Urethane Comments from Dow Investors’ Call

Jim Fitterling

On slide 5, Industrial Intermediates & Infrastructure operating EBIT was $221 million, primarily reflecting margin compression in polyurethane component as well as lower equity earnings largely driven by margin compression in MEG at the Kuwait joint ventures and in glycol ethers at Sadara. Industrial Solutions reported lower net sales, primarily driven by lower prices for chemical intermediate. Volumes also declined modestly, primarily in ethylene glycols, which was partly offset by growth in heat transfer fluids and pharmaceutical applications.

The Polyurethanes & Construction Chemicals business reported modest volume growth driven by gains in construction chemicals applications, and this was more than offset by local price declines for polyurethane intermediates.

Before I turn it over to Howard, I want to give an update on our progress at Sadara. As we mentioned last year, we had one remaining logistics service agreement to get signed by parties in the Kingdom in order to start the process of achieving project completion. I’m pleased to report that the parties have reached agreement in principle and the official signing is imminent. And as a result, the remaining steps to achieve project completion are underway.

As we’ve discussed before, achieving project completion is an important milestone for several reasons. First, it formalizes Sadara as a fully operational venture. Second, it enables the parent guarantees that Dow has on Sadara’s debt to be released. And third, Sadara will then move forward to reprofile its debt. The debt reprofiling is a critical next step for Sadara in providing the JV with enhanced financial flexibility. The JV expects these discussions to take place over the course of this year, and we will provide another update once they have more to share. Sadara offers an impressive suite of world-class assets, technologies and products. Both Dow and Saudi Aramco remain aligned as shareholders in getting Sadara to a self- sustaining financial position as soon as possible.

Finally, as you look through our fourth quarter results, you will see that we recorded a write-down of our equity investment in Sadara. I want to emphasize that this action does not detract from our belief in the JV’s ability to enhance its financial strength and achieve independence. Rather, it is a reflection of our view of the latest financial projections for the JV relative to the book value of our investment.

Howard Ungerleider

Thanks, Jim, and good morning, everyone. Turning to Slide 8. Net sales were $10.2 billion at the high end of our guidance range. Local price declined 12% year-over-year driven primarily by declines in polyethylene, isocyanates and hydrocarbon co-products. Currency decreased sales by 1%. Volume declined 2% year-over-year, largely driven by lower hydrocarbon co-product sales. Excluding the Hydrocarbons & Energy business, volume was up 2%, led by demand growth in packaging and construction chemical applications.

Equity losses were $21 million. Operating EBIT was $1 billion. Tailwinds during the quarter included savings from stranded cost removal, contributions from new capacity on the U.S. Gulf Coast and improved earnings in the Performance Materials & Coatings segment. These gains were more than offset by year-over-year margin compression in our core value chain, lower equity earnings and higher planned turnaround costs.

Jim Fitterling

On the portfolio management front, we completed a number of incremental transactions aligned with actions to clean up and simplify our footprint. During the fourth quarter alone, we shut down a polyurethanes facility in Australia as well as a coatings manufacturing facility in the U.S. We transferred ownership of a coatings emulsion plant in Germany to Trinseo. We sold our acetone derivatives business and associated assets, site infrastructure, land and utilities in West Virginia to ALTIVIA; and finally, we sold our La Porte, Texas site.

Jeff Zekauskas

Thanks very much. And what was the – is the $500 million that you plan to put into Sadara optional on your part? Or was it part of a contractual obligation? What’s the theory behind the additional investment? And are there any obligations that you’ll face in 2021? Or is this the end of the end of the investment?

Howard Ungerleider

Hey Jeff, good morning. This is Howard. That $500 million is what we had to put in last year. As you look at Sadara, where we are in the cycle with chain margins and polyolefins, and isocyanate, they’ve got enough cash flow that they’re generating to cover their own costs and to cover their interest expense. But the project was project financed, and that project financing all is now that the project is fully operational, the principle is coming due, and they don’t have enough cash to generate to pay all of that principle. So that $500 million is roughly our expectation that 2020 conservatively will look like 2019. And in 2019, we had to put in $500 million, which was our 35% ownership of the principle.

And so what we talked about, what Jim talked about on the, I think, in the prepared remarks, is that we’ve got agreement in principle now on the last logistics agreement to – that’s the last remaining step, signature of that document is imminent. At that point, we will have achieved project completion. And then we – Sadara will work with the support, obviously, of both Dow and Aramco to reprofile the debt with the lender group. And so that’s our focus. Our expectation is that will take us through the better part of this year to get that done. So conservatively, for modeling purposes, we said, look, we’ll put the $500 million in there just to – as a precaution.

Frank Mitsch

Hey good morning folks. I want to come back to the Polyurethanes & Construction Chemicals business. You reported some positive trends on the construction chemical side. I was wondering how sustainable that was. And then again, on Slide 19, in terms of polyurethanes, you’re showing MDI as having – the MDI spread as having bottomed in September, and so I’m wondering if you could talk about what your outlook is there. Are we going to flatten out? Or is this a sustainable sort of recovery there? Any sort of color there would be very helpful. Thank you.

Jim Fitterling

Good morning Frank. I think on the MDI spreads, I think the current levels that we’re at are probably sustainable. You could see some pressure down on some of that. But I’m hopeful with the U.S.-China deal done that that gets some confidence back in the markets and some of those downstream derivatives start to pull demand and that’ll firm things up a little bit. As it comes to construction chemicals, we’ve seen good volume and good demand in the housing side. And I think it’s held up better for longer than we had expected. It’s going into a wide number of applications, which has been good.

And it’s offset good. And it’s offset some softness that we’ve seen in some other parts of the PU business, for example, systems into automotive and into furniture and bedding. You don’t think of it, but sometimes a mattress is a high-ticket item. But they were under some pressure because of the price of a mattress, it’s one the things that consumers, if they’re tightening the belt a little bit, will kind of slow down purchases on. But no, construction looks good, and I think we’re off to, with the weather, we’re off to a pretty reasonable start to the year.

Christopher Parkinson

Thanks. Just a corollary to the question before. Can you just comment on your – any updates on your intermediate-term outlook for the MDI SD, just break out some key variables in the context of some capacity delays and so on and so forth. Just any update on your longer-term spread expectations. Thank you.

Jim Fitterling

Yes. MDI, I think MDI’s exposure in the marketplace, Chris, is basically in those areas that I talked about that have been a little bit slow, automotive; some of the more rigid polyols and so appliances, those things pull on the MDI chain. That’s been what’s been the softest. There have been announced delays in capacity expansion, which makes obviously a lot of sense given where we are in the market and the spreads. And there’s enough capacity out there to satisfy the demand for a while.

So I think you’ll see these are not easy facilities to build and they’re not easy facilities to operate. My sense is now that we’ve got a little bit of confidence coming back in after the trade deals and we start to see maybe some people seeing their way through higher demand if automobiles start to pick back up, you’re going to see things tighten a little bit and these spreads have the potential to go up.

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