Q1 2020 Earnings Call
Please standby we're about to begin.
Good day and welcome to Dal first quarter 2020 earnings call you may signal to ask a question by pressing star one at anytime during today's presentation also today's call is being recorded.
I'd now like turn the call over to cooling.
Please go ahead.
Good morning, everyone. Thank you for joining us discuss the first quarter financial results are now we're making this call is available via webcast and we've prepared slides to supplement our comments during this conference call.
You are posted on the Investor Relations section about that's why I'm through the link to our webcast.
I'm, calling K Investor Relations Vice President for down I'm, joining me on the call today or Jim Fitterling, now Chairman and Chief Executive Officer, and Howard Ungerleider, President and Chief Financial Officer.
Please read the forward looking statement disclaimer contained in the earnings news release on flights during our call you make forward looking statements regarding our expectations or predictions about the future.
These statements are based on current assumptions and factors that involve risks and uncertainty our actual performance and results may differ materially from our forward looking statement.
No its form 10-Q, and Sanjay include detailed discussions of principal risk and uncertainties, which may cause such differences.
Unless otherwise specified first quarter, 2019th historical financial measures presented today on a pro forma basis, and all financial replicable, excluding significant items.
Also refer to non-GAAP measures.
Reconciliations to the most directly comparable GAAP financial measure and other associated disclosures contained in the downturn really in the slides to supplement on today.
And on the Dow website.
On slide two you'll see our agenda for the call.
Your may begin with the first quarter highlights sure details on valves response to cope with Nike and discuss the operating performance of the segment.
Howard will provide an update on Saddam then moving three financial overview of the quarter and provide our modeling guidance and finally joke locums from remarks, I keep actors that differentiate now.
Following that we will take your question.
Now I'll turn the call over to Jim.
Thank you, calling and thanks, everyone for joining in on this morning.
We began I'd like to burn recognized Neil Jerry for the tremendous we're always played in our Investor relations team over the past four years.
Glad to have a leading our coatings on performance monomers business.
And also very warm welcome to going Crazy, we succeeded meal as our new Investor Relations Vice President this quarter.
Starting on slide three I'll begin with notable highlights from the first quarter. We delivered net sales in line with guard joking guidance as we met strong demand in our consumer staple nondurable application, such as food health and hygiene packaging and surfactants in solving for cleaning products.
<unk>, excluding hydrocarbons and energy declined 1%, reflecting the impact of reduced economic activity in China with the onset of the code in 19 pandemic and couldn't payment interventions.
Volume in China was down 25% sequentially, that's seasonal decline due to the Chinese new year with intensified by the sudden demand reduction due to the virus cash flow was again, a noteworthy headline we generated solid 1.2 billion in cash from continuing operations on 79% conversion.
Operating EBITDA cash from operation and our free cash flow increased by 240 million year over year. This was underpinned by three actions one our quick response to shifting trends in global energy prices and regional demand, which enabled us to liberate cash from working capital too high.
Capital expense control, including more than 30 million in stranded cost savings and three a non operational cash inflow as we recovered a 259 million dollar tax withholding on the Canadian tax authority related to the 29 gene judgment against notably.
We ended the quarter with approximately 12 billion cash on available liquidity and we took further actions to reinforce our financial strength and flexibility.
Early in the quarter, we opportunistically executed a 2.25 billion euro denominated debt issuance.
Achieving a weighted average coupon of about 1%.
We immediately use the proceeds to repay debt extend our debt maturity profile and reduce our financing call.
As a result today, we have no major long term debt due until the second half 2023, and finally, we get all of this while also called prioritizing returns to our shareholders. We returned nearly $650 million to owners <unk> industry, leading dividend as well as opportunistic share repo.
Purchases.
Quarter presented us with unprecedented headwind.
And we responded my flexing, our operational and financial capabilities to protect our employees and facilities meet customer demand and fortify our financial position.
This brings me to our Kogan 19 pandemic response on slide four.
I'm incredibly proud of the determination and resilient shown by the Dow team.
The many euros on the front line, helping to ensure the health and wellbeing of our communities around the wall. Thank you.
These are unique and trying times, where every one of us and it has been inspiring to see the global community rallied together to help solve this challenge.
Now team has our share of heroes as well, particularly those employees on the front line has kept our operations running staying close to our customers and adapting with their need and making sure that our central products needed around the world are still flowing from power plants to our customers gate.
These challenging time now people are at their very best and most resource.
Turning to slide five safety is always our first priority Adele and protecting the health and safety is more employees and community is the first thing we did.
We rapidly deployed our crisis management framework and activating site by site plan to maintain business continuity and secure safe reliable operations today, two thirds of our workforce is working for Paul and Dow sites continue to operate with reinforced health safety and security protocols.
In fact close to 100% of our sites our operational.
In addition, our business and government affairs teams are working with federal state and local officials and agency to share best practices and help unlock solutions to enable the continued low critical goodman products as well as recommendations for how to get the economy reopened lately moving.
Slide six.
As an industry considered essential to global infrastructure, the chemical industry and now have a critical role to play we remain agile by modifying our manufacturing processes and product will you need increased demand for raw materials used to produce disinfectant p. eat food ingredients and packaging weve it.
