Focus - The Dow Chemical Company

To the Stockholders of The Dow Chemical Company:
2002 was not a good year for Dow. Neither the general economy nor industry fundamentals offered much relief from the difficult conditions we
faced in 2001. Despite expectations that industry conditions would improve in the second half of the year, the economic rebound never materialized,
and lagging demand and excess capacity continued to impede our efforts to adequately raise prices and substantially increase volume. As a result,
profit margins were severely compressed.
Although industry conditions were tough, they are not an excuse for earnings that were, in a word, unacceptable.
Regardless of the conditions we face, the management of this company is being held responsible and accountable for performance. That is why
the Board of Directors decided in December to make a change in executive leadership.
Building our financial strength
In returning as Dow’s CEO, my immediate tasks are to raise profit margins, improve cash flow and reduce debt. To do so, we are restructuring,
consolidating and streamlining our company in order to improve our cost structure, reduce capital spending and focus more on our competitive assets
and businesses. All options are on the table. The measures we are pursuing in 2003 include:
Bill Stavropoulos,
Chairman, President and CEO
> 2 The Dow Chemical Company
•Divesting non-strategic and under-performing assets.
• Closing assets that are either under-utilized or non-competitive, including our announcement in January of 2003 to
close two Union Carbide ethylene crackers in Texas that will reduce U.S. Gulf Coast ethylene capacity by roughly 4%.
•Sharply reducing structural costs by $400 million, including cuts in discretionary spending, strict limitations
on new hires, productivity improvements and the elimination of 3,000-4,000 jobs through divestitures, plant
shutdowns, attrition and efficiencies.
• Reducing capital spending by $400 million, or 25%, from 2002, placing capital expenditures well below depreciation
levels. The bulk of these spending cuts will come from reduced planned capacity expansions. We will continue
to devote capital to maintaining the reliability and safety of our plants.
• Shifting our successful Six Sigma methodology to cost-reduction projects that have an immediate, positive impact
on earnings, rather than longer term revenue-increasing projects.
• Delaying or canceling all corporate initiatives, except those that positively impact the bottom line in 2003.
• On the revenue side, focusing on our customers and market dynamics to increase prices and improve volume.
Since 1995, Dow’s oil and energy costs have increased while prices have fallen, with a negative impact on profits
of nearly $9 billion. We are working closely with our customers to confront the challenge we face, given the
highly volatile cost of feedstocks.
These measures, taken together, are designed to increase cash flow by over a billion dollars from 2002 and generate positive free cash flow in 2003.
Meanwhile, we will continue to pursue our long-term strategy to invest in our franchise businesses—those with long-term competitive advantage—
and in our less cyclical performance businesses. In doing so, we will emphasize productivity, which is the sine qua non of this industry. Ours is a world
of unremitting competitiveness. Trends toward supplier and customer consolidation, high and volatile energy costs, and increased competition from
developing countries continue to challenge the chemical industry. Productivity must and will be a priority for Dow not only at the trough of the cycle,
but also at the peak.
On track for long-term profitability
Looking at the long-term, it is important to remember that difficult conditions are not new to the chemical industry. Herbert H. Dow, this company’s
founder, encountered them in the early years of the 20th century, as have more recent Dow managers in the 1980s and 90s, when deep troughs were
followed by periods of robust profitability.
Our task is to ensure that the company will benefit not just from better conditions, but from the work we are doing right now to improve profitability
regardless of where we are in the cycle. Towards that end, we are building on our accomplishments in 2002; chief among them were:
• Completing the integration of Union Carbide and other key acquisitions, including Ascot fine and specialty chemicals, Rohm and Haas’s agricultural
chemicals business, Gurit-Essex, and EniChem’s polyurethanes business. With Union Carbide alone, we achieved cost synergies of $1.2 billion dollars,
significantly improving the profit margins of Carbide’s businesses and making them globally competitive.
•Growth in Performance Chemicals, a $5.1 billion portfolio of businesses that was Dow’s most profitable segment in 2002. Specialty businesses from
Carbide not only substantially increased the sales of Performance Chemicals, they also increased profits. Performance Chemicals is now one of the
top five specialty chemical businesses in the world.