Q4 2019 Earnings Call
Please standby we're about to begin.
Good day and welcome to the Dow fourth quarter 2019 earnings call.
The signal to ask a question by pressing star one it anytime during today's presentation also today's call is being recorded I would now like to turn the call over to Mr. Neal Sheorey. Please go ahead Sir.
Good morning, everyone. Thank you for joining us to discuss the fourth quarter financial results for Gal, We're making this call available via webcast and be prepared slides to supplement or comments. During this conference call. They are posted on the Investor Relations section of Gals website and through the linked to our webcast speaking on the call today or Jim Fitterling, Chief Executive Officer.
Lighter president and Chief Financial Officer. Please.
Please read the forward looking statement disclaimer contained in the earnings news release in flight during our call. We will make forward looking statements regarding our expectations or predictions about future. Because these statements are based on current assumptions and doctors that involve risks and uncertainties actual performance and results may differ materially from are forward looking statement.
<unk> Form 10-Q , and 10-K include detailed discussions the principal risk and uncertainties, which may cause such differences unless otherwise specified all historical financial measures presented today on a pro forma basis, and all financials, where applicable excluding significant items well also refer to non-GAAP measures reconciliation to the most directly compare.
GAAP financial measure in other associated disclosure it can change in the GAAP earnings release in the slides to supplement our comments today and on the Dow website on slide two you'll see our agenda for the call Jim will start with an overview of gas fourth quarter in operating segment performance as well as an update on Cidara. Howard will then move into a financial overview of the quarter.
Including detailed honor principal joint ventures, and will also provide some comments on modeling guidance for the first quarter and full year.
Finally, Jim will provide a review of the outperformance against our 2019 targets and then close with our priorities for 2020. Following that we will take your questions with that I'll turn the call over to Jim.
Thanks, Neil and thanks, everyone for joining us this morning.
On slide three the downstream once again executed against our operational and financial playbook.
The pivotal year and the company's history, we captured growth achieved another year over year improvement in cash from operation and delivered leading returns to shareholders. Our results showcased the resilience of our portfolio and our ability to leverage our core strengths and are focused on delivering value to our customers and owners.
Here are some notable highlights from the corner first we continue to capture demanding key end markets, particularly those closer to the consumer.
Trends in the fourth quarter mirror, what we've seen all year solid demand and consumer driven staples offset by lagging or contracting demand in industrial segment ended applications related to big ticket items, such as automobiles overall, excluding the hydrocarbons and energy business, we achieved volume growth of 2%.
In the quarter second we continue to drive a lean cost structure, we removed more than 35 million of stranded costs in the quarter and third we remain focused on generating strong cash flow and utilizing our free cash flow in a balanced way aligned with our capital allocation priorities we generated.
1.9 billion of cash flow from operations up more than 500 million year over year, our EBITDA cash from operations conversion rose significantly the 110% supported by the inflow of cash from the legal judgment with noble as well as the release of cash from working capital. These factors enabled us to.
Execute more than 1 billion in de leveraging as well as returned 600 million to our shareholders.
I'm proud of the Dow team's performance in the face of challenging industrial markets and trade dynamics.
Once again, we demonstrated our ability to control the things that we can control while pursuing growth opportunities in our targeted end markets and equally importantly, these results represent solid progress against the priorities, we laid out a year ago, which I will review later in the call moving onto our segment results in the quarter on slide.
For packaging and specialty plastics operating EBIT was 648 million the benefits of stranded cost savings and volume gains in the packaging in specialty plastics business were more than offset by lower polyethylene prices and reduce equity earnings the packaging and specialty plastics business delivered 4% volume growth.
Led by double digit growth in Asia Pacific, We continued to see solid demand growth in our key packaging end markets, including flexible food and specialty packaging industrial and consumer packaging and health and hygiene applications.
Hydrocarbons in energy reported both lower volume and price volume declines were primarily due to planned turnaround activity in Europe , which led to reduced hydrocarbon co product sales.
On slide five industrial intermediates and infrastructure operating EBIT was 221 million, primarily reflecting margin compression in polyurethane components as well as lower equity earnings largely driven by margin compression and M. E. G. At the Kuwait joint ventures, ending glycol ethers, that's a dark.
Industrial solutions reported lower net sales.
Really driven by lower prices for chemical intermediates.
Walliams also declined modestly primarily in ethylene glycol, its which was partly offset by growth in heat transfer fluids and pharmaceutical applications.
Polyurethanes and 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 and finally on slide six performance materials in coatings operating EBIT was 233 million EBIT rose year.
Over here in part due to lower cost in the coatings and performance monomers business, which was impacted by an extended turnaround in the fourth quarter of 2018.
Sales declined as a result of weaker local prices in all regions, primarily due to lower so lots change prices.
Numerous solutions delivered flat volumes versus a year ago period.
Growth in high performance infrastructure applications globally, as well as improved demand for so boxing's in Asia Pacific and the U.S. in Canada was offset by demand contraction in automotive and consumer electronics end markets.
Coatings and performance monomers sales declined due to lower local prices and volumes on a regional basis coatings volume was primarily impacted by lower demand in the U.S. in Canada and Europe .