Five down sites around the world to produce hand, sanitizer for donation local hospital and other health care organization.
And just recently, we developed a simplified Hcl design help protect health care professionals on the front line.
We collaborated internally to produce and donate 100000 face yields to Michigan hospitals, and we also made the innovative design openly available fabricators around the world in order to help accelerate production rates of critically needed PPD globally.
These are just a few examples of how downs utilizing our material science expertise to combat Cobot 19, which is spring new innovation ideas for the future.
Moving to slide seven we understand the extreme stress that these unprecedented times placed on our communities and people. So we've committed committed $3 million to covert 19 relief efforts for immediate support and to build community resilient in the recovery phase.
Ill point of support from our workforce has been inspiring and we're giving them creative ways to provide airtime and expertise above and beyond the things that are already doing to help down and our customers.
I'll close my comments on the first quarter with a quick review of our segment results on slide eight.
Packaging and specialty plastics operating EBIT was 580 million down from the year ago period.
The benefits of consumer led packaging demand growth and additional stranded cost saving.
More than offset by lower polyethylene and global energy prices as well as reduced equity earnings.
Packaging and specialty plastics business delivered a 1% volume growth supported by strong end market demand, particularly in health and hygiene rigid packaging and flexible food and specialty packaging applications. The business delivered volume gains in Asia Pacific versus a year ago period, Despite the demand reduction in China from.
The onset of the carbon 19 pandemic hydrocarbons in energy reported lower volume and price volume declines were primarily due to reduced ethylene sales from increased internal derivative consumption.
That's true intermediates and infrastructure operate EBIT was 175 million down from the year ago period as demand growth in the industrial solutions business was more than offset by margin compression in polyurethane application.
Well its equity losses. The segment also benefited from lower year over year planned maintenance turnaround costs.
The Polyurethanes and construction chemicals business reported lower net sales, primarily driven by lower global energy prices and decreased demand, particularly in furniture, and bedding automotive appliance and aircraft Deicing applications.
Industrial solutions reported volume growth supported by strong demand in surfactants insolvent used in cleaning application volume grew in all geographic regions, except EMEA, which reported a modest decline.
And finally performance materials and coatings operating EBIT was 162 million as volume growth in coatings end markets was offset by a decline in silicones applications and local price decreases consumer solutions reported demand growth in upstream boxing and home and personal care end markets in the U.S. Encana.
However, these were more than offset by volume declines and other region, which included the impact of Cowen 19 in Asia Pacific.
Coatings and performance monomers reported volume growth, primarily driven by increased demand in performance monomers coatings volume grew in the U.S. in Canada led by road, marking and coding but was more than offset by reduced architectural coatings demand in Asia Pacific and EMEA driven by impacts from Cobot 19.
Finally, I want to showcase the Swift and early action Bow management team continues to take as these unprecedented events play out.
We're actively working to preserve our financial strength and flexibility, while also maintaining business continuity and so today, we're announcing another set of proactive measures, which are summarized on slide nine.
Maybe clear as operational and financial playbook have put us in a very good position.
The actions, we're announcing today build upon our focus to provide additional agility drive cash generation and adjust our spending to current realities to that end. The following near term interventions are already underway and will gain momentum as we move through the remainder of the year. We've targeted a further 500 million dollar.
Use of cash from working capital, we are reducing expenses by 350 million and we are decreasing our capital expenditures target to 1.25 billion a reduction of 750 million versus last year. We're achieving this further reduction in a way that we'll maintain our long term competitiveness.
And our most attractive growth projects.
Also we are taking action to idle facilities or reduce operating rates in line with demand trends in the U.S. Europe and Latin America, we're working with our customers to get orders placed with an up lead time. So we can make the best asset decision across our network and manage bottlenecks in the supply chain to deliver product.
Where it's needed.
In plastics balanced production to current demand we are temporarily idling three polyethylene and two elastomers production units or at least 30 days the plants have an aggregate annualized capacity of approximately 2 billion pounds and are located on the U.S. Gulf coast and in Argentina.
Equates to approximately 10% of the business as global annual capacity.
Our polyurethanes business have strong participation and durable goods segments, such as automotive furniture, and bedding appliances and construction.
Segments are being heavily impacted by government mandated shutdowns around the world as a result, we're running our polyurethanes assets, including propylene oxide and empty guy at reduced operating rate and silicones, we're running reduced rate across our global grid, So roxane train and ours onto Gong production.
For two facility in China will remain down on an extended planned turnaround into May we also benefit from full flexibility at our silicones, finishing asset, allowing us to quickly respond to demand in all formulated silicones applications around the world.
We are taking these actions with a thoughtful approach that will allow us to quickly respond as demand improves when economies around the world reopen.
And while the timing and shape up a recovery remain uncertain. These actions positioned now to emerge even stronger when the global economy rebounds, with that let me hand, it over to Howard.
Thanks, Jim and good morning, everyone turning to slide Ken I'll start with an update on a key milestone reached at Sonora on our last earnings call. We share that Sundar was very close to finding its final logistics service agreement.
