on ownership. It looks like effectively there are some headwinds in 2016 that DuPont is facing and I'd imagine that Dow is facing the FX headwinds, but you're also announcing extra EBITDA from Corning, Dow has invested in several projects over the next several years in Sadara and Freeport.
Was there a discussion in how that would be monetized and to me it seems like Dow potentially is not getting its fair share for some of those investments? Maybe comment on that. Thank you.
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Howard Ungerleider, Dow Chemical Company - CFO [46]
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Yes, I would say -- Arun, this is Howard. How are you doing? Look, there's lots of different ways you can take a look at this and we just felt as we were working through the transaction detailed that a true MOE and really what were being contributed is equity value, and if you look at that where the equity values were leading up, it was relatively very close on a 50/50 basis. So when you look at EBITDA, yes, you could draw some other conclusions. Both companies have different business lines, different cash flow forecasts which leads to different liabilities and those lead to different multiples, so we just felt collectively across the table that the equity value in the right way to measure this on an MOE.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [47]
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And I think is the quality of EBITDA in the predictability of EBITDA that sets equity values. DuPont has been more highly valued than Dow over the last decade about 90% of the time. So, just to remember, how the market views -- I when the rumor occurred the other day the market reacted equally and it said a lot about what the market thinks of your question. I think the market speaks.
Now, by the time this is done we might have our preferreds converting. They might tilt a little bit in the Dow favor, but we've accommodated that. It's a shareholder win at 50/50 based on all the data that all the banks and all the fairness opinions have shown us.
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Howard Ungerleider, Dow Chemical Company - CFO [48]
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Just to give you granularity on Andrew's point on the preferreds, assuming we're at the $53.72 on the Dow side for 20 out of 30 consecutive trading days, we do intend to force that conversion, and so that would be additive to the 50/50, so that would make it 2 percentage points to a 200 basis point swing, so technically after the preferreds it would be $52.48.
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Ed Breen, DuPont - Chair & CEO [49]
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And that's a good thing for us to want to do.
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Howard Ungerleider, Dow Chemical Company - CFO [50]
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Absolutely. Highly value creating and accretive to the common.
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Operator [51]
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Jim Sheehan with SunTrust.
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Jim Sheehan, SunTrust Robinson Humphrey - Analyst [52]
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Good morning. Following up on the Dow Corning announcement, I assume you are going to be placing that within specialty products. Could you also address the price paid for that share of the JV?
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [53]
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I will let Howard address the price. We had a big conversation about that and we are inbound as an integrated construction, integrated personal care, integrated company on the market side in particular in automotive. That all fits the Dow current product mix. Electronics is one that we think will be, once we've done that carve outs, something that will go with the electronics part of specialty, the specialty products company.
So we've done a lot of forethought on that. Look, down the road we'll see whether anything else makes sense, but right now we're telling the market we're 90%-95% done on the mix.
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Howard Ungerleider, Dow Chemical Company - CFO [54]
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So on the value side of the equation, so it's $4.8 billion price -- under the terms of the agreement, Dow is going to become 100% owner of Dow Corning silicone business through a split off transaction. Corning is going to redeem its interest in Dow Corning for 100% interest in the newly created Splitco, and an important point is Hemlock semiconductor will still be a joint venture between Dow, Corning, and Shin-Etsu at the same relative percent ownership. So, Dow will own 40.25% equity stake in Hemlock semiconductor which is effectively what we have today.
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Operator [55]
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Bob Koort with Goldman Sachs.
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Brian Maguire, Goldman Sachs - Analyst [56]
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Good morning. This is actually Brian Maguire on for Bob. Just a question following up on that. Aside from Dow Corning, any other JVs that have any puts or calls that might get triggered here that you might have to clean up before the deal closes, and as you look out two or three years to when the company split up, particularly on ag, any opportunities for an inversion or any kind of unique tax structures when that were to happen?
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [57]
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I'll handle the JV and then maybe I'll turn the floor over to Ed for the ag question.
But on the JVs, this Dow Corning one was another step in our consolidation or de-consolidation. We have already publicly announced our intention with our Kuwaiti JVs to reduce our ownership stake. That still -- next kind of 30- to 60-day window we should see that Phase I transaction where Equate will lever up and then buy the ME global company where we are at 50% ownership.
