The Urethane Blog

Urethane Comments from Dow Investors’ Call

James R. Fitterling – The Dow Chemical Co.

Performance Materials & Chemicals on Slide 10 delivered a year-over-year EBITDA increase of $100 million. Equity earnings and volume gains in all geographic areas and all businesses more than offset margin compression in some of the products.

Polyurethanes achieved double-digit growth on continued robust demand for systems application, particularly in building insulation and household appliances as well as tight market conditions in isocyanate. Industrial Solutions grew volume in high-value applications for textiles, lubricants and electronics, with double-digit volume growth in Asia Pacific. The business also reported higher equity earnings.

Kevin W. McCarthy – Veritical Research Partners

Yes. Good morning. Your Performance Materials & Chemicals segment posted strong results relative to the street expectations and also year-over-year. So wondering if you could talk through your outlook for the polyurethanes business specifically.

It seems to me you have a number of moving parts there in terms of industry outages in MDI. And I think you cited strength in systems, PDH uplift, etcetera. So how would you characterize the sustainability or durability that you saw in 1Q, as you look through the latter nine months of the year?

James R. Fitterling – The Dow Chemical Co.

Yeah. Thanks, Kevin. The volume trends are very strong. If you look in polyurethanes, the systems volumes and the MDI volumes are both double-digit growth. And as you mentioned in North America we’re going to be a little bit limited on MDI and PO, because we have a planned turnaround there. But the pricing momentum has been strong in those spots.

And even when we come back, realize that we’re not a merchant MDI seller. We’re selling into the systems market and into formulated end product. So compared to some of our competitors who are big merchants, MDI sellers, we may look a little bit different there.

The other thing I’d say, besides the volume and price moves, our equity earnings improved in this segment. And also, we’re capturing some of the margins from on-purpose propylene. So at points in time in the first quarter, the spreads on propane propylene were as much as $0.30 a pound and we ran the unit at greater than 95% of capacity in the first quarter. So that helped too.

Duffy Fischer – Barclays Capital, Inc.

Yes, good morning. I wanted to drill down on your marketing agreement with the Saudis. How is that going to play out kind of at the sales line, the EBITDA line and the cash flow line as you report?

We’ve got some production today. Are you seeing those sales roll through from your marketing agreement already? And how will that ramp? And then, do you have to take the working capital on your balance sheet to fill up all of those warehouses you were talking about? So just how should we think about that sales agreement flowing through your financials?

Andrew N. Liveris – The Dow Chemical Co.


Howard I. Ungerleider – The Dow Chemical Co.

Yes, thanks, Duffy, for the question. If you go to Slide 26, we tried to give you little bit of modeling guidance, because you’re right, because we do – we have responsibility to market the Sadara product everywhere outside of what we call the Middle East Zone, which is the countries around Saudi Arabia, including Saudi Arabia where Sadara will market for themselves.

In the first quarter, about 20 basis points of our EBITDA margin dropped. So we had a 61 basis point margin drop year-on-year. 20 basis points of that was due to just the Sadara revenue ramping, because we essentially make a distributor-type or an agency-type commission on those sales. We preserve the profit. We get the 35% of Sadara’s profit flowing to our equity earnings. So there is a little bit of disconnect between the two.

At this point, I would say for the full year, you should expect about $1.5 billion of revenue coming into Dow’s revenue from Sadara. And for the second quarter, we’re calling between a 25 basis point and a 50 basis point margin compression on the Dow total bottom-line.

Your question around working capital, it should balance itself out. Obviously, we’ve got to fill the pipeline, so there’s a little bit of a build here in the first 90 days or 120 days of each asset coming up. But once they line out, it should be neutral on a Dow working capital basis.