Before I turn it over to Howard I want to give an update on our progress at Cidara as we mentioned last year. We had one remaining logistic 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, Andy official signing.
Eminent 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 at formalizing the dark as a fully operational venture.
Because it enables the parent guarantees the Dow has ones that are that to be released and third the Darla. We'll then moved forward reprofile into that.
The debt Reprofiling is a critical next step for Cidara and providing the JV with enhanced financial flexibility.
JB expects these discussions that take place over the course of this year and we will provide another update once they have more to share.
Offers an impressive suite a world class assets technologies and products, both now and Saudi Aramco remain aligned to shareholders and getting the dart two and 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 Sadar I want to emphasize that this action does not detract from our belief in the jbs ability to enhance his financial strength and achieved independent rather it is a reflection of our view of the latest financial projections for the Jay.
Maybe relative to the book value of our investment I'll now turn it over to Howard discuss our financial performance in the quarter and modeling guidance.
Thanks, Jim and good morning.
Turning to slide eight net sales were 10.2 billion at the high end of our guidance range.
Oh price declined 12% year over year, driven primarily by declines in polyethylene Isocyanates hydrocarbon co products on the degree sales by 1%.
Volume declined 2% year over year, largely driven by lower hydrocarbon co product sales.
Moving to hydrocarbons and 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.
During the quarter includes savings from stranded costs removal contributions from new capacity on the U.S. Gulf Coast and improved earnings in the performance materials and 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.
EBITDA margin.
33 basis points year over year, excluding equity earnings expanded 75 basis points.
Our fourth quarter operating results also benefited by approximately 50 million from it.
Project related items.
These included two items in our industrial solution.
Catalyst sales and a large concentrated solar power project.
Well the EBIT line reported on favorable tax rate year over year and versus our guidance, resulting from a change in our mix of geographic earnings, notably we drop.
Europe Park for redemption grade polyethylene margins.
Well as turnaround costs related to the planned maintenance outage at our cracker in the Netherlands. This was offset by favorable interest expense DNA in share count.
Operating EPS was 78 cents on a GAAP basis, we reported a loss per share due to significant items that totaled $3, a 92 cents per share.
It was driven by several items in the quarter.
Recorded a non cash impairment charge of 2.85 billion, which included a 1.75 billion write down related just to Dora that Jim mentioned as well as a 1 billion impairment of goodwill associated with a coatings and performance monomers reporting unit.
These write downs were conducting following our annual financial projection reviews, which determines the carrying values were higher in the fair values.
Moving to cash flow as we laid out at our Investor day in 2018, we've been applying a much greater focus on enhancing cash flow and once again, the Dow team delivered a strong quarter, our cash metrics. We generated 1.9 billion of cash from continuing operations, which was driven by improvements in earnings to cash conversion supported.
More than 400 million dollar when we use of cash net working capital.
Finally, we allocated our free cash flow in a balanced way in line with our capital allocation priorities.
Hey down more than 1 billion of debt in the corner and returned $611 million to our owners, including the remaining 100 million of share repurchases left to achieve our 500 million share repurchase target for 2019.
Turning to our principal joint ventures on slide nine equity losses for the quarter were 21 million. This was primarily driven by lower results at our Kuwait Joint ventures as a result of margin compression any jeetan polyethylene as well as reduced cracker in polyethylene margins at our Thailand Jvs.
Darren reported a modest improvement in earnings as the benefits of volume gains and cost control more than offset price declines.
Moving to slide 10, we continue to provide modeling guidance on sequential basis. As we believe this is the most relevant way to explain the dynamics given the current market conditions we.
We see first quarter being stable with where we ended the fourth quarter as I mentioned before we had some project based items in the fourth quarter benefited our results after adjusting for those items the key drivers or tailwinds.
More turnaround costs and normal seasonal recovery from the fourth quarter headwinds from an ongoing third party supplier outage near our target on a same site.
Lower results RGB, primarily due to compressed spreads in Asia.
Non operational headwind from higher pension expense.
Result of lower discount rates at the end of 2019.
In the packaging and specialty plastics segment, we entered the year expecting overall stabilization with some regional recovery with negative integrated polyethylene margins in Asia and European margins low as well, we expect price increases to gain traction from the low point at the end of 2019, if they don't we expect high cost producers to come under pressure.
And in fact, we've already seen some competitors turned back right in the fourth quarter for that every reason.
Industrial.
Construction segment will benefit from lower turnaround costs compared to the prior quarter. However, as I mentioned, we're currently impacted by a third party supplier outage near our target to Spain site, which is forced us to take some yield derivative capacity offline.
And finally performance materials and coatings, we expect to lock things pricing to remain relatively flat with the fourth quarter.
Coatings in performance monomers, we expect the normal seasonal uplift and profitability.
Core business performance, however will be offset by higher planned turnaround activity at our performance monomers site in Texas.
Turning to full year 2020 on slide 11, there are several items for consideration as you update your models.
Provided the income statement castle item that we can forecast at this time.