Im pleased to report the JV has now achieved that milestone. This agreement was important as it was the final substantive step to project completion.
As a result, Dora and the JV partners have now be done the debt reprofiling process and are in parallel currently engaged in discussions with its lenders.
We expect this dialogue to advance over the course of this year and will provide further updates since that on phones.
Well that financing discussion is progressing dart is making good progress on executing this longer term operating structure improvements and from this year Dow remains on track with its plan loans, just Dora, which remain in the range or $500 million.
Moving to slide 11, net sales were 9.8 billion at the company level local price declined 8% year over year, driven primarily by lower global energy prices currency decreased sales by 1% volume declined 2% year over year or 1%, excluding the hydrocarbons in energy business.
Equity losses were 89 million, primarily driven by lower results at the Kuwait and tied joint ventures.
Operating EBIT was 843 million an operating EPS was 59 cents.
Positive drivers during the quarter included demand growth in food packaging health and hygiene and cleaning applications on resilient consumer purchasing trends in response to cobot 19, as well as continued stranded costs we will.
These gains were more than offset by year over year margin compression, notably in the Polyurethanes and telecoms change as well as lower equity earnings.
Overall, the financial impact you covered 19, and a substantial decline in crude oil prices.
In line with our expectation of an approximately 200 million dollar headwind in the quarter.
Moving to cash flow, we generated $1.2 billion of cash from continuing operations and increased our free cash flow by 240 million versus the year ago period.
Our earnings to cash conversion of 79%, representing a significant improvement year over year.
All of these metrics were helped by a solid release of cash from working capital lower transaction costs as well as the cash inflow from recovery of 259 million from Canadian tax authority related to the 2019 judgment against filled up.
Finally, we allocate our free cash flow in a balanced way inline with our capital allocation priorities. In addition to the dividend, we repurchased 125 million of our own shares.
Looking forward as a prudent measure given the economic uncertainty you are temporarily suspended our share repurchases from the balance of the year.
We will however continue to reevaluate that's lever in light of macro trends and our free cash flow generation.
Moving to slide 12, Dow remains well equipped to navigate the current environment and ensure our financial flexibility through the cycle. We ended the first quarter with nearly $12 billion in total liquidity, including 3.6 billion cash and equivalents.
The first quarter, we prudently drew down $800 million on our uncommitted lines further bolster our cash position.
Recall that last year, we extended our $5 billion revolver out 2024, and importantly, all of our more than $8 million on committed facilities remain untapped.
With our solid liquidity position, we have clear capital allocation priorities to maximize value, ensuring safe and reliable operations continues to be our number one priority and financially a dividend is our top priority followed by additional debt pay down.
In fact over the past year, you've seen us take proactive liability management actions, including over $3 billion on gross debt reduction and 29 team and extensions to our maturity profile and we continue this practice this past quarter.
We opportunistically tap the euro bond market issuing 2.25 billion euro debt at an all in rate of approximately 1%.
Use of proceeds to repay debt and further extend our maturity profile as a result today, we have no substantive long term debt maturities due over the next three years.
Actions have also benefiting earnings as our net interest expense run rate is now more than $100 million lower than 2019, and 200 million lower than 2018.
As you can see our financial strength and flexibility provides a solid foundation navigate the current entitlement.
You should expect us to continue being active and opportunistic and further fortifying our financial position.
Before I move in the bottom line guidance I want to take a minute to discuss how we view the corner ahead and the range of potential scenarios, we're planning for.
These are clearly uncertain and unprecedented times and due to the limited visibility we felt that even more critical that we provide an assessment using the best information available to us year to date, how the second quarter and the rest of the year could unfold and the assumptions behind our range of potential outcomes.
Our forward guidance is based on our expectation that virus containment will continue in the coming weeks and the global economy will gradually and sustainably resume as industries and businesses returned to work and global government stimuli take hold.
My question of containment and recovery that we thought in China is now playing out in Europe, and we expect similar patterns to evolve in the us and other countries.
Corridor of potential outcomes, assuming that the second quarter will show the largest global economic and chemical industry impacts from Cowen 19, and the collapse in energy prices.
As in China as a reference our modeling guidance assumes recovery for Dow begins as economy three open.
Port suggest that overall activity in China did improve quickly year over year in February and March.
Currently we have been uneven across industries.
The restart of the global economy be materially different than our assumptions, we intend to provide you with updates as the quarter progresses.
With that being said, let's move to slide 13, let me highlight adjustments to the full year items, we share in January based on current realities.
As Jim mentioned in his comments, our 2020 earnings should benefit from tailwind to $350 million on expense reductions.
We expect higher equity losses as our JV is also a similar trends as our core business.
I would expect a higher tax rate due to shifts in the geographic mix of earnings in our core business as well as lower equity earnings.
To preserve flexibility and thats slowing macro environment, we have reduced our capex spending target by 750 million versus 2019.
We will have a cash tailwind of more than 400 million related to lower integration and separation costs from the balance of the year and as I mentioned before we have put further share repurchases temporarily on home at least until we get better visibility on cash flow.