So our ownership in Equate is 42-1/2, so we will be de-consolidating a little bit. We will be receiving approximately $1.5 billion in gross proceeds for that. But other than the Equate transaction there's nothing else.
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Ed Breen, DuPont - Chair & CEO [58]
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And we don't have any ventures either that would be an issue in that regard. It's early on to be talking about what might be available for way of an inversion and a partner for inversion if that were to occur. We're focused on realizing the synergies now, driving to realize those, recognizing both the cost and the growth synergies, and then we'll see 18 months from now what's visible.
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Operator [59]
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Duffy Fischer with Barclays.
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Duffy Fischer, Barclays Capital - Analyst [60]
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Good morning, fellows, and congratulations.
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Ed Breen, DuPont - Chair & CEO [61]
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Thank you.
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Duffy Fischer, Barclays Capital - Analyst [62]
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Two questions. One, when his the Board going to be named the individuals and the two co-directors. And then the second one around ag. In putting this together, will the Pioneer side be able to go back and use ENLIST now for soybeans in the US now or are we too far down the road there to kind of back away from the Extend product?
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Ed Breen, DuPont - Chair & CEO [63]
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Let me talk about the Board. The good news is we both have two full boards as we speak, and so the merge Board will be a high subset of basically of our two boards with 16 being on the Board. And so that's great because they all know the businesses well and all that, so I think it's a great way for us to start out together.
So between Andrew and I and the boards, we will pick that, and we will be doing that over the next four to five months. There is no rush on that, but we do want to get it set up nicely before separation so they can meet a couple times and do some things together. So I would say four or five months at the outset we'll have that pegged.
And then we will have advisory boards, as Andrew had mentioned, for the three companies. I like that. I did that when I separated [Tycho] into the five companies because it gives them a running start on kind of the nucleus of a Board and having meetings like that and being prepared. And there are some decisions we want the advisory Board to make even though it might come up to the parent Board for sign off and approval, but it would be nice for them to study the detail of that respective business and know it as we move forward.
So that's how we will handle it. So I think we have enough people between us. We will probably have to hire some directors for the specialty Board when we get a little closer, but that's way down the road. Is not time for that right now.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [64]
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Just to pile on. This is an incredibly important part of the conversation between Ed and I for us to extract value here. Not only do you have that merg co set up right to get the synergies, but you have to have the three companies ready for when they get -- the two get spun out. And then the focus on that, there's two things to be done and then on top of that you have to operate the business.
So a lot of experience from Ed on how that actually can be done. These advisory board/committees therefore have foci. The materials one, call it that will become the future Dow company. There is the ag one which will become the future DuPont company, and the specialty products going to its own future as Ed will say, and Ed will lead that. I will work closely with him.
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Ed Breen, DuPont - Chair & CEO [65]
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And we have Board members that actually I think also from your board that are actually interested in both our boards interested in being on the specialty board which is great because, again, they know those businesses.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [66]
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And that is really key. So as we construct the future, the construction of the future board has to suit the purpose of those companies to his point. So, we have a pair of glasses on. Each of the lenses has to work, not just one lens. The view to the future while we do the current.
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Ed Breen, DuPont - Chair & CEO [67]
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And then your question specifically around the ag side of it. Look, when you look at the products that we are going to be combining here, the traits around Enlist and other things, it provides tremendous optionality for the growers.
We're excited about the opportunities we think Enlist will present with us along with [Contesta] in the Latin American -- outside North American market. When you look at North America, we are planning and Pioneers is launching Extend in 2016 pending regulatory approval, so that will be the primary driver there.
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Operator [68]
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Steve Byrne with Bank of America.
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Steve Byrne, BofA - Analyst [69]
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Hi. Really just adding on to Duffy's question about Enlist. So much of the ag selling is going on right now for 2016. The business models for these two differ in various ways, whether it's a direct to grow or through the retail channel and rebates through retailers, et cetera. Is it fair to assume that these ag businesses will really function separately through 2016 before you can really start to combine the business models and share technology?
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Ed Breen, DuPont - Chair & CEO [70]
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Yes, they have to legally function separately until we get the merge co. We can do planning in the meantime and be ready with all our thoughts on how we want to proceed, but you can actually do it.