Expect our 2020 JV equity earnings to be lower than 2019, largely just the averaging impact as key spreads did not bottom second quarter of 2019.
We also anticipate plant turnaround spending to be flat year over year and as I mentioned before we expect higher pension expense of 125 million year over year.
Provided the estimated split of that headwind bike segment.
Below the EBIT line, we once again anticipate lower interest expense as a result of our lower debt level.
See our tax rate range moving higher this year as we're forecasting a change geographic mix of earnings, particularly due to lower earnings in Europe , and finally, our share count estimate includes base case share repurchases offset dilution.
Some selected guidance for cash items.
And on the next slide you provided a review of our known cash upsides and downsides some context for our free cash flow Optionality this year.
With that let's turn to slide 12.
There is no change in our cash priorities for 2020, we remain focused on generating solid cash flow from operations and improving our cash flow conversion and we will continue to prioritize our use of free cash flow between de leveraging incremental capex target lower risk growth opportunities and returns to shareholders.
Our base case operating cash flow upsides and downsides are shown here.
Cash upsides.
Integration separation and restructuring spending.
Lightly lower required cash contributions to our pension plan interest expense savings and an inflow of cash from offense, one customer burn ethylene capacity reservation fee, which we expect to be end of 2020.
Regarding capex, we see our spending in a range of 1.5 to 1.75 billion. This year, which gives us an additional 250 $500 million a flexibility either applied toward our free cash flow priorities.
Or pursue incremental growth investments.
And given that there's still work ahead first off well conservatively assuming that are contributions will remain flat with 2019.
Outside the decrease in JV dividends as the JV eight or dividends based on the previous years earnings.
Our base case does not assume any non operational cash.
Related to our remaining proceedings with Nova and therefore, we show year over year decline.
With that said, we continue to actively pursue resolutions in our favor on two items recording a tax was held in last year's pre 20 told judgment entertaining adjusted.
2012 case.
The most important takeaway here is that we expect or cash generation at 2020 lead us with free cash flow Optionality.
If you keep priorities that will dictate how we deploy this cash dividend remains our number one priority.
We're currently on the high side of our capital structure targets and so de leveraging continues to also be a key priority as well as putting more investment indoor businesses, where we see lower risk quicker payback opportunities.
Should market conditions show improvement, we can also be more toward returning additional capital to shareholders.
Those are cash Optionality could also come from non operational items.
Items listed on this slide hold additional free cash flow potential.
Absolutely $1 billion. All these items are emotion and we will continue to provide updates on then as we make progress in some more confident about our ability to deliver against our disciplined financial play back this year and we will continue to deploy free cash flow and responsible manner balances our actions to improve.
Our debt profile rent than our financial flexibility and reward our owners with that I'll turn it back again.
Thanks, Howard turning to slide 13, just over a year ago, we laid out to investors are clear set of near term priorities for now reflected are more focused disciplined and market oriented company and in 2019, we delivered on these priority we control the factors in our control and we showcased our resilient.
I'll spend the next few minutes highlighting the key progress we made in 2019 against our objectives, starting with slide 14.
Our focus on profitable growth helped us navigate the headwinds that we faced throughout 2019.
Our U.S. Gulf Coast investments enable topline volume growth in the packaging and specialty plastics segment as well as bottom line contribution thanks to the U.S. Gulf Coast Global cost competitiveness, even in the midst of a euro market challenges our packaging business grew volume year over year every quarter in 2019, which.
Ultimately reflects our businesses global competitiveness, our silicones franchise completed 16 incremental growth projects unlocking additional downstream capabilities and driving higher captive sidewalk seems consumption. This will continue to be our focus going forward as downstream silicones applications can deliver.
Up to 1000 basis points of margin uplift over commodity side Roxane.
We reached final investment decision on our flexible al constellation capacity expansion and signed a 10 year supply agreement with the key customer and we announced plans to retrofit and ethylene facility in Louisiana with our new proprietary fluidized catalytic dehydrogenation technology to produce on purpose propylene.
Yeah.
Our digitalization efforts helped us improve our customers' experience.
2019, we launched an expanded e-commerce portal on Dot com.
We achieved nearly 3 billion a revenue on the portal in 2019, and we have plans to continue growing sales through this channel.
Turning to slide 15, we demonstrated a balance and disciplined approach to capital allocation first and foremost we doubled our focus on cash and improved our cash flow conversion to 78%, which was 37 percentage points above the conversion rate we had in 2018.
In the fourth quarter alone, we achieved a conversion rate of 110% as we benefited from a combination of operational and non operational cash improvement.
We also prudently managed capital spending responding to the softer market conditions by proactively cutting capex spending the $2 billion or 500 million below the target set at the beginning of the year more importantly, we tilted our growth capex toward the highest return businesses pushing forward our way.
Two investments in our packaging silicones and industrial solutions businesses.
These actions enabled us to deliver 3.8 billion a free cash flow in 2019, which we deployed to drive toward our capital structure targets and to reward our shareholders. We strengthened our debt maturity profile by paying down more than $3 billion of debt and we conducted opportunistic liability management such that our next.