Heading into the details of the corner ahead, let's please turn to slide 14.
We see second quarter sales in the range of seven to have to $8.5 billion on our assumption of demand production, peaking in the second quarter with the spread of Cowen 19, and slowing economic activity globally.
Outlined on the flight our current sales expectations by segment and our normal passion for.
We're also providing corridors as corner along with high and low volume estimates you understand the range of scenarios, we think thats possible for each segment.
This is an attempt to give you a level look forward visibility in the very difficult period to forecast. Let me. Please reemphasize. These are estimates only.
As usual, we're highlighting the key the drivers on the quarter on a sequential basis.
The packaging and specialty plastics segment, while we expect continued robust consumer driven demand for our food health and hygiene and packaging applications, we see that's being more than offset by demand softness in automotive and infrastructure applications as well as lower average energy prices.
With the dramatic shift in oil dynamics, we expect naphtha cracking can continue its advantage, we should support our European cracker margin as well as keep demand relatively resilient there and our actions in the Americans to idle capacity should help balance supply and demand until the economies around the world We open.
Industrial intermediates and infrastructure segment were seeing high demand in the industrial solutions for our solving some surfactants that make cleaning products effective to come back hold at 19. However, we expect that the only partly offset trough MBS spreads and weakness in end market demand for our polyurethane products, particularly in consumer durable.
Construction and automotive applications.
And finally in performance materials and coatings, we expect demand softness for industrial application and coatings as well as weaken fundamentals in our upstream to lock chains, and acrylics building blocks, which are experiencing a challenging pricing environment on lead supply and demand fundamentals.
During the second quarter. We also anticipate we will begin to feel the positive effects of China continues to slowly reverse the declines on the first corner and as the global economy continues to come back online beyond the second quarter. We also expected DCT discrete impacts related to the virus begin to reverse globally.
I'd like to just stress again at the near term guidance you see here and is based on our assumptions for how the cobot 19 containment and recovery could play out as we move through the second quarter and are based on the outlined assumptions given the limited visibility will remain strongly focused on cash flow and protecting our enterprise priorities with that I'll turn it.
Back to Jim.
Thank you Howard turning to slide 15, I want to emphasize several factors that we believe said ballot part and support our competitive position.
Given our more than 120 year history, Dow has a strong track record of successfully navigating periods of uncertainty and as a result, we have built competitive positions and asset flexibility to be prepared in situations like those that were experiencing today.
We call. These our points of distinction and today I will highlight a few points that set Dow apart on slide 16000, unmatched feedstock flexibility and superior product mix are key factors that underpin the higher and more resilient margins that we deliver across the cycle. We also have a geographic mix of assets.
Provide a structural hedge to feedstock dynamics for example in today's environment, we're able to capture improved cracking margins in Europe, and southeast Asia, which offset some of the margin compression we see in other regions.
We have a leading packaging and specialty plastics portfolio with assets designed to be flexible and adaptive feedstock volatility.
Our feedstock flexibility enables us to crack a wider mix of feedstocks. For example, we have two to three times more propane capability than our peers, we can implement that at a furnace by furnace level in our crackers.
Heavier feedstock flying naphtha become advantage another limitation could be co products, if not managed adequately ethylene units may be forced to cut rate or switch feedstock and we've seen some signs of beef strains in the industry as demand for co products are tied to automotive and fuel end markets, which are key.
Currently experiencing weak demand, but here to Dow has advantages we have aromatics processing units in Europe and on the U.S. Gulf Coast, which gave us flexibility to consume and process pie gas from the crackers, we have capabilities of handling increased fee for streams from the cracker, which includes co crack.
Going to reprocess the fee for in our furnaces.
In short, our feedstock flexibility and co product management capabilities prove their worth over the cycle time and time again and this period is no different.
These capabilities to preserve our low cost to serve physician, regardless of which feedstock scenario is advantage.
Further downstream our product mix is another differentiating factor our mix of polyethylene and functional polymers products delivers a more resilient and higher margin profile, which begins to stand out and softer periods like we started to see in 2019, and we're seeing today. The benchmarking we've delivered over the past two.
Two years as highlighted this performance as well you can find our 2019 benchmarking data in the appendix of this earnings slide presentation and on thousand Investor website.
Another point of distinction comes from the market segments that we've been targeting and the consumer orientation that we have in our products and solutions, which I'll cover on slide 17.
With our primary market verticals of packaging infrastructure and consumer care, our business portfolio is tilted toward the consumer and in today's situation. We find that a substantial part of our business is essential to some of the most critical end markets that consumers value.
Related to the pandemic Dow has the breadth of solutions that are in high demand.
We see a strong Paul and applications, such as intermediates for cleaning products pharmaceutical ingredient packaging and nonwovens for gallons white and math.
Food packaging to secure the freshness and safety of our food supply.
These are moments when our material science expertise and technologies prove their work and play a significant role for example in the pharmaceutical and health and hygiene markets alone. The following are examples of just some of the products enabled by material science innovation and our diverse set of Chemistries silicone technology than anything.
