The Urethane Blog

Urethane Comments from Dow Investors’ Call

James Fitterling

Starting on Slide 3. In the fourth quarter, the Dow team delivered results that exceeded expectations with sales and EBIT growth year-over-year and a sequential net sales increase of 10%. And as the global economy and market fundamentals continue to improve, demand drove volumes above or in line with pre-COVID levels across all operating segments.

We captured strong durable goods and construction demand, we grew volumes and do-it-yourself architectural coatings and home care sectors, and we continue to benefit from solid demand and pricing momentum in packaging applications, supporting a sequential net sales increase of 12% in our Packaging & Specialty Plastics segment.

This volume increase, combined with improved pricing and margins, particularly in polyethylene and polyurethane applications, delivered 5% revenue growth and higher operating EBIT year-over-year.

We completed the sale of select U.S. Gulf Coast marine and terminal operations and assets, delivering another strategic nonoperational cash lever. And improved financial and operational performance at Sadara was a key contributor in delivering positive year-over-year equity earnings.

Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT was $296 million, up $75 million year-over-year and up $192 million versus the prior quarter. Supply and demand fundamentals in polyurethanes and construction chemicals as well as higher equity earnings from improved performance at Sadara drove this result.

On a sequential basis, significant improvement in margin over raw materials drove operating EBIT margins up more than 500 basis points, more than offsetting typical seasonality. The polyurethane and construction and chemicals business reported a double-digit increase in net sales year-over-year and sequentially.

The year-over-year increase was primarily due to higher local prices with gains in all regions, except Latin America. Compared to prior quarter, sales growth was driven by strong local pricing and furniture, bedding and appliance end markets.

Howard Ungerleider

Thank you, Jim, and good morning, everyone. Turning to Slide 6. The strong supply and demand trends that continue to benefit our packaging and polyurethanes businesses this quarter also benefited Sadara. The joint venture again delivered improved financial and operational results, driving equity earnings higher by more than $130 million year-over-year.

We expect solid market fundamentals and an improving economy to continue to benefit the joint venture in 2021, supported by Sadara’s feedstock flexibility and enhanced global cost curve position. We are also very pleased to report that Sadara declared project completion in the fourth quarter, removing Dow’s $4 billion share of the guarantees that supported the joint venture’s debt.

In addition, in January of this year, Dow, Saudi Aramco and Sadara reached an agreement in principle with the remaining lenders and Sukuk investors on key terms for its debt reprofiling with formal agreements expected to be completed within the first quarter. As a result, Sadara is expected to be cash flow self-sufficient going forward.

Key provisions of the reprofiling include an extension of the contractual debt maturity from 2029 to 2038; a modified repayment schedule aligned with Sadara’s projected cash generation profile, including a grace period until June 2026, during which interest-only payments are required; no upfront payments of principal; and limited support in the form of much lower sponsor guarantees of Sadara’s reprofiled debt, in proportion of the sponsor’s ownership interest.

The impact to Dow’s commitments are expected to include the following, which are in proportion to Dow’s 35% ownership interest in Sadara. Dow will provide guarantees for $1.3 billion of Sadara’s debt, effectively replacing approximately $4 billion of prior guarantees. Dow will provide guarantees for its portion of Sadara interest payments due during the grace period.

Our pro rata share of any potential shortfall, which based on Sadara’s current performance we do not expect, will be funded by a new $500 million revolving facility in Sadara, guaranteed by Dow. This is expected to be established in the first quarter of 2021.

And finally, Dow’s existing $220 million letter of credit related to the guarantee of one future Sadara debt service payment will also be canceled. As a result of these actions, the company does not expect to provide any further shareholder loans or equity contributions to Sadara.

Let’s now turn to our modeling guidance for first quarter on Slide 7. We exited the fourth quarter with increasing strength, which is carried over into the first quarter. The ISM manufacturing new orders index is trending at its highest level in 10 years. In addition, low interest rates are supporting a resilient housing market and deurbanization trends are driving U.S. housing starts to their highest point since 2006.

We expect sequentially higher business results in the first quarter with total sales in the range of $10.7 billion to $11.2 billion, driven by ongoing strength in our polyethylene and polyurethane value chains, improvement in our silicones franchise and supported by our U.S. Gulf Coast ethane advantage. We will see some headwinds sequentially with higher turnaround costs and the reversal of approximately $50 million in onetime benefits from the prior quarter.

