Q2 2020 Dow Inc Earnings Call
[music].
Please standby.
Good day and welcome to the Dallas second quarter 2020 earnings call.
You may signal to ask a question by pressing star one at any time during today's presentation.
Also today's call is being recorded.
I would now like to turn the call over to Coleen K Vice President Investor Relations. Please go ahead ma'am.
Good morning, everyone. Thank you for joining us to discuss the second quarter financial results. Good now we're making this call available via webcast and we have prepared slides to supplement our comments. During this conference call their posted it on the Investor Relations section of Downs website and through the link to our webcast.
I'm cooling K Investor Relations Vice President for down in joining me on the call. Today are just Fitterling bouts, chairman and Chief Executive Officer, and Howard Ungerleider, President and Chief Financial Officer. Please.
Please read the forward looking statement disclaimer contained in the earnings usually and slide during our call you make forward looking statements regarding our expectations or predictions about the future. Because 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 statements doubts.
Forms 10-Q, and 10-K include detailed discussions of principal risk and uncertainties, which may cause such differences.
Unless otherwise specified all financials, where applicable exclude significant item will also refer to non-GAAP measures.
A reconciliation to the most directly comparable GAAP financial measure and other associated disclosure is contained in the down earnings release in the slides to supplement our comments today and on the Doe website.
On slide two you'll see our agenda for the call Jim will begin with the second quarter highlights and discuss the operating performance of the segments.
Oh and will provide a financial overview of the quarter and an update on sit or you will share. The additional actions, we're taking to address current market conditions, and then move into modeling guidance, Jim will close with some remarks on our outlook and those competitive advantages for growth. Following that we will take your questions with that I'll turn the call over to Jim. Thank you.
[music] cooling and thanks to everyone. Joining us this morning on behalf of the down team, we hope that each of you and your families are healthy and say.
Starting on slide three despite the impact the cobot 19 pandemic head on valves financial results. This quarter. The Dow team continued to stay focused prioritizing cash and maintaining our financial strength.
We electively lowered our operating rates to meet demand reduced inventory and focus on cash to deliver on our priorities importantly, we generated 1.6 billion and cash flow from operation up more than 600 million year over year and free cash flow of 1.3 billion up more than 800 million year over year.
Disciplined focus on cash generation has resulted in an improved cash flow conversion every quarter since spin delivering 110% conversion on a trailing 12 month basis.
Once again, we ended the quarter with approximately 12 billion in cash and committed liquidity and we continued to see additional cash flow upside from a top line perspective net sales were near the high end of our guidance range driven by solid demand and pandemic related applications and in geographies that are leading the economic recovery.
We delivered volume growth in consumer staples, including packaging health and hygiene homecare and pharma end markets. However, it was more than offset by declines and consumer durable end markets.
We achieved notable improvements in Asia Pacific with 3% year over year volume growth and 13% quarter over quarter, largely driven by China as Asian economies continue to reopen and gain momentum.
And while Europe, and North America were generally slower to restart, especially with the delay in key industries like autos and construction. We're now seeing positive demand indicators across most of our segment.
In line with our focus on cash generation, we maintained our financial and operational strength and flexibility.
In the quarter, we released 526 million of cash from working capital driving our cash flow from operations higher in yet another quarter consistent with the expectations that we shared at our first quarter earnings call. We continued to deliver on the expense reductions, we previously committed and strategically idled assets so balance.
Production to demand.
And we're taking additional actions to maintain our strength and flexibility by increasing our expense savings target and initiating a restructuring program to ensure our competitiveness, while the economic recovery gains traction.
Howard will talk more about that in a moment.
Our strong cash generation enabled us to also deliver on our capital allocation priorities.
We maintained safe and reliable operations returned 516 million to shareholders via our industry, leading dividend and paid down 600 million in debt during the quarter with net debt reduction of approximately 740 million year to date.
And finally, we continued to advance the key pillars of our ambition for long term value creation, which you'll see on slide four we stayed close to our customers to manage through this historic period, introducing GPS shipment tracking to help customers better monitor their deliveries and plan their operation.
Something that has proven to be exceptionally valued by our customers.
We launched our new mobility science platform to enable easier and better access to our solutions for the transportation sector and as the transportation industry recovers, our expertise relationships and unmatched product portfolio enable us to innovate across the value chain, increasing our competitiveness.
We also launched an ambitious set of new sustainability target as well as a set of actions that will take to advance anti racism inclusion and diversity.
We believe these actions are the right thing to do and they will further drive long term competitive advantage and value for Dow and all of our stakeholders.