Trail debt maturity is not until the second half of 2022, we did all this while also delivering 2.6 billion to our shareholders through our strong dividend and share repurchases.
Turning to slide 16, we continue to reduce our cost structure, we achieved more than 600 million and cost synergy and stranded cost savings. In 2019. This included more than 160 million of stranded cost removal and the completion of a 1.365 billion dollar cost synergy program.
As a result of streamlining and optimizing our organizational and management structure over the past few years, we closed 2019 at the headcount that we targeted at our Investor day, a little more than a year ago. These actions were also shaped by our enhanced focus on benchmarking, which brings me to our final pill.
Our best on her mindset on slide 17.
We follow through on our commitments to increase transparency and disclosure, we moved to ethylene market based transfer pricing shifted our primary profit metric from EBITDA to EBIT and disclosed our key product capacities.
We enhanced our focus on benchmarking to develop a clear picture of our competitive position in the market and shared that output with shareholders on a periodic basis.
Were critical steps to drive toward best in class performance.
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 of Polyurethanes facility in Australia, as well as a coatings manufacturing facility in the U.S. we.
We transferred ownership of a coatings emotion plant in Germany to Trinseo, we sold our acetone derivatives business and associated assets right infrastructure land and utilities in West Virginia to Al Tobia, and finally, we sold our Laporte, Texas site in summary, we did what we said we would do.
And the framework, we used in 2019 applies once again to our priorities and 2020, which we outlined on slide 18 in terms of growth, even though we plan to keep our capital spending restrained we will still progress our suite of higher return lower risk growth investments on the immediate horizon.
We expect the two new furnaces at our Texas nine cracker to come online by the middle of second quarter 2020, with commissioning projected to start for the end of first quarter. This will bring the crackers capacity to 2 million metric tons, making it the worlds largest ethylene facility and today, we're announcing plans to incur.
Mentally expand capacity at our ethylene facility in Western Canada by approximately 130000 metric tons with the addition of another furnace Tao co invest in the expansion with the regional customer evenly sharing the project costs and ethylene output. This expansion leverages our unique pasta.
Vantage feedstock position in Western Canada, the additional ethylene will be consumed by existing polyethylene assets in the region, making the investment immediately accretive once it comes online in the first half of 2021 Dow will fund this project within our stated Capex spending targets.
We also have more incremental silicones investments on back in 2020, as we're targeting another 12 de bottlenecks this year.
We expect to complete branded cost removal by capturing the remaining $140 million of saving and will also focus on continuous productivity not only in terms of costs, but also manufacturing efficiencies.
As Howard mentioned earlier, we have plenty of operational and non operational cash flow action that we are pursuing.
Finally, we will continue to apply at best owner mindset to all we do.
Our team continues to evaluate additional incremental footprint cleanup options much like the ones. We completed in the fourth quarter of 2019, we will provide updates through the year as we have information to share before I wrap up my comments I will provide our current outlook, which is on slide 19.
Many of our key product lines were challenged throughout 2019, however, our advantage positions on the cost curve global diversification and differentiated products have allowed us to continue capturing volume growth around the globe.
So far in 2020, we had seen similar conditions to those at the end of 2019, but the dynamic is now beginning to shift as macro conditions weekend into the end of 2019 third party industry reports indicated that high cost producers in many change, we're struggling with breakeven or negative cash margins.
For example in polyethylene capacity in Europe , and Asia that utilizes naphtha feedstock, which represents a significant amount of wallet capacity was that zero or negative margins for much of the fourth quarter.
M.D. I spreads around the world and continue to bounce around but we believe were breakeven levels.
So I locks and prices in China have also hovered at breakeven levels or at least the last six months.
For these reasons third party industry reports have suggested that producers with fourth quarter mile cost position are considering or implementing rate cuts or extending planned turnarounds and in the past few months, we have seen public announcements by some producers delaying new capacity additions and with inventory levels normalize.
And in some of our chain, we see a good environment or an inflection to gain traction.
In our view it it's still too early to claim sustainable improvement and in fact, it could take some time for the dynamics to play out but that said, we're seeing early signs that support gradual improvement in the near term from the lows that we reached at the end of 2019.
To close on slide 20, as we enter 2020, we're taking a conservative view given the macro and micro trends that we're seeing recent trade resolutions shouldn't be a positive for sentiment, but it may take some time before we see this translate into improved fundamentals.
Even after the phase one U.S., China agreements a majority of the original tariffs are still in place, which will continue to weigh on supply chains, as well as consumer and investor sentiment.
As such the same discipline that we showed in 2019 will guide our actions in 2020, we're not counting on end market conditions to determine our success rather we have a suite of actions and advantages within our control. We will continue to be financially disciplined our portfolio will remain competitive.
Thanks to our operational and footprint advantages, we will continue to generate strong free cash flow and responsibly allocate that capital along the lines of our priorities and we will continue to institute self help measures.
These factors will serve us well as our end markets stabilize and reset and just as important they put us in the best position to continue serving our customers and rewarding our shareholders now I'll turn it back to Neil open acuity.