Well disposables lungs, and tissues, detergents, and hard surface cleaners soaps and shampoos.
Hi, fix that are vital for surrendered medical to biles poses bowel device in pharma packaging grades gloves and gowns.
Sure thing solution juice for hospital bedding rigid insulation for medicine, refrigeration and transport and safety issues coatings applications for medical devices and tape.
The water pipes paper food packaging and paper Cups, and our industrial solutions team recently found an innovative way to reconfigure existing underutilized assets to increase our volume of ice the profile alcohol by up to 50%. This is a critical raw material for hand sanitizers.
Out of periods of change new ways of living working and staying healthy are developing across the diverse markets that we serve such as improving the performance comfort and convenience of PPD Smart building, an infrastructure solutions for multi purpose spaces restaurant takeout food packaging home and surface.
Care solutions and add on Microbials.
Now to material science know, how and strong design collaborations with customers can help enable new solutions to these developing market needs.
On slide 18 last point of distinction I want to highlight is the global scale of our operations. This is something we often take for granted but year. So far as emphasize just how much of an advantage. It provides to our ability to meet customer demand rapidly adjust and innovate and take advantage of shipping downstream and upstream.
Same dynamics, we have world class manufacturing sites in every geography, with well develop agile regional supply chain and a deep understanding of the needs of our customers in all of our markets.
Our geographic diversity serves as a natural hedge for our business operations and uniquely positions us to shine in times of crisis and uncertainty.
In fact, all of these strengths were on display in the first quarter as our teams rapidly work through regional and global supply chain complexity manufacturing limitations and shifting consumer trends and as we move through the rest of the year I see the strength continuing to provide now with unique advantages.
Altogether valid points of distinction unmatched feedstock flexibility a superior product mix participation in critical end markets and geographic diversity set us apart and give us a competitive edge today and throughout the cycle.
In summary, Dow is prepared for what's ahead, our balance sheet is strong and we have plenty of liquidity to meet our obligations with no significant long term debt due over the next few years, we continue to take proactive and thoughtful actions, both operationally and financially with a focus on.
Pete and cash flow, which we firmly believe will serve us well through this period.
We have unique points of distinction that differentiate now and position us for upside when economic recovery begins we have a remarkable team who continues to inspire and deliver everyday and we are focused on navigating through this challenging time emerging even stronger and continuing.
To execute our growth playbook with that I'll turn it back to Coleraine opened acuity.
Thank you the question and answer session will be conducted electronically.
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And we'll take our first question Vincent Andrews with Morgan Stanley.
Sir.
Thank you and good morning, everyone sounds like everyone's doing well, which is which is great.
Maybe I could just ask about.
How you're thinking about and packaging and specialty plastics.
Look at the the price decline that you guided to for to Q.
Could you just talked about how much of that's coming out of you think is gonna come out to us market versus its just the weak export market.
Or the EU and how are you thinking about ethane and propane.
Through the quarter, there's been some volatility in ethane over the last month and propane seems to be pretty stuck being pretty stubborn relative to move some crude so far thanks.
Yes, good morning, Vince everybody is doing great here and thanks. Thanks for asking we hope you are too.
Most of the pricing and I think what you're seeing on pricing is that you're seeing things.
On a come too.
Global kind of a price right now and that you would expect that with what's happened.
I think you're going to see a little bit more come out in Europe than in North America.
Little bit less in Latin America.
Less in the Pacific actually we've started to see exports to China stepping up pretty dramatically China's rate due to the tariffs coming in and the Chinese economy is starting to rebound versus March I would say, we started to see activity. There in late March and through the month of April so the industry.
Part of the economy is starting to get rolling again, consumer part still a little bit uneven.
And then obviously, we did what we did on supply.
To balance off demand. So we had a good strong first quarter volumes were flat slightly up and packaging specialty plastics.
So we're going to see some impact on volumes in the industrial part of the sector in the second quarter, which is why we we tightened up some of the supply.
And that was primarily due to industrial shipping industrial applications automotive applications.
We're starting to see the automotive industry talk about coming back here in the month of May.
And also in the month in May in Europe. So hopefully, we'll see them May June.
Turn in the economy on the industrial side here in North America Latin America.
And next Lou John Roberts with you'll be yes.
Yes.
Thank you. Thank you and you also pretty well here as well some glad to hear that.
Can you comment on other industry closures you might be seeing it we don't usually think of Dow is high cost. Although ethane is kind of slip tier currently but are we seeing.
Other closes we havent heard about yet from competitors in the marketplace.
Yes, John Thanks for the question.
We're not we're not closing the high cost assets were closing to balance demand.
So look all of these are reasonable cost assets, but the reality is there has been on a pretty significant amount of industrial capacity shut down on the downstream and so we don't feel like in this environment really plowing a lot of material into inventory is the right thing to do so that's why.
Why we're dialing back the capacity.
I have seen some delays and indefinite suspensions of projects. There was one of this weekend in Ohio the time.
Project that was going to go ahead. So we're starting to see some of those kinds of announcements were seeing reduced rates across polyurethanes across.
Globe, basically and we've got Polyurethanes MPCI capacity down in China right now.