I'm proud of the Dow team for their disciplined execution and their focus on operational excellence and cash generation, which are critical to navigating in this challenging environment as the economy gradually return, we will continue to leverage our financial and operational flexibility deliver differentiated value and advance our.
Ambition generating superior shareholder return for the long term.
I'll close my comments on the second quarter with a review of our segment results on slide five.
Across the company, we took action early in the quarter to idled certain assets and adjust operating rate to match supply demand dynamics caused by the pandemic.
Packaging and specialty plastics operating EBIT was 318 million down $450 million from the year ago period, we saw strong demand in consumer staples like packaging and also benefited from the targeted expense reductions announced last quarter.
However, these gains were more than offset by weaker demand in consumer durable end market as well as lower integrated margin.
In the packaging and specialty plastics business total volumes were flat as gains in EMEA and double digit gains in Asia Pacific were offset by declines in the USA and Canada, where the market was impacted by both weaker demand and excess supply.
Total business volume is up year to date and sequentially the business reported 7% volume growth in packaging applications.
We saw margins begin to improve at the end of the quarter with improved price in June and the return of the U.S. Gulf Coast ethane advantage.
Industrial intermediate and infrastructure operating EBIT was down 374 million due to reduced demand margin compression and increased equity losses.
This segment experienced at almost 20% volume decline based on his broad exposure to cobot impacted consumer durables market.
Our urethanes and construction chemicals reported reduced volumes due to weak demand for consumer durable application, including construction furniture, and bedding and automotive as a result of the pandemic.
The team responded quickly to the evolving market challenges lowering operating rates to match production to demand, reducing inventory and operating assets to maximize cash.
As the quarter progress the business did see double digit volume improvement in June off of the May lows, including volume growth in Asia Pacific and the business Order book through July is also up double digits.
Industrial solutions reported volume growth as gains in pharma and homecare were more than offset by declines in industrial and oilfield applications as well as consumer athleisure apparel.
In response to the pandemic business strategically shifted its focus to capitalize on pockets of consumer demand strength, including materials for cleaning and disinfection.
And finally performance materials and coatings reported operating EBIT of 27 million down 187 million from the year ago period, primarily due to margin compression antilock thing and lower demand primarily as a result of the cobot 19 related lockdown.
Consumer solutions reported lower volumes is 8% demand growth at home care was more than offset by declines in automotive construction and personal care end markets with consumer activities limited by cobot related government mandate.
Despite the workplace challenges through the quarter the business continued to commercialize new innovative products, which will enable growth as the use and European economy continue to recover.
Coatings in performance monomers also saw volume decline due to slower global construction activity as a result of the lockdown.
Which was partially offset by growth in architectural coatings in the United States in Canada as consumers spent more time on do it yourself projects at home.
The decline in professional contractor demand due to the pandemic resulted in demand shifting into the do it yourself segment benefiting dow's coatings business with that let me turn it over to Howard.
Thanks, Jim and good morning, everyone turning to slide six I'd like to start by providing an update on Pandora.
Since we last punks Dora and the joint venture partners have continued to make good progress on project completion and pet Reprofiling.
As we mentioned on our first quarter earnings call, We announced the final logistic service agreement was signed this was a final substantive step to achieve project completion.
All right is now in a position to declare project completion, but is considering with holding the final administrative step as long as meaningful progress on the debt Reprofiling as nations.
Negotiations with the lead agency creditors are underway with a farm target to complete the Reprofiling no later than the end of 2020.
Darren is working in good faith with support from Dow and Saudi Aramco to revamp and term sheet acceptable to all parties.
We look forward to progressing the negotiations on a timely fashion as intended groups collective interest to complete the reprofiling by the end of the year.
Dow in Saudi Aramco remain alignment steps needed to facilitate dora maintaining a position of cash flow self sufficiency throughout the tenor of the re profiling.
Together, Cidara, Dow and Saudi Aramco and also made good progress by executing a framework for longer term structural operating improvements, which are conditional on a successfully profiling and included 10 year supply agreement for additional ethane allocation and a five year extension to the natural gasoline allocation further enhancing the.
Crackers feedstock flexibility.
As indicated previously Dow continues to expect to contribute approximately $500 million to start this year.
Moving to slide seven as Jim mentioned earlier the team remains focused on generating cash flow to continue to fortify our financial position and fund our priorities.
Since the beginning of the year, we delivered a series of cost any cash levers in response to the current environment as well as several unique non operational cash inflows that provide us with additional free cash flow optionality on through 2021.
These actions have further improved working capital and reduced operational and capital expenses in light of the current macro environment.