Thank you Jim with that let's move onto your question I would like to remind you that are forward looking statements apply to both our prepared remarks and the following QNX operator, please provide the queuing instruction.
Thank you if he would like to ask a question. Please press star followed by the digit one if you are using a speakerphone. Please make sure. Your mute function is turned off to live I used signal to reach our equipment to give everyone. The opportunity just to signal for a question. We ask that you limit your questions to one only.
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I'm a pause for just a moment.
And our first question, we'll hear from a room this whatnot from RBC capital markets.
Thanks, Good morning.
I'm just curious it sounds like basically you're seeing a potentially a supply driven inflection point.
Yeah, maybe with some rate cuts by competitors.
On the motivation that week bargains.
I guess I'm just worried that.
Demand doesn't improve and we see on some slight improvement.
That's really speaking would that prevent some of these supply step downs going forward and kind of credit box the recovery that your processing.
Having just offer some thoughts on how that materializes over the next couple of quarters.
Morning around this is Jim Thanks for the question I you know I think what we saw in what we've seen out of the third party reports is that you had some fairly significant deltas on cash margins for some of the especially now that the producers in Asia, and a little bit in Europe to infer.
Fact, we got a couple of periods in the last several weeks, where it was negative two as much as kind of 12 cents. So that's a lot to absorb if you're at the bottom of the cycle.
So I'm not sure that we would see at all come back on but you can always bump around here a little bit.
I'd also point back to we had very strong demand and plastics. So plastics was up 4% in the quarter four consecutive quarters of volume growth in plastics. So I think demand is out there and I think our cost positions are good and that's really what's helped us out all the investments we've made over the last five to seven.
Two years really brought us down on the cost position feedstock flexibility as well as just the lower cost of the crackers and that's what's going to help us navigate through here.
And next summer to Hassan Ahmed with Alembic Global.
Morning, Jim.
You know what two part question on China, you know system, obviously relatively new news about this plastic bags.
You know how should we be thinking about died.
And again, you know early days, but.
But you know what are your thoughts about.
The demand impact from the grown up I was.
Thanks, Thanks Us on for the question first on the on the plastic span from a Dow perspective, we don't produce materials that go into most of those products that were ban so straws in the lightweight AG films and some of the T. shirt bags is not a market for us most of what we're selling into China goes into.
More durable packaging it goes into flexible food packaging and that demand continues to be strong health and hygiene markets. Obviously continue to be strong nonwovens is a big market for us as well.
On the Corona virus I had to experience to live there during the Sars epidemic and it looks it feels like to me what we went through during the Sars time period, you're saying no impact on tourism people staying at home.
People not going to restaurants, the service industry gets hit a little bit people, maybe making a run at the grocery store to stock up on things you're seeing some pull on demand on things like materials that are going into household cleaners and disinfectants.
Nonwovens that are going into masks or wipes.
So we're seeing some of that pull on demand and I know our counterparts.
At Dupont are also seeing that for example on pull on some of their nonwovens and their surgical masks and things as well.
It will take once we figure out how to treat this things will start to return to normal and I think it took us in Sars a few weeks, so really whr and CDC to figure out how to treat it and then everybody started to kinda get back into normal life customers.
Not gone back from Chinese new year, yet so I talk to the businesses yesterday, there's still seeing customers take an extended Chinese new year, but I would imagine and another week, they're gonna have to go back because demand for some of their products is starting to pick up too.
The next to move on to Vincent Andrews with Morgan Stanley .
Thank you and good morning, everyone.
Just to come back to the Asian margins on polyethylene lessons. We've noticed is that a lot of the negative margin has come from the increase in the naphtha feedstock cost rather than the decrease in the price of I guess.
Slightly weak. So you know oil prices have been flat. So can you give me an assessment of what's going on in the nap Submarket and.
What would happen if naphtha prices retreat, but the prices therefore don't improve in terms of good sort of expectation for recovery in the first half.
Thanks, Vince Good morning, that's a good question and I do agree with you that you know that that NAFTA movement up and down is a big contributor to what we saw happened with those margins both in Europe .
And in Asia Pacific The Asian pricing has been stable. So that's that's been a good thing even the ended the year and typically the ended the year you would see people doing some de stocking you might expect to that price to get depressed, but it held up pretty well.
But I think it's holding up well because the breakeven costs over there are much much higher so if we're running at the bottoms right now on Asia and on Western Europe , and we've still got this advantage on Canada, Argentina, U.S. Gulf Coast I think it speaks to the fact that the high cost producers are gonna be under pressure.
Sure for Awhile and I think that's why the third party reports are out there, saying people are pushing out expansion people are talking about shuttering in some capacity, we'll see we'll see how that develops.
The other thing I would mention is that typically in March to June that's the heavy turnaround season for ethylene and usually historically you have about 8% of the capacity offline.
Lot of the third party reports that are out there right now in turnaround activity you have as much as 15% of that capacity offline. So I think as we go through the quarter and some of that capacity comes off we're gonna see some opportunity there for some pricing in some margin expansion.
And next we'll hear from Jeff said caucus with JP Morgan.
Oh, thanks very much.
