The Urethane Blog

Dow Urethane Comments from Investors’ Call

Howard Ungerleider

Thanks, Jim, and good morning everyone. Turning to Slide 6, I’d like to start by providing an update on Sadara. Since we last spoke, Sadara and the joint venture partners have continued to make good progress on project completion and debt reprofiling. As we mentioned on our first quarter earnings call, we announced the final logistics service agreement was signed. This was a final substantive step to achieve project completion. Sadara is now in a position to declare project completion, but is considering withholding the final administrative step as long as meaningful progress on the debt reprofiling is made.

Negotiations with the lead agency creditors are underway with a firm target to complete the reprofiling no later than the end of 2020. Sadara is working in good faith with support from Dow and Saudi Aramco to advance a term sheet acceptable to all parties. We look forward to progressing the negotiations in a timely fashion as it’s in the group’s collective interest to complete the reprofiling by the end of the year. Dow and Saudi Aramco remain aligned in the steps needed to facilitate Sadara, maintaining a position of cash flow self-sufficiency throughout the tenor of the reprofiling.

Together Sadara, Dow and Saudi Aramco have also made good progress by executing a framework for longer term structural operating improvements, which are conditional on a successful profiling and include a 10-year supply agreement for additional ethane allocation and a five-year extension to the natural gasoline allocation, further enhancing the crackers feedstock flexibility. And as indicated previously, Dow continues to expect to contribute approximately $500 million to Sadara this year.

Turning to our third quarter modeling guidance on Slide 8. We see third quarter sales in the range of $8.5 billion to $9 billion on our expectation of gradual demand recovery through the quarter. We have provided our best estimate of current sales and volume expectations by segment as well as provided corridors again this quarter for high and low ranges, reflecting the potential for an uneven recovery. And although forward visibility remains challenged, we did deliver sales and volumes in all segments and system with the guidance ranges provided last quarter. And we are now narrowing those ranges this quarter to try to provide even better transparency to our expectations. As usual, we are highlighting the key EBIT drivers in the quarter on a sequential basis.

In the Industrial Intermediates & Infrastructure segment, we’re seeing the beginning signs of consumer durable recovery in the automotive, construction and furniture and bedding markets. We’re also seeing stable demand from the higher levels we saw in the second quarter for our solvent and surfactants that help make cleaning products even more effective. It’s worth pointing out, however, that we remain at trough MDI spread.

Jim Fitterling

Thank you, Howard. Please turn to Slide 9. I want to take a moment to highlight how our operational lever and our differentiated portfolio competitively position us today and for the long term. This quarter, we intentionally adjusted our operating rate lower to meet demand, reducing inventory and prioritizing cash. Operating rates across the integrated ethylene envelope remain strong at 82% down only 1% from the year ago period, reflecting resilient demand. However, in our polyurethanes business, we quickly brought operating rates down to the low 50% range as the extent of the durable end market shutdown became apparent.

We will continue this dynamic management of our assets and in polyurethane, as end markets recover, we expect to quickly ramp back up above breakeven operating rate. Our operational excellence, combined with our purposeful focus on cash and liquidity, are critical differentiators at this point in the cycle. We saw the benefit of our disciplined approach as we released more than $500 million of cash from working capital during the quarter and we used that strength to pay down $600 million of debt.

And as many of our chains have experienced compression over the last few quarters, we’re starting to see rationalization take place in the industry with delayed and canceled ethylene, polyethylene and isocyanates projects. This will help Dow accelerate upward and capture growth opportunities as the recovery strengthen. As demand returns the fundamentals in the markets that we serve remain unchanged and will continue to grow well above GDP.

John Roberts

Thank you. You highlighted MobilitySciences in both Slide 4 and Slide 9. You gave up most of Dow automotive in the DuPont separation. Do you still have a Dow automotive kind of integrated organization or is it just spread around all the businesses and how big is automotive today and what are your strategies there longer term?

Jim Fitterling

Good morning, John. Thanks for the question. We do have a fair amount of business today into the automotive industry, the transportation industry. In the neighborhood of $2 billion to $2.5 billion of sales that goes in there, it’s different than the mix of products that went with the transportation and high performance polymers to DuPont. What went to DuPont was glass bonding adhesives and crash durable adhesives. But remember we still have a very large platform of elastomers, silicones into a number of applications in the automotive construction, also polyurethanes and other materials that go into the interior of the cars, coatings for noise vibration and harshness.

So what we did was we pulled together a mobility platform that we can put out to the industry to have that face to the industry. And then what we’re doing is pulling the resources that know that industry together from the existing businesses, to be able to focus on them and to drive that growth, especially as we see them making changes as they come out of this pandemic to really lean in on next generation mobility platforms, vehicles, and some of the needs that they have there.

Vincent Andrews

Thank you, and good morning, everyone. If I could just ask, in II&I and PM&C, if I look at your volume guidance, and maybe we can focus on the low end and the high end, how should we be thinking about the incremental margin sequentially as that volume comes back?