Year to date, we've already achieved 1.5 billion of the targeted $2.6 billion have been quite actions, including 750 million of year on year savings related to separation from Dow Dupont, notably we have now successfully completed all key separation related activities in the second quarter and we've also.
We made good progress on the expense reductions, we announced last quarter, which will continue to be a tailwind moving forward.
We also expect to benefit from several one time cash contributions totaling up to $1.5 billion, which includes the contractual reservation payment of approximately $450 million, we receive from Olin during the second corner.
In addition, we announced earlier this month the definitive agreement to divest our rail infrastructure asset and related equipment at six major North American site and Watco companies are over $310 million. This transaction continues our commitment to apply at best on a mindset and aligns with our strategy to grow our core business and.
Capital efficient manner.
And consistent with that transaction going forward, we will continue to evaluate ownership of additional non product producing assets across our global portfolio.
And today, we're sharing further proactive actions to ensure our cost structure remains competitive in a market recovery that may be gradual and uneven. This includes increasing our 2020 operating expense reduction targets from 350 million a $500 million. We're also initiating a restructuring program.
Targeting more than $300 million, an annualized EBITDA benefit by the end of 2021.
Program includes a 6% reduction of Dallas global workforce as well as actions to exit noncompetitive assets that are closely linked to markets impacted by the pandemic.
Once finalized the charge from the program will be taken in the third quarter and we expect full payback within approximately two years.
These are very difficult decisions to take however, they are necessary to ensure our financial strength continues through the cycle.
Turning to our third quarter modeling guidance on slide eight.
We see third quarter sales in the range of $8.5 billion to $9 billion on our expectation of gradual demand recovery through the corner.
We have provided our best estimate of current sales and volume expectations by segment.
Well as provided corners again, this quarter for high and low ranges, reflecting the potential for an uneven recovery and although forward visibility remains challenged we did deliver sales end volumes in all segments consistent with the guidance ranges provided last quarter and we are now narrowing those ranges this corner dry.
Provide even better transparency to our expectations.
As usual, we are highlighting the key EBIT drivers in the quarter on a sequential basis.
And the packaging and specialty plastics segment, we expect continued robust consumer driven demand for our food packaging health and hygiene applications and the beginning of a recovery in our functional polymers business, which is highly aligned to durable end markets.
This demand growth combined with industry planned and unplanned outages as well as industry inventory level that are now hovering. Your five year loan. We believe we'll continue to tighten up the market and support the five cents per pound polyethylene price increases expected from both July and August.
In the industrial intermediates and infrastructure segment, we're seeing the beginning signs of consumer durable recovery in the automotive construction and furniture and bedding markets.
We're also seeing stable demand from the higher levels, we saw in the second quarter for our solvent and surfactants that help make cleaning products even more effective.
It's worth pointing out however that we remain at trough and DIY spreads.
And finally in performance materials and coatings, we expect continued DIY coating demand strength in the quarter, which benefits Dow as our portfolio is tilted toward retail DIY versus the professional contractor space an area still challenged by the pandemic.
And we expect to see gradual improvement in automotive construction and electronic segment as well as beginning signs of stabilization in global personal care market, where our silicone offerings provide notable performance benefits.
We're also providing an updated full year tax rate as higher versus our previous guidance as the pandemic has reduced our full year earnings expectation and altered the mix of both equity and core earnings, resulting an upward pressure on the operational rate.
I'd like to emphasize again at the near term guidance you see here is based on our assumptions for how the coal the 19 recovery will progress as we move through the third quarter starting to reverse the declines in the first half we are in the beginning phases of one is likely to be an uneven recovery, which the additional expense savings we announced today will help to.
Mitigate we remain focused on cash flow protecting our enterprise priority and driving shareholder value creation with that I'll turn back to Jim. Thank you Howard Please turn to slide nine.
I wanted to take a moment to highlight how our operational lever and our differentiated portfolio competitively positioned us today and for the long term.
This quarter, we intentionally adjusted our operating rate lower to meet demand, reducing inventory and prioritizing cash.
Operating rates across the integrated ethylene on below it remains strong at 82% down only 1% from the year ago period, reflecting in Brazilian demand.
Over in our Polyurethanes business, we quickly brought operating rates down to below 50% range as the extent of the durable end market shutdown became apparent.
We will continue this dynamic management of our assets and in Polyurethanes as end markets recover we expect to quickly ramp back up above breakeven operating rate.
Our operational excellence combined with our purpose will focus on cash and liquidity are critical differentiators at this point in the cycle. We saw the benefit of our disciplined approach as we released more than 500 million of cash from working capital during the quarter and we use that strength to pay down 600 million of debt.