Not on us but competitors to.
Really to balance out the fact that downstream automotive and appliances and construction for for insulation materials has been slow so I think thats, what youre, saying I think it has less to do with cost position and more to do with supply demand.
And David Begleiter with Deutsche Bank will have our next question. Please go ahead.
Jim on the same point the idling of the.
Eric is ethylene polyethylene plant is their decision to influence at all by the cost competitiveness of these plans given the.
Recent drop in oil prices.
I have not are you concerned about losing any share to competitors, who are not being as disciplined as youre. Thank you.
No I don't think we'll lose share David actually we were flat to slightly up in share in the first quarter across our plastics business and ethylene cost are still very low in the us Gulf coast. So we haven't idled anything on the ethylene side in fact, right now probably 9% to 10%.
On of ethylene production capacity is out on the us Gulf coast, So a balance that out.
We've been operating.
Very well from a working capital standpoint, I think what we're trying to do here is just make sure that we don't cloud a lot of material in the inventory until we see a good demand signal coming on the back in we're starting to get good signs.
Turning to get positive signs out of many states in the United States for May opening and some parts of Europe, like Germany, Austria, Switzerland, and then I think as competence bills testing comes along people are going to be more certain about going back into manufacturing and consumers will be back in the March.
Good.
At that point.
Easy to fire these polyethylene units backup and meet that demand.
The next to move to Jonas Oxgaard with Bernstein.
Hi, good morning, guys.
Ill follow up on the previous question there.
The 5% to 10% lower ethylene that's that seems to be higher than the industry average the how much of that is refilling your own inventory from TX nine then.
Maybe I sort of a hypothetical if TX nine had not been down do you think whatever you would been forced to reduce rates more in line with industry average.
Yes. Thanks, Joe is for the question, Texas nine is back up so it's that the 2 million run rate right now.
Most of that expansion on Texas nine was four Emmy global for their consumption for Amegy and so they've been buying ethylene.
In the market to really get themselves started up and running so the supplies them in the marketplace.
And I haven't seen any reduction in volumes there I think the other thing that's happening is.
As.
You've seen the automotive industry go down.
People that are cracking naphtha cracking heavier don't have much place for some of their romantics and some of the upgrades to go and so the rubber industry has been slow automotive industry has been slow so that has brought rate down in some other crackers and then you have some more turnaround and outage in other.
Crackers, so as we go into the quarter, we feel like the toughest quarter here is going to be Q2, and so we want to make sure that we balance supply and demand through Q2 and position ourselves to be able to turn things back on and come up as the industry starts to come back.
We'll move on to Jeff Zekauskas with JP Morgan.
Thanks very much.
What's your cash tax rate.
Sit between 30, and 35 or is it lower or higher.
And in the United States, how will your feedstock slate in producing ethylene change versus 2019 in 2019, what we are rough percentages of ethane propane in NAFTA and what do you think there will be this year.
Let me get Howard to cover the tax rate, while I have to do some CEO mass cylinder cracking question all right I'll wait for you to do your CEO map a Jeff good morning, So look the tax they that the piano tax rate that we published this morning for Q2 and for full year is between 30 and 35% slightly higher.
Other than what we had guided to earlier and really three issues.
Lower equity earnings.
Different geo mix.
Earnings and then some discrete items.
But I would say on it on your question on cash taxes lower.
Than that rate.
I would guide you something in the mid Twentys.
And to your question on cracking, Jeff and I am just focus on.
Gulf Coast here, because that's where the bulk of the flexibility is.
I'd say, we were in the 70, 580% ethane cracking through the year the balance of the propane and butane and very little total for the back half of the year zero NAMSA.
Nap has come down, but honestly ethane is still the best crack and so if ethane gets tight and we start to see prices rise in propane comes into the slate will swing over to our propane flex and as you know we can we can swing 70% of the capacity over to propane. So we've got that.
Next ability built into what we're modeling and.
Ron I'm optimistic that.
This is a more resilient gas market than people are estimating.
And we'll move on to Hassan Ahmed with Alembic Global.
Good morning, Kevin Howard.
Yes, I just wanted to sort of continue with this team off.
Off the feedstock side of things.
Let's just assume sort of second that the feedstock environment that we're in right now is the new normal in terms of scale.
Roughly where crude oil pricing is this a session that in this low crude oil pricing environment. Obviously, you will see curtailments and cuts on the shale side of things.
Maybe attain isn't guys advantaged as it used to be so now it's sort of beyond the extreme Nick if that is the feedstock cost environment. How do you see the second in a way of off cracker in derivative sort of units play out I mean.
In theory, the CTO MTO aside will not looked at competitive maybe naptime looks a bit more competitive secondly, whether it has flexibility will be better off than those that don't and then you have this whole sort of notion often it ought to capacity and Terry coming online eventually in China.
A lot of the facility is head into us just being go to attain basis entities. I mean, how would you see those all of those sort of different desktop display no to if feedstocks continuing to act the way they have over the last couple of months.
Thanks Us on that's a lot in that question, but I would say right now if things continued where they are today, we'd say, there's about 21 million metric tons about 11%.