What was the is to 500 million that you plan to put in to sit Dora.
So on your part or was that part of a contractual obligations, what's the theory behind me.
Additional investment and are there any obligations that you'll face and 2021 or is this the end up the investment.
Hey, Jeff Good morning, this is Howard.
500 million as what we had to put in last year.
As you look at Sundar out where we are in the cycle with chain margins and Polyolefins and Isocyanates, they've got enough cash flow that they're generating to cover their own costs tend to cover their interest expense, but the project was project financed and project financing all isn't that now that the project is fully operational the Prince.
Well as coming due and they don't have enough cash to generate the 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 principal and so you know what we talked about what Jim.
Talked about on the I think into prepared remarks is that we've got agreement in principle now on the logistical last logistics agreement to that's the last remaining step signature of that document is imminent.
At that point, we will have achieved a project completion and then we Sundar I will work with the support obviously at both dial in Aramco to re profiling debt with the lender group and so that's our focus and that 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 we'll put the 500 million in there.
Just a.
I would caution.
And moving on David Begleiter with Deutsche Bank will have our next question.
Thank you Jim just looking back on Q4, just a two part question first T M and see please comment on how it was so strong given some weeks alok same margins and second the $50 million of a catalyst sales and.
The other benefits, so we'll fill benefits where those expected.
To be realized in the quarter when we spoke back in.
Over in November thank you.
Yeah. So thanks, David Good question one of the main things. We had was we had lower cost this fourth quarter than last year, because there was a turnaround fourth quarter of 19 or of 18.
And we didn't have that in the fourth quarter of 19, we also saw lower propylene raw material costs. So we had PDH out in turn around and propylene prices actually came down pretty significantly so that rolled through on the acrylics change. So you see some of that impact we did get some margin expansion. So we saw.
I'd also like saying pricing slightly improve and we also saw some volume gain is locked sign so boxing's versus what we had expected.
To your point on the two onetime things catalyst and the solar Phil we had expected those to come you never know exactly when the timing of those is going to happen because their capital projects. So when the you the solar Phil charge comes when they tell you hey deliver the material, we're ready to load up the plant and that just happened in the fourth quarter side.
Think that when you can look and say that one wasn't expected in Q4.
And we'll move on to Jonas Oxgaard with Bernstein.
Hi, good morning, guys.
Oh.
Talk a little bit but to your capital policy toward 2020 of course I can tell there was no buybacks and the guidance, but it looks does look like you should have some capex from some cash left over.
My missing something there.
Let me, let me talk a little bit John it's about how we're approaching Capex and then I'll get Howard to talk about cash priorities for the year. So.
On to start the year here with a target of 1.75 billion of Capex, we'll keep all of our incremental high return de bottlenecks in place.
Talked about the furnace add in Canada. That's on the capital list. The two furnaces that are going on to Texas nine will go into commissioning in March. So that's on finishing up that is on the capital as about a dozen de bottlenecks and so oxaydo and they all constellation facility that were put in place to support that tenure contract.
Additionally, we're making the investment to retrofit F. C D H into one of Louisiana crackers and that is really to be able to deliver propane to propylene economics at a much lower scale than PDH, but but also do it with like 20% less greenhouse gas emissions, 20% less energy costs.
So we were going to be able to to really do PDH scale economics. The that we did over PDH one.
At 150 to 200000 tons that that's a big breakthrough for US and then that becomes a great licensing opportunity for US now we paid down 3 billion of debt in the year, but we wanted to pay down a little bit more than that so when we look at remaining capital we have to keep it balance between de lever.
Hi, Jane and what we all want to do for share buybacks and what's in the base case here is we will cover dilution I think you'll see from our share count that we've been doing a good job, but making sure the shareholders don't get diluted so that's first priority. How do you want to talk about the other priorities. Yeah. Thanks, Jim Good morning join Us and I think I think in covered it well our target.
And that we laid out at Investor day is tough to cover dilution every year at a minimum so when we look at the margin compression that we had last year.
And we look at the capital we look at our capital structure targets over the economic cycle. We're on the higher end of that range, we'd get a very good job of doing 3 billion as Jim said of debt pay down last year, but we want to do a little bit more so as we enter 2020, you know the primary focus after the dividend them after the one seven.
Five of Capex is really to incrementally continued to de lever with operational cash flows with that said Jonas and I think your point is very valid and you look at the slide that we put out in the deck you know.
We are a cash generating machine and so as we continue to drive higher cash flows.
You can expect a balanced approach with additional debt pay down an additional shareholder remuneration or we just felt like it was prudent given the capital structure targets to start the year.
Preferred focus on on debt pay down.
Well move on to Frank Mitsch with.
I mean research.
Hey, good morning, folks I want to come back to the Polyurethanes and construction chemicals business. You reported you know some positive trends on the construction chemicals side I was wondering how sustainable that was and then again on slide 19.
In terms of Polyurethanes, you're showing M.D. guy as having by the FDI 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 any sort of color there would be very helpful. Thank you.