The Industrial Intermediates & Infrastructure segment will continue to benefit from strong consumer durables demand, supported by automotive and housing sectors and improvement in industrial end markets. These trends, combined with industry supply limitations and low inventories, should support pricing uplift, although we do see some cost increases from rising propylene pricing as well.

Jeffrey Zekauskas

Hi thanks very much. Propylene is going up really quickly. Are your acrylate prices going up as fast as propylene prices are going up, that is are acrylate margins likely to be squeezed in the early part of the year or widen in the later part of the year, how do you assess that? And for Howard, in the operating cash flow in 2020, how much of operating cash flow came from asset sales or legal settlements?

James Fitterling

Good morning Jeff. Let me see if I can cover propylene first, and then I will flip it over to Howard. Spot prices have increased. And it is a combination of reduced supply because ethane has been the preferred crack in the crackers and propane has been much more expensive, again due to that polar vortex I was talking about in Europe and Asia, driving these prices up.

That means ethane has been the crack, and so you don’t have as many byproducts. And that shortest bit on propylene. And then on purpose propylene, you have had a raft of issues through on purpose propylene production, which has meant there hasn’t been as much there. And so that has tightened things up.

I think acrylates are holding up well because demand has been good, downstream demand has been good. So there has been some price improvements. Do It Yourself, architectural coatings are growing. In fact, they were the big winner last year in terms of market share. I expect the contractor side will come back this year.

David Begleiter

Thank you. Jim, polyurethane has strong end to the year. How do you foresee that business progressing into Q1 and through the rest of the year, both on prices and margins?

James Fitterling

Good morning David, thanks for the question. The markets that I mentioned, automotive, furniture, and bedding, appliance and construction are very solid right now. In the energy space, the oil and gas space, it is a little bit challenging.

And so we see the trajectory that we had in isocyanates and polyols in the second half continuing to move up in first quarter due to supply limitations. It is hard to keep things on the shelves like mattresses and furniture, while we have got these strong housing drives that are going on.

We are seeing the automotive sector come back. Obviously, we saw it big electric vehicles, we have set records in 2020, and I think we are going to crush those in 2021. But internal combustion engine vehicle is coming back as well. And that is good demand and strong order patterns, even without some of the bigger capital-intensive markets being back on stream.

So like the large-scale industrial construction, those types of markets. So I think we have got a good demand at and ahead of us. Housing starts is a very, very solid sign, highest we have seen since 2006. So that drives a lot of content for our products.

Howard Ungerleider

Yes, Jonas, look, thanks for the question. I mean, I couldn’t be prouder of the Dow, the Saudi Aramco and the Sadara team. It is about 18-months worth of work that got us to this point where we have got the agreement in principle with the entire lending syndicate of commercial banks, ECAs as well as the Sukuk investors.

So we have got a five-year great period where no principal is due until June of 2026. We have matched the principle from 2026 out to 2038 with the projected earnings and cash flows. And in terms of the next five-years, on a 100% Sadara basis, you are looking at about between $300 million and $350 million of interest expense.

So our share would be about $100 million to $125 million a year. But I would say based on Sadara’s current performance as well as all the plans that they have in place, they will be cash flow self-sufficient for this year and going forward. So we do not expect to put any cash into Sadara. So that is a $350 million tailwind year-on-year.

John Roberts

Thanks and nice quarter, guys. We are reading a lot about how much shipping activities are challenging and freight costs are up a lot. How much is it contributing to the tight markets and higher pricing? And is it impacting more than just polyethylene?

James Fitterling

Yes, right, we have seen some shipping rates on marine pack cargo, primarily due to the fact that you have got a container dislocation. China has had some pretty high export levels. And so some empty containers have been moving back to China. Mostly that is been reported in the Ag sector, not so much in the plastic sector.

I think our supply chains are pretty well stocked in terms of containers, but we keep a close eye on it. So I don’t anticipate anything that is long-lasting. I think we will work through this. And they just assigned some of the supply chain imbalances. China came back fast from COVID, and we are coming back now. And so things can, from time to time, get dislocated.

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