Two capacity that risk.
That's either due to age or the scale or the high conversion costs or their feedstock cracking capability I.
I think one of the assumptions that everybody made with NASA coming down was that the whole world, what's going to switch to naphtha cracking, but what people forget is that you make so many byproducts on NAFTA and there is no home for those byproduct. So those byproduct credits go away at the end of the day ethane and propane still remain the most competitive crack and we think.
Thats going to continue.
Other assumption that goes into this then is what happens to oil price and and oil is responded to just an unbelievable slowdown in demand, which is primarily because we told everybody to stay at home and Nobody's traveling.
But what we're seeing in China is people are going back.
Traffic rates in China for car traffic and truck traffic or back up to 80% of what they were pretty coven I think when people come back here, they're going to come back into their cars, that's going to tighten up the demand side or the demand side on oil at the same time. Some of these supply adjustments are going to come back in.
So I'm I'm not predicting that we're going to go to this is the oil demand for the rest of the future.
I think if you look over a long long time that oil demand growth tracks population and what's going on around the world was the development of the economy will get back to that the question for everybody is just what's the timeframe our people going to if we get to a test and we get a treatment.
Our people going to get optimistic and go back faster or is this going to take longer than people think.
And then Hassan on your CTO MTO question, I would say about six and a half a million.
That 21 million as CTO, MTO, which with oil below 50 Bucks. That's those are really stressed assets.
Well move on to PJ Juvekar with Citi.
Yes, Jim and Howard good morning.
Just just a good.
Just a quick question again on this co products you mentioned that there is no demand for coal products and prices are coming down how would that change NAFTA margins.
And then can you compare.
Current todays.
Well in margins in Usource as Europe.
In the good position to do that and any thoughts on new.
China ethylene crackers that are coming online. Thank you.
I think what we've seen so far PJ in terms of the cost curves on ethylene is that NASA has come down but lighter cracking ethane propane cracking is still advantaged.
$100 and maybe more than $100 autonomy.
And so that is a byproduct of the byproduct credits and when you run. These naphtha crackers typically you're running them to produce ethylene and you take credit for all the by products that you sell in the market and that that back against the ethylene capacity.
When there is no margin on the byproduct Theres no netback credits and so that's what we're looking at is Theres no place for the C Force to go the Buda dying demand is down rubber demand is down and so at some point.
Flip those markets upside down and at that point.
But to slow down rather than crack more nap.
That's what we're looking at and I think Thats, what were going to see play out.
And we'll move to John Mcnulty with BMO capital markets.
Yes, thanks for taking my question.
On the cost side can you speak to the $350 million costs out that you're looking to pull out how quickly that can be phased in and then I guess also in terms of the cost and efficiency improvements that you you're looking for instead or how can we be thinking about that playing through throughout the year as well and if that may be expedited in anyway.
Yes.
Howard can put a good timeframe to that yes.
Good morning on the 350, I would say I would look at about 20% of that realized in the second quarter, and then of the 80% pretty evenly split between the third quarter and fourth quarter, maybe a little bit of a lighter third quarter and a heavier fourth quarter, just as we continue to take those costs out.
Relative to Cidara look these if these NAFTA margins hold you'll actually see margin expansion in cidara as as the second quarter Progressive and then on the cost on the cost out the team continues to do a good job of.
Reducing costs pretty evenly through the year in fact, if you looked at our equity earnings in the first quarter. It was the one JV that actually was flat or up on same quarter last year or prior quarter basis, and that's really because they saw the same thing that all the other JV saw which was some margin compression because of the demand destruction.
But they were able to offset that with the with the cost.
The thing that they're also working on is just the sell off remember we brought 26 unit operations on pretty much in about a 12 month period. So we sold them out but now we've got to sell them up until the teams are working on that and that's not going to be a one or two quarter activity, but that's that's over the course of about three or four years.
And we'll move on to Frank Mitsch with Permian Research.
Hey, good morning, and Jim I'd like to Echo your appreciation and congrats to Neil and offer a warm welcome to Colleen.
So dow spoken in the past about multiple Monte Carlo simulations and I'm not sure. If you factored in a pandemic car oil collapse in those simulations, but here we are if I'm looking at the first half of 2020, we're running at a run rate below 6 billion in EBITDA. So I guess my question is.
At what level decline in profitability do start to get concerned about the dividend then if you could offer any any comments regarding that that would be that'd be very helpful.
Sure. Let me have Howard do that because he went through a tremendous amount of his work pre spin as we came out of spend Howard yes. Frank Good morning look we're really smart I don't know that we factored in a pandemic into the.
Into the Monte Carlo simulation, So let me use the current most bearish.
Wall Street number that's out there on our 2020 earnings around 5.1 5.2 billion of EBITDA. If you take out interest and taxes that leaves you with about $4 billion and then from there you've got a $2.1 billion dividend you've got what we said today was 1.25 of Capex and 500 of Cidara.
So you've got plenty of room, even at that bearish number.
To do it just with operating earnings and more than cover the dividend. We're also working on non operating side of the house. So that part of our cash flow in the first quarter was the 250 that we got from no no the judgment on the tax side.