Good morning, Frank I think on the M.D. ice spreads I think the current levels that were at our probably sustainable you could see some some pressure down on some of that but I'm I'm hopeful with the U.S., China deal done that get some confidence back in the markets and some of those downstream.
Derivatives start to pull demand and that'll that'll from things up a little bit.
As it comes to construction chemicals, you know 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 some softness that we've seen and in some other parts of the Pugh business for example systems into automotive.
With and into furniture, and bedding, you don't think of that sometimes a mattress is a high ticket item, but they were under some pressure because of the price of a mattress you know, it's one of the things that consumers if they're tightening the belt, a little bit what 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 or.
The next step will have Steve Byrne with bank of America.
Yes. Thank you wanted to ask you a little bit about your best owner mindset.
What's your long term view of the value proposition of your key joint ventures, and and is your ownership of those the best use for for Doll and then also related to this the specced on her mind. So I was curious as to whether your recent benchmarking analyses as identified any.
In a new opportunities for you for a head count reduction you mentioned the E. Commerce platform is gaining traction to is that an area, where you think that might ultimately lead to trimming the sales force.
Yeah. Thank Steve for the question on on joint Ventures. So we do joint ventures for several reasons. The three key joint ventures that we have today, we have strong partners with and they were for the reason a market access and to make sure that we had access to low cost feedstocks. So when you.
Look at that you have to think about it in context of how do I served the market with my customers. If I don't have access to that partnership and that feedstock our priority on the ventures is we want them to be self sustaining and self funding and Standalone. That's why we're doing what we're doing with Cidara Ah the Kuwait joint ventures.
Already and that spot.
The tie joint venture is also in that spot.
And then they can as they improve they can yield dividends and pay back or they have the ability to fund their own growth as they move forward all of our partners in the Jvs are committed to that mindset have the same mindset as we do and obviously, what we need to do with Cidara is get through this that reprofiling to get isn't the best.
Long term sustainable solution.
We're doing a lot of work on footprint most of that would be Ah think of divestiture work like what we did in the fourth quarter.
Exiting a a facility in a market that as decline like Australia Polyurethanes was not competitive.
Looking at our Laporte, Texas side, I'm, moving that capacity over to Freeport getting off of that site selling that site to somebody who really wants to come in and expand there. It's a it's a good side, it's a good location.
We only had one asset on in that location. So we needed to make a change there and then obviously we will look at product chains that inside down may not get investment money like we did with acetone derivatives in West Virginia, That's a there's a better owner for that business and we're continuing to look at that.
So I believe digital is gonna help us in two ways.
If I look at the silicones business consumer solutions.
They are one of the most Saar deficient businesses that we have they're doing about 3 billion of sales through that digital portal. What they do then is they focus there sorry capabilities on application development and very close a customer contact so they pull through.
Lot of demand through that chain, but what digital really does for US is help us get that end customer and that end to end signal back into our plans so and Polyurethanes to give you. An example, as we're able to get good demand signals and that's a very complicated integrated chain through that Polyurethanes chain, we can run they add.
Assets differently in some cases, we can free up as much as 10% to 20% of incremental capacity off of an asset. So it isn't just about sard. It's also about how we run the asset how we get working capital out.
We did 400 million of working capital out in fourth quarter by the old fashioned way when we get digital Rolling I think we're gonna have the capability to see more working capital improvements.
The next we'll hear from John Roberts TBS.
Thanks, Congrats on an upside corner.
Fit when you Reprofile the Cidara debt do you get paid back on these 500 million dollar contribution to right away or does that somehow get rolled into your investments in your equity.
Yeah, and good morning, Johnny I don't want to have that negotiation with the lenders on on this earnings call.
I would say, though is I wouldn't expect that I mean, because that's been historical principle I really think what our focus is really trying to get it to use Jim's words to try and get cidara to a cash flow self sufficiency TCO.
Looking to the lenders and working with them to extend the tenors and door to adjust the amortization tables.
Not to take a haircut and Ah that's that's our primary focus of what we're going to be working with them.
Im Christopher Parkinson with credit Suisse, we'll have our next question.
Thanks, just a corollary as a question before can you just comment on that you're any updates on your intermediate term outlooks for the DSD Sprague in some key variables in the context of you some capacity delays and so on and so forth just.
I need to update on your on longer term spread expectations. Thank you.
Yeah empty I I think empty eyes exposure in the marketplace. Chris is basically in those areas that I talked about that have been a little bit slow automotive up.
Some of them more rigid polyol sales and so appliances those things pull on M.D. I chain.
That's been what's been the softest there have been announced a delays and capacity expansion, which makes obviously a lot a sense given where we are in a market in the spreads.
And there's enough capacity out there to satisfy the demand for awhile, So I think you'll see.
These are not easy facilities to build them, 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 you know seen their way through higher demand if automobiles start to pick back up you're going to see things.
In a little bit and these spreads have the potential to go up.
The next step we'll hear from P.J. Juvekar with Citi.
Yes, I good morning.
A question on recycling.
So it seems that's been a special dealing do you think Boston continue to grow why the commodity plastics come under pressure your bags your straws.
How much of here how much of those portfolio.