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Operator [71]
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John McNulty from Credit Suisse.
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John McNulty, Credit Suisse - Analyst [72]
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Good morning. Thanks for taking my question. So with regard to the $3 billion synergy target, is that inclusive of any incremental cost tied to the splitting of the Company, if not maybe into three pieces? If not, can you give us a little bit of color on that?
And then somewhat linked to that, can you walk us through how -- this is a massive transaction putting two companies together and then breaking them apart. How should we be thinking about the one-time costs in terms of cash cost and cost of this transaction actually going through the full process? Thanks.
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Howard Ungerleider, Dow Chemical Company - CFO [73]
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Hey, John. Good to hear your voice. It's been a while. Yes, look, on the cost to achieve the synergies we are estimating that we're still in the early part of the funnel, I would say the wide part of the funnel, but in the $3.5 billion to $4.1 billion range, almost dollar for dollar on the synergies in terms of cost implement.
On your point about the splits, these numbers are not including that. I mean we're looking at extracting maximum cost synergies from putting this company together on an MOE basis, and then of course standing up these three companies inside the Dow DuPont entity, so there likely could be additional cost that would be need to be built out structurally after that, but that's 18 -- 12 to 18 months post Dow DuPont close.
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Operator [74]
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At this time, I'll turn the call back to Jack Broodo for any additional or closing remarks.
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Jack Broodo, Dow Chemical Company - VP of IR [75]
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Jennifer, thank you very much. Maybe it would be a good idea to give Ed and Andrew a chance to say some final comments. So, Ed?
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Ed Breen, DuPont - Chair & CEO [76]
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No, listen, as we said earlier, both Andrew and I, maybe this was a unique time in the history of both companies where we could pull this off, but I think we've created a very attractive path forward for our shareholders. We got to do a 50/50 deal. We got a very tax efficient way to do it.
We are creating three unbelievably focused world-leading platform companies out of this, and so the strategic nature of what we could pull off was incredible. And then on top of that, as Howard just said, we get these massive synergies which were all within our control. Nothing that the market is doing, it's all within our control to do, and then over kind of a longer period of time, and I say longer, intermediate to longer, we will be working on revenue synergies and, by the way, just on the ag side back to the last of question, there's really neat opportunity there just as one.
So to me it checks all the boxes of a great deal and a way to create value for our shareholders and that's the way I have always looked at this, what's the best way to create long-term, sustainable value for shareholders and that's the move we made today.
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Andrew Liveris, Dow Chemical Company - Chairman & CEO [77]
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And my close, if I can to everyone who I worked with in the investment community for the last decade or so, this has been a long journey that our investors have seen as go through to transform our Company, the Dow Chemical Company into its future. This deal had to be had to create value for shareholders. This deal will be working on for an awful long time.
I see it the culmination of the work of a lot of people on both Dow and DuPont that Ed and I working with our respective teams have been able to respect our respective legacies but also put us into our futures, and I think that's what we had to do. We had to create value for the future, not just value for the current. To be able to do that is not easy to do.
To put two companies together that are of storied names, put the two names physically together, and then to address their futures is our job in front of us. We are very committed to do that and liberate the shareholder value that we are talking about today.
This is not an overnight thing. We are committed as partners and as teams to get this job done. In the future may be in fact in my case almost certainly will be a new leader of the Dow Chemical Company.
I do want to eventually go to the place where the future of the Company is not just beholden to my presence. I think it's very important that you understand that Ed and I checked our egos at the door. You've got to understand that Ed's mindset, which is what I responded to the most, was his ego was checked at the door and we really put shareholder value and the future of these companies as the primary thought, and I'm very proud of this moment where our companies, the company we are about to create and the companies we will create.
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Jack Broodo, Dow Chemical Company - VP of IR [78]
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Thank you, Andrew. Thank you, Ed. We appreciate your interest in the Dow Chemical Company and DuPont. For your reference, a copy of our prepared comments will be posted on Dow's and DuPont's websites later today. This concludes our call for today. We look forward to speaking with you all again very soon.
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Operator [79]
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This does conclude today's conference. We thank you for your participation.
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