Obviously, if earnings or that kind of depressed and oil and oil is down we're going to see at least a 500 million dollar release in cash on working capital and then we've got some of the other non operating things that we're working on which is the the Olin payment that's expected in contractually obligated at the end of the year of about 500.
Million dollars, so even at that level, we are more than comfortable and adequately able to cover that dividend and we've got $12 billion.
Committed liquidity, including 3.6 billion a cash on hand.
And we'll move on to Chris Parkinson with credit Suisse.
Great. Thank you can you talk us through your various US is our assumptions just regarding the structural off improvements you reference and just also update us on your bad debt Reprofile in discussions. Thank you.
Sure Howard you want to hit Sundar or assumptions and our debt Reprofiling, yes. So look I mean, what we set a number in the prepared remarks. This morning, we're very pleased that Sundar up got that last remaining rail agreement logistics agreement signed that is the final subs.
Tim step to achieve PCB now we have a series of what I would call administrative steps that star has got to work through things like registration of their security documents for the lenders verification on that project costs and some of those other things those should be well underway as we approach the end of the second quarter, if not coming.
Wheatley done.
As a result of the logistics agreement being done thus the Dora, Saudi Aramco and our treasury teams have jointly begun.
The lender Reprofiling discussions in fact, those discussions got actively started.
This week I would say for modeling purposes, it's going to take the balance of the year to make that happen you got ease in the next you've got to Cook financing and you've got.
International banks, so it's going to be a complicated discussion. That's why we say look $500 million of of cash this year inline with last year makes sense from a modeling purpose standpoint.
We're pretty focused on making sure that we get that done by the end of the or that is the goal and if you see Chris Sadar as first quarter results were relatively flat with last year, we're taking lots of actions Sadara and Aramco and now to make sure that they can continue to deliver performance similar to last year, we put in the model 500.
Million, which is our contribution to repayment or principle for the year. So thats, how much cash will be looking at putting them. This year.
Hi, Steve Byrne with Bank of America.
Yes. Thank you.
One of the drilling a little more on the 350 million of of cost cuts.
Can you describe.
What functional areas and businesses. These came from and perhaps you can.
Talk a little bit above.
The learnings from trend you're.
Benchmarking.
Well since any any specific productivity initiatives that have come out of that.
Yes, Steve So let me let me try to hit and then ask Howard if I, if I Miss anything to come in.
So it isn't I.
I think most people go to this and say that its head count related we've we've tried not to do that obviously, we've gone most all of our plants running today. So we're trying to support our customers. We are idling some capacity, but we are laying off people in order to do that we've cut discretionary spend and then obviously big.
Cuts of spend like travel and other things are near zero.
And so there's been a shift in some of the spending we've moved out some turnaround activity that carries with it obviously some discretionary expense that goes along and so we've looked at different types of activities like that where we can cut discretionary spend out and we've got that modeled out for the rest of the year.
But we havent given that this is a pandemic and one of the biggest challenges around the world has been the number of people that are unemployed, we have not tried to add to that because thats a burden right now for a lot of governments around the world. We've also done a fair amount of digitalization.
As we brought as we brought the Dupont assets in and set up for regional back office centers, one in China, one in the Netherlands, one in the U.S. here in Michigan and then another in Sao Paulo, So we've been able to do a lot of streamlining as well.
The next summer Karen.
With RBC capital markets.
Hey, good morning, Thanks, a lot I think while you're doing on the front lines as well.
I guess I just wanted to ask about both polyethylene and Paul your Ethanes.
Markets of doctors and structural changes here polyethylene on this on the feedstock side and and potentially demand side.
Your ethanes outcome demand side with maybe reduced demand for consumer discretionary items.
I guess with you would you agree with us characterizations and I guess when you when you think about that thinking longer term.
Do you foresee any changes in your strategy in Polyurethanes, you've talked about adding systems houses and he is talking if you talk about selling up.
Are those still valid in this environment anything new customers trade down or change their strategy as well. Thanks.
A room and I think we'll get back to the growth playbook as we mentioned in and in the script and I think it's just a matter of timing here. So it doesn't make sense right now to continue to plough cash into capacity when the demand in Europe, and North America, and Latin America has slow.
Down because people are staying at home. So that's why we're taking.
Taking some of the actions that we're taking right now is just a balance that demand, but that demand will come back.
People are not going to stay at home forever, we're helping governments right now with safe ways to return to work and we're operating safely 14000, Dow people go to the sites everyday and we're operating safely and people are healthy. So we know it can be done, but it's just going to take some time before the consumer confidence to come.
Back and that's why we're doing what we're doing downstream.
Expansions in our industrial solutions and ours.
Functional silicones products are still continuing systems house will come back as the automotive business and the installation and construction business comes back and we'll continue to look at downstream on plastic.
And that will conclude today's question and answer session. At this time I'd like to turn the call back over to fully paid for any additional for closing remarks.
Thank you everyone for joining our call today. We appreciate your interest in down for you referenced a copy of our transcript will be posted on does website within 24 hours. This conclude their call and have a safe day.
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