He's in specialty category and is it an update on the recycling initiatives are from the alliance and is it mostly focusing on the recycling mechanical the recycling and do you have any long term view on plenty of demand good. Thank you.
Yes. Good question PJ, So I'd say our portfolio today is probably running around 40% of the higher value immaterial. So it's all of our functional polymers business would be in that category. That's about 25% of what we sell out of P. NSP today and then another.
15% on the high end of P.S.P. NSP would be in things like health and hygiene products et cetera, which are probably not in that same space.
Recycling and and these bans have been targeted at a low end single use I would say a commodity types of materials and you know people just.
Aren't getting their heads around the need for behavioral changes the consumer level to make that happen. So.
What we're working on what the alliance, we now have a more than 46 members in the alliance and it's growing every day.
Focusing on chemical recycling back to feedstock. So that we can make recycled plastic out of you know taking the plastic going back through chemical recycling and back to the cracker and the plastics plant, we're looking at mechanical recycling and going into high volume applications like construction materials.
Pallets crates into asphalt for roadways, any number of those applications, they're gonna be waste to energy facilities.
There's a large facility right now in Indonesia 500000 tons.
Mixed use recycling waste to energy chemical and mechanically recycling. Both we have several projects like that with the alliance. We have a project with a Nobel Prize laureate Mohammed units are working on a zero plastic waste city in India, showcasing what can be done there you're saying.
Again across the board tremendous amounts of recycling activity one of our customers sealed air I, just announced that they've taken bubble rep to post consumer recycle we launched agility CE last year, which is up to 70% post consumer recycled material, you're going to see that go into things like correlation shrink.
For water bottles or beverage cases.
And we're getting it into a whole host of other applications. So this is taken off in a big way.
Big announcements like Nestle, saying, they're going to spend 2 billion to buy post consumer recycle packaging are great because we need that demand pull on the chain to make this work.
The next step, we'll hear from Bob quite with Goldman Sachs.
Good morning. This is Don Campbell on for Bob a quick question on your U.S. Cracker fleet.
Propane prices I'm come up in the fourth quarter I'm curious on kind of your ability to flex a U.S. cracker fleet and the fourth quarter relative to the third quarter Almond and in early January I think are thus far in January propane prices have come back and so I guess kind of what you're buying is to flex in first quarter relative to the fourth quarter.
Yes. Good question done we have the ability to flex we get flex every day, but that doesn't sometimes it makes sense, but every week, we're looking at the flex that we need to take.
You know ethane has been.
In rejection here recently, so it's been advantage, but there were a periods in the fourth quarter.
Where our variable cost from cracking propane were extremely low.
And butane has been in the mix all year as well I'd say with what's going on with TPC and the C. Fours. You know, we're we're watching butane because we created a lot more see fours out of that and so we don't want to get ourselves into a jam on C. force, but.
Oh paying its been advantaged propane advantage is a big advantage for Dow because we have more flexing the industry.
We can crack up to 70 plus percent propane in the fleet in the U.S. Gulf Coast and it's been advantage for Europe as well. So we've been able to crack up LPG is all through the fourth quarter and Mccracken now in Europe .
Well move on to John Mcnulty would be ammo capital market.
Yeah. Thanks for taking my question with regard to the silicones de bottlenecking, the new furniture furnaces at Texas nine can you kind of ballpark the opportunities in terms of the the earnings add that that can give you. This year and then also do you have any incremental cost cutting or efficiency levers that you can pull just given the difficult backdrop I know you have a.
Little bit of the you know still working on the on cutting out some of the cost tied to stranded costs from the separation, but anything anything beyond that that we should be thinking about.
Yeah.
Morning, John up we've got another 140 million of stranded costs to come out this year and we're well on track to deliver that number.
Obviously looking to liberate more out of working capital as I talked about and get that cash and some non operational things like the remaining settlement of the 2013 to 2018 part of the Nova litigation case, which will come in there.
We're doing a lot with all the businesses and functions on what we can do for efficiency, so and fourth quarter Levered surfaces, and Dow was down 13% in terms of cost of their their ringing a lot of efficiencies out digitalization will help that Anna and I think that'll be a difference a throw it to our do where do we haven't.
A number on Texas, nine and on a Canada, well, we didn't give a number of this morning on the on the Canadian except for the capacity John So what I wouldn't say as you take 130000 tons as ethylene, but we're going to use our portion of that were not all of that we're going to use our portion of that to make additional polyolefin, we've got the reactor capacity already.
There.
And so that's the that's gonna be the primary focus and the other thing that I would say that wasn't in jeans lift as a billion dollars of cash.
That will get back from the lower transaction costs. We spent almost 1.2 billion in cash last year to finish the dowdupont span.
Spin out for now and that will get up we'll get a billion of that back this year and then another 200 million in 2021.
And that will conclude today's question and answer session. At this time I would like to turn the call back over to Mr. Neal survey for any additional my closing remarks.
Thank you everyone for joining our call. We appreciate your interest in down for your reference a copy of our transcript will be posted on Dow's website. Later today. This concludes our call have a great day.
And that will conclude today's conference May think keeps me your participation.