And as many of our change of experienced compression over the last few quarters, we're starting to see rationalization take place in the industry with delayed and cancel ethylene polyethylene and isocyanates projects.
This will help dow accelerate upward and capture growth opportunity as the recovery strengthened.
As demand returns the fundamentals in the markets that we serve remain unchanged and we'll continue to grow well above GDP.
Applications in our core market verticals of packaging consumer infrastructure and mobility represent a total of 650 billion and addressable market opportunity.
In addition, as we discussed last quarter, our feedstock flexibility and product mix enable us to deliver lower costs and higher more resilient margin than our peers through the cycle.
The approach that we've taken to structurally improve our margin combined with our cash generation capability will allow us to capture further incremental uplift as the recovery takes hold.
And as the global economy continues to recover we will leverage our competitive advantages to drive growth above the market within these market verticals.
Let me close by sharing our view on the outlook.
They extended pandemic related lockdowns created that delay in the ramp up for consumer durable application.
But as economies continue to reopen and industries got back to work. We saw continued demand improvement across all of our businesses through the end of May all through June and continuing into July.
Oil demand and pricing have increased as economies continue to reopen business, providing support for the higher downstream derivative pricing.
Oil to gas spread has more than doubled from the lows in the second quarter with considerable ethane rejection and available for current and future use.
Recent economic indicators show us industrial production up 5.4% in June.
And consumers are starting to spend more with June retail sales up 7.5%.
Lets us housing starts up 17.3% for June all favorable trends for continued broad economic improvement.
On the geographic front economic recovery patterns have developed generally as expected with China seeing rapid improvement reporting last week that their economy has now returned to growth for the first time since the pandemic started with second quarter GDP up 3.2% year over year. This is evidenced in dow's 30.
1% volume growth in China versus the prior quarter, and 13% volume growth versus the year ago period, a positive indicator for the rest of the world. Although the pace of recovery may vary by region.
European and North America economies have been slower to recover but began improving in June Latin America remains challenged but we expect them. The follow a similar recovery pattern in the second half of the year.
We're seeing these patterns in our order books with monthly volumes, improving sequentially in key markets and geographies and shipments trending upward across all of our businesses, which we expect to support improved operating rates than margin moving forward.
On slide 10, as I mentioned earlier, our solutions plan to a diverse set of end market to grow well above GDP and we also have advanced feedstock flexibility multiple technologies and geographic reach that uniquely position us to outperform our competitors. This allows us to not only deliver.
Superior operational performance at the trough, but also gives us the flexibility we need to take advantage of shifting dynamics across our portfolio positioning Dow is a leader throughout the cycle and driving value for shareholders. Finally, with this disciplined operational and financial focus we continue to reward owners with our industry.
Three leading dividend supported by our strong financial profile and cash flows in summary, we will remain agile, taking swift and decisive action to enhance our competitiveness advancing our digital capabilities to better serve customers, increasing our operational and financial flexibility and capturing.
Greater value from the market recovery and growth opportunities ahead with that I'll turn it back to coleen to open the QNX.
Thank you Jim now, let's move onto your question I would like to remind you that are forward looking statements apply to both our prepared remarks and following QNX operator, please provide the Q and a instruction.
Thank you as a reminder, if you would like to ask a question to signal by pressing star one on your telephone keypad.
If you're using a speakerphone. Please make sure your mute function is turned off to larger signal to reach our equipment. Please limit yourself to one question once again that to Starwood ask a question.
And our first question comes from David Begleiter with Deutsche Bank.
Thanks, Good morning.
Tim Howard on your modeling guidance for packaging specialty plastics looking for volumes and sales both to be flat top 5%.
Yes that implies pricing is flat.
Ticket pricing up and polyethylene in June and likely in July and maybe even August so how is pricing flat sequentially given that tailwind from polyethylene. Thank you.
Good morning, David Thanks for the question, we do expect volumes to continue to improve like we'd like we saw in the second quarter.
We are going to have a little bit of the tailwind from our headwind from some turnaround costs that are in the third quarter.
Some turnaround activities have stretched through this year because of the coven related issues with workforce.
But we do have pricing on the table for July and for August applied and July up five in August we were successful in getting price of four cents in the month of June and so I think we're watching what's happening there also with input cost feedstock costs.
To see what the net is on the integrated margin. So this outlook would have the whole integrated margin relatively flat and all the increase on volume.
Well take our next question from John Roberts at CBS.
Thank you.
You highlighted mobility sciences in both as Ford Slide nine.
Gave up most of Dow automotive in the Dupont separation do you still have a dow automotive kind of integrated organization or is it just spread around all the businesses and how big is automotive today and what it will your strategies there longer term.
