The Urethane Blog

Comments from DowDuPont Investors’ Call

Ed Breen

Thanks, Neal and good morning, everyone. As you saw, we had a strong second quarter. The highlights were that we grew sales, volume and operating EBITDA by double digits percent and we delivered local price gains and operating EBITDA margin expansion. We are delivering growth in each division, due to a combination of strong global demand and innovation. These are key indicators for me that our business focus and our people are making a difference in the marketplace for our customers and for shareholders.

Net sales grew double digits percent in every division, and we were up in every region. Growth was fueled by broad based volume gains, enabled by capacity expansions from our US Gulf Coast and Sadara investments, benefits from the recovery of Ag sales due to weather-related delays last quarter, and pricing strength. This is the second quarter in a row that we see synchronized growth in our end markets.

We also continued to benefit from cost synergies. We realized more than 375 million of savings in the second quarter. Savings since the merger closed total nearly 900 million. Examples of our cost synergy work include renegotiating procurement contracts, streamlining manufacturing operations and rightsizing our organization. Most of our nearly 900 cost synergy projects have been initiated. Based on our progress so far, we are increasing our year-over-year savings target to 1.4 billion, up more than 15% from our previous target. And we remain on pace to deliver our target of 3.3 billion on a run-rate basis at the end of two years.

We’re seeing benefits in our gross margin, which was up this quarter, despite raw material costs; and we’re seeing it in SG&A, which declined as a percent of sales. I am very pleased with the progress our teams are making with synergies, while continuing to run the business well.

Now I will turn to the status of the intended separation and spins, on slide 3. Since our last call, we have made substantial progress determining the capital structures of each of the spins. We expect to share our capital structures at our investor events this fall. We also made progress this quarter with the other items you see on the timeline. We remain confident that the new Dow will separate by the end of the first quarter of 2019, and Corteva by June 1, resulting in the creation of new DuPont at that time. We expect to file the first Form 10 for Dow in September and the initial Form 10 for Corteva by the end of October.

Our teams are getting excited about this as the date gets closer and they can see the opportunities ahead for themselves, as more focused companies and leaders in their industries. We have made strong progress with building out the three advisory committees, announcing ten new members since our last earnings call. The addition of these high quality leaders strengthens the focus of each committee and the diversity of perspective within them. We intend to announce the leadership teams of Corteva and DuPont next month.

Also, on July 1, we completed the handover of the management books and operational control of the Hemlock Semiconductor JV to Specialty Products. This completes the transfer of the 2.4 billion in EBITDA resulting from the portfolio realignment we announced last September. Starting with the third quarter, the results of the JV will be aligned with Electronics and Imaging. And we will provide you with a recast of our historical results to reflect this reporting change.

I also recognize many of you are interested in our views on the potential effects of tariffs that took effect, July 6. We support fair trade and continue to work with all stakeholders to find effective and measured solutions to unfair trade policies. We have completed an analysis of the potential impact, and continue to expect that tariffs will not have a material impact on the company in 2018, partly due to mitigation actions we have already taken and partly due to our global asset base.

On the Ag side, we recognize that trade tensions have increased volatility in agricultural commodity prices, and have amplified market reactions to very highly rated US crops. We can also see that global markets are already adjusting to the current landscape. US soybean exports that would normally go to China are simply being shifted to other countries, as reported by USDA. That said, we will continue to monitor events as they unfold and take actions to mitigate any potential impacts.

With that, I’ll turn it over to Howard to cover our financial performance in more detail, as well as our outlook.

Howard Ungerleider

Thanks, Ed. Moving to slide 4 and a summary of our second quarter results. We once again grew earnings per share, net sales and EBITDA, each by double digits. Drivers of the 41% EPS increase include: volume and local price gains, cost synergies, currency, higher equity earnings and lower pension and OPEB costs. Our tax rate was also lower than the year-ago period, in line with our modeling guidance. These gains more than offset higher raw material costs in all divisions and increased turnaround activity in Materials Science.

We drove top-line growth of 17%, led by broad-based demand for products across the majority of DowDuPont’s key market verticals. Sales rose 25% in Agriculture, primarily driven by a recovery from weather-related delays in the first quarter and local price gains. Materials Science delivered top line growth of 18%, with double-digit gains in every segment and in every region. And Specialty Products achieved 10% sales growth in the quarter with gains in most segments and all regions.

