The Urethane Blog

Urethane Comments from Dow Investors’ Call



Turning to slide 11, Performance Materials and Chemicals operating EBITDA grew 28% year-over-year and EBITDA margin expanded nearly 600 basis points as the benefits of our productivity actions, focused price/volume management and lower costs continued to positively impact the bottom line. Demand is strong for products in our core chains including integrated chlorine, polyurethanes and EO derivatives. The chlorine envelope is showing recovering EBITDA performance and stable EBITDA margins due to our productivity gains following a weaker first quarter.



Andrew Liveris – Chairman, President and Chief Executive Officer

Yes. Thank you, Howard. Our overall outlook is on slide 15, and if you go through the points, global growth remains volatile and uncertain despite a growth in some economies. And our overall global GDP is approaching around 3%. Now the U.S. remains the one consistent bright spot and our view is that the consumer has begun to spend some of those lower oil price bonuses with our order loading remaining strong as we enter Q3.

China remains a mixed bag; a very solid Q2 for us is not necessarily a harbinger of Q3, but note that we have targeted our products and our product mix to sectors that are truly domestically driven, like automotive and construction, and we see good growth in those areas. Volatility and softness do prevail in other sectors.

Western Europe remains a positive for Dow with further [ph] demand despite the situation that unfolded in Greece. And emerging markets are all strong with the exception of Brazil. And Dow has positive exposure to all of these growing markets, nearly 35% of total revenue, and we see decent demand in places like Southeast Asia, the Middle East, India, and Eastern Europe.

Overall we are growing where growth is. That’s our strategy and our execution is very focused on growing share of demand in those markets, which for us means true value growth. We are doing this predicated on the assumption that the world economy will remain in its current volatile condition and we have to find growth while continuing to focus on productivity and our key projects.

So turning to slide 16, this brings me to our earnings growth drivers, both in the second half of this year and beyond. Our discipline and our emphasis on EVA, and portfolio management continued to release further value and are driving higher rewards for our shareholders. As Howard showed, we are very milestone driven, with now 11 straight quarters in a row of strong earnings performance. And our key enterprise growth projects are beginning to start up over these next six months with our first units coming online in Texas and Sadara beginning its start-up in Saudi Arabia. Our low-cost integration strategy will be even further enhanced with these new assets coming online.



John Roberts – UBS

Thank you. You mentioned your China strength was automotive and construction. And I can understand automotive. Construction seemed a little bit peculiar there. What’s driving that?

Andrew Liveris – Chairman, President and Chief Executive Officer

No question, John. It’s infrastructure spend. I was just in China. I mean, they pivot the big bubbles that they created in the housing market. They’ve pivot on really trying to figure a way to continue the economy to grow at a reasonably decent rate until they get strong domestic consumption, they’ll be getting all of the good example. But in some not all areas as well. They’re investing in upscaling their water treatment plant so our sales of water treatment products are going up. That’s also construction.

So I would say it’s an infrastructure driver. We particularly saw it in our Performance Materials business as well in China not just our water business. The Water Performance Materials, mostly polyurethanes as well as of course the plastics points especially in packaging and specialty plastics and elastomers in transportation. These were all strong drivers and again very targeted. And not your normal housing construction spend.



Peter Butler – Glen Hill Investments

Looking ahead, if this was the second quarter conference call in 2016, what would Andrew be talking about? What would be the Dow-related positives and negatives that would be highlighted in your conference call next year?

Andrew Liveris – Chairman, President and Chief Executive Officer

Successful – hi, Peter. Good morning. Successful start-ups of PDH. Successful start-ups and, of course, producing positive EBITDA for Performance Materials mostly polyurethane as well as acrylic acids and reduced mostly in coatings. Successful start-up on the first units in Sadara by end of the year. The second quarter next year we’ll have quite a few more. So headwind becoming tailwinds on the EBITDA line for the Sadara enterprise which is a big deal. Places [ph] relates to Plastics side. A very, very low cost Plastics coming out of those units which is very material to the cash flow projection of Sadara. And then of course continue recovery of the global economy and Dow’s operating rate starting to get mid-80s and beyond. Probably in the high 80s by then.



James Sheehan – SunTrust Robinson Humphrey

My question, just wondering about some of the strength in your Performance Materials. You noted polyurethanes demand was quite strong. Could you talk about some of the drivers there? I know you’ve done a lot of work internally. What are you seeing on the macro front in polyurethanes?

Andrew Liveris – Chairman, President and Chief Executive Officer

Well, there’s two major macros, one on the supply side, which is – obviously there was major competitor outages that enabled us to expand margins because of supply shortages. That will disappear in the second half. But the demand side of it, as I mentioned already on China, we started up a new poly-all [ph] plant in Thailand and that’s a specialty poly-all [ph] plant that fed the Chinese market and started up and it’s flat out right now. So it is demand and it’s in demand in the areas I mentioned like construction and bedding and furniture, which is local consumption, back to the domestic drivers in China, but also our competitive position here on propylene in the United States, which means we can run the PO chain flat-out which is one of the other reasons. Isocyanates remains challenged, in particular TDI. But look, demand and tight supply especially in the PO chain.