Jim Fitterling

Good morning, Vincent. We’ve got volumes up 10% to 15% in II&I and 5% to 10% in Performance Materials & Coatings. I would think about it in this way. I think, it’s more around operating rates and the ability to get those volumes moving and get up above breakeven operating rates in polyurethanes and also seeing some increase in the industrial activity.

In II&I, a lot of solvent applications there go into industrial coatings, so they would go into things like the automotive industry, the aerospace industry, the oil and gas industry, also oil and gas production. So those have been relatively flat. So I think as those operating rates come up, we’ll see an improvement there.

Just to give you an example in Polyurethanes. In the second quarter, we saw automotive rates down 50% year-over-year. They’re back in third quarter. They’re going to be still below last year, but they’ll be about 20% below last year. And some of the other sectors like consumer durables, where they were off 30% year-over-year in the second quarter. We expect them to come back to about 10% below year-over-year.

So as that operating rate improves, you’re going to see polyurethanes, our target is to be it breakeven operating rates or above in Q3. They’ll be about – probably about 9% below last year in terms of volumes. I would say that will be the main thing. I don’t expect they’ll get a lot of benefit from pricing. They may get some benefit from raw material costs because we have seen ethane still stay relatively available. So the ability to have a good price on ethane as we go through the quarter looks stronger than it did in the middle of the second quarter.

Jeff Zekauskas

Yes. Thanks very much. I also have a couple of questions on Sadara. So the EBIT at Sadara has been negative for a few quarters. So is the way that we should understand that, that losses in MDI are offsetting income contributions in polyethylene. Is that the main dynamic? Or are there other dynamics? And secondarily, in the changes in the supply agreements, does this mean that Sadara is being expanded? Or does it mean that it’s staying the same, but the raw materials flowing in might be different? And then lastly, do you expect to still contribute money to Sadara in 2021 or 2022? Or you won’t? Or you can’t tell?

Jim Fitterling

Good morning, Jeff. Thanks for the question. Three questions in one. So I think that’s…

Howard Ungerleider

It’s one question with three parts. I think…

Jim Fitterling

I think, I can’t comment on the EBIT of the different business units in Sadara. I don’t have that in front of me. But I can tell you that plastics has performed better than isocyanates and polyurethanes, and that is improving. And so maybe, Howard, you could comment a little bit on the other two parts of Jeff’s question on the feedstock agreement and the next steps?

Frank Mitsch

Good morning, folks. A bit of a broader question. Obviously, there’s been a lot of restructuring that’s been going on with the combination and then the separation of DowDuPont, and then you announced this morning the 6% headcount reduction, which was a bit of a surprise, at least, to me. Over what time period do you plan on executing that? And I guess, this might be a little bit unfair. But I mean, should we be taking this as a sign that Dow is not seeing a return to pre-pandemic levels for several years? Or how should we think about it?

Jim Fitterling

Good morning, Frank. I think a couple of things to take into consideration as we look at it. Obviously, we’re seeing volumes come back. We also need to see margin improvement to get back to pre-COVID levels. We have some industries that we serve that have been hit pretty hard. So automotive and construction have been hit pretty hard. We’re seeing people go back to construction sites, but on existing projects, and we’re watching closely to see how new construction projects get permitted. And a fair amount of product that we sell goes into products that help support the construction market. So we’re watching that. On the consumer side, those demands and volumes look much better.

And so we need to see ourselves get to a point where operating rates and margins improve before we get ahead of ourselves. We did finish in the second quarter, all the IT separation from DuPont. So that’s good. We’re going to swing IT activities over to digitalization to help better serve our customers. We’ve had good success there in silicones. We’re making great progress there in coatings. We want to take the whole platform over to an e-commerce platform that can make it easier for customers to interact with us.

We turned on a lot of capabilities for them in the second quarter. So what we’re trying to do is look at how to be more efficient as we move forward and also look at our structure in terms of the fact that we – I don’t expect us moving CapEx up until we get back to pre-COVID type volume levels and margin levels, and so that would mean probably a couple of years before you see us ramp back up into that kind of space.

Howard Ungerleider

Frank, this is Howard. To answer your question on run rates, our target is to be a 50% run rate on that restructuring program by the end of second quarter next year and 90% by the end of next year.

Chris Parkinson

Thank you. Just on the polyurethane side and construction and II&I, and just how do you see the demand spectrum, you hit on this a little bit, how do you see the demand spectrum evolving in 2021 versus 2019 level? So put simply if you were to index your outlook for the key end markets to 2019 versus where you see supply trends heading into 2021, just how would you assess supply demand dynamics as well as spreads? Just any additional color there. Thank you.

Jim Fitterling

Yes. So I think when you look at volumes in PU and you look at that segment, we talked about volumes being down 20% and prices being down on top of that. What we’re starting to see is automotive production is coming back. Automotive is back at about 80%, maybe as much as 90% of where it was in Asia. It’s not back to those levels yet in the U.S., but it’s trending back in that direction. I think, it will take polyurethanes a little longer to come back than plastics for example because that demand is going into much more ratable consumer applications. So, our view would be, you’ll probably see polyurethanes back above breakeven operating rates before the end of this year. And then next year, you’ll start to see them building some positive trends and maybe pre-COVID levels may be out to the 2022 kind of timeframe.