The Materials Science division expects continued EBITDA expansion from underlying end-market growth, pricing gains, new supply from our US Gulf Coast projects, cost synergies, lower startup and commissioning costs and continued improvements in equity earnings from Sadara. This will be partly offset by higher raw material costs and the impacts of an MDI force majeure and moderating isocyanate prices that are coming down from first half levels.

Jim Fitterling

Thanks, Jim. Moving to slide 8, Materials Science delivered another stand-out quarter. Our results demonstrate the mindset and the sharper focus of the New Dow, a more agile and disciplined enterprise where value growth is and will remain Job number one. Our performance also speaks to our ability to play to our core strengths moving closer to the customer in our targeted market verticals, maintaining our position as a best-in-class operator, and driving an optimized cost structure.

I’ll start with the division highlights. We achieved double-digit top-line growth, led by broad-based demand in our core end-markets of consumer care, infrastructure and packaging. And our growth projects delivered organic expansion. Our EBITDA grew even faster year-over-year, as we again delivered ahead of plan on our cost synergy targets. And our equity earnings showed strong improvements, driven by the Kuwait joint ventures and Sadara.

We delivered these results despite higher raw material costs of more than $400 million, and a $100 million impact from higher planned maintenance activity. Our growth projects were very important contributors to the quarter. I’ll start with Sadara. The JV delivered another 82 million of year-over-year equity earnings improvement, bringing the first half benefit to about 160 million. Nearly two-thirds of this improvement shows up in Industrial Intermediates & Infrastructure.

Looking to the back-half of this year, we will begin to lap the full commercial operations of this complex. But the JV remains on track to deliver its 200 million equity earnings improvement this year. Switching to our US Gulf Coast investments, our new Texas-9 ethylene facility and our ELITE, NORDEL, and low density facilities are all running well and contributing to the bottom-line.

Both our Polyurethanes & Chlor-Alkali Vinyl business and our Industrial Solutions businesses delivered double-digit sales growth, with gains in all geographies. Demand growth was particularly strong in Asia Pacific, due to the contributions from new capacity at Sadara. Customer wins in our Polyurethanes systems house applications also drove our growth.

John Roberts

Thank you. Is Sadara still planning an IPO and is it too early for Sadara to start thinking about expansions, now that they’re at full commercial operation.

Jim Collins

Hi, John. This is Jim. Sadara doesn’t have any plans right now for an IPO. It has the optionality, obviously to do an IPO in the future. We’ve always retained that, but with all the other things that are going on in Kingdom, especially with our partner Aramco, Saudi Aramco, we haven’t had a plan to do anything with an IPO right now.

And then as far as expansions go, obviously, we’ll take a look at that. Our first order of business is to get our lenders’ reliability test done at the end of this year and once we get through that lenders reliability test and pass that hurdle, I think the teams will take a look at do we have the feedstocks we need, do we have the other things we need to look at potential expansions. We’re working on the Value Park right now. Sadara is building an yield pipeline to the Value Park. We have customers coming in to build next to that and so we’re looking at building on neighboring plants to actually take some of the offtake of Sadara and build up capability in the Kingdom. They may not be DowDuPont investments, but they may be third-party investments.

Kevin McCarthy

Jim, maybe a two-part question for you, Jim Fitterling. First, would you comment on the level of planned and unplanned outages related to Freeport and the MDI force majeure for example that you expect in the third quarter versus the second quarter? And then secondly, wanted to ask about ethane feedstock, we’ve seen some upward volatility there, how much of that is transitory versus more durable in your view? And has it changed your feedstock mix in any appreciable way.

Jim Fitterling

Yeah. So — and we announced an outage on the Freeport MDI unit and that’s scheduled to run from August to the first half of September. It’s really a mechanical change that we need to make and there are some clean out of some parts of the plant, requires us to open it up and go in and then close it up. So that’s a time consuming one. As far as planned outages around the Gulf Coast, really, they’re small — there’s nothing coming in terms of any crack or outages. We’ve got the St. Charles de-bottleneck and when we do that, we need to take the plant down to actually put that expansion in place. So it’ll be out for a little bit, but other than that, maybe a few days here and there on plastics plant in the fourth quarter, nothing to speak of.

In terms of how the feedstock prices are moving, obviously, you’ve got new capacity coming on right now. Exxon’s up. So you’ve got a big pull on ethane. There’s still quite a bit of ethane in rejection. I think 275, down from 450 the last time we talked about it, but I think you’re going to see ethane kind of rebound here, propane has been running a little bit high. Right now, we’re heavy light, we’re cracking as light as we can and we’re cracking as much ethane as we can and I think we’re going to be in that situation for the foreseeable future.