Good morning, John Thanks for the question, we do have a fair amount of business today into the automotive industry the transportation industry.
In the neighborhood of two to two and a half a billion dollars sales that goes in there it's different than the mix of products that went with transportation and high performance polymers to Dupont.
I went to Dupont has glass bonding adhesives and crash durable adhesives.
But remember we still have a very large platform of elastomers.
Silicones into a number of applications in in the automotive construction also polyurethanes and other materials that go into the interior of the cars coatings for noise vibration and harshness. So what we did was we pulled together a mobility platform that we can put out to the end.
History to have that face to the industry and then what we're doing is pulling the resources and know that industry together from the existing businesses to be able to focus on them and to drive that growth, especially as we see them, making changes as they come out of this pandemic.
To really lean in on next generation mobility platforms vehicles, and some of the needs that they have there.
Our next question comes from Jonas Oxgaard with Bernstein.
Hi, good morning, guys.
Oh, okay.
I am wondering about.
Morning.
Wondering about the dollar.
Looking at your page 17, and debt is flat every year, but clearly the repayment schedule. There should have paid background $250 million. So can you comment on why the but that isn't moving.
Im going to ask Howard to take that John it's because in the treasury team have been doing the heavy lifting on Saddam Jonas. Good morning, I mean look Cidara had had a challenging second quarter, just like all of our all of our chains because of really the cold and pandemic.
So it when you look at their equity earnings to us they were essentially flat.
Versus prior quarter, but down versus same quarter, a year ago I think.
Some of the comments that I made in the prepared comments I mean at the end of March we did achieve that rail agreement. So that was the last substantive step to project completion. So now we are in a position Sundar is in a position to declare PCB, where with holdings that at the moment as we are we.
Looking to negotiate a term sheet that's acceptable.
To all sides I would say the other thing that we did in the quarter is we essentially executed a framework for structural improvements that includes a 10 year supply agreement for additional ethane and a five year extension to the natural gas allocations that further enhances the crackers feedstock flexibility going forward those changes are.
Conditional on a successful reprofiling. So we're working through that we've engaged all the lenders and the negotiation I would say it is on track and it's ever in everybody's interest to get that done by the end of the year and that's that's our target.
Our next question comes from Vincent Andrews with Morgan Stanley.
Thank you and good morning, everyone.
So I could just ask and III NTM and see if I look at your volume guidance and maybe we can focus on the low end at the high end, how should we be thinking about the incremental margin sequentially is that this at volume comes back.
Good morning, Vincent we've got volumes up.
10% to 15% and III, and 5% to 10% and performance materials and coding.
I would think about it in this way I think it's more around operating rates and the ability to get those volumes moving and get up above breakeven operating rates in polyurethanes.
And also seen some increase in the industrial activity in III a lot of solvents applications. There go into industrial coatings. So they would go into things like the automotive industry, the aerospace industry, the oil and gas industry also oil and gas production.
So those have been relatively flat so I think as those operating rates come up we'll see an improvement there.
Just to give you an example in Polyurethanes in second quarter, we saw automotive.
Rates down 50% year over year, they're back in third quarter, they're going to be still below last year, but they'll be by about 20% below last year and some of the other sectors like consumer durables, where they were all 30% year over year in second quarter, we expect them to come back to about 10% below.
Year over year, so is that operating rate improves you're going to see polyurethanes, our target is to be at breakeven operating rates or above in Q3.
There will be about probably about 9% below last year in terms of volumes.
I would say that will be the main thing I don't expect they'll get a lot of benefit from pricing, we may get some benefit from raw material costs, because we have seen ethane.
Still stay relatively available so the ability to have a good price on ethane as we go through the quarter look stronger than it did in the middle of the second quarter agents into this is how we're good morning, just to give you some numbers on decremental margins I would say industrial intermediates was low fortys versus same quarter, a year ago and.
Hum and see which was which was a little bit better than that was kind of high thirtys.
Industrial intermediates as you would expect has the more durable exposure, so thats, where the numbers a little worse.
Our next question comes from Hassan Ahmed with Alembic Global.
Good morning, John Howard.
Just wanted to revisit a sadara if I heard you guys correctly you said.
Thank you had sequentially flattish sort of earnings contribution over there just trying to get a sense I mean, obviously volume wise. It was a very strange quarter, you know with a pandemic and alike, but in terms of margins I'm just trying to assess so to.
What happened in Cidara, particularly keeping in mind, how some of the heaviest feedstocks.
Dramatically there sort of came down and kind of went up they're off to did you guys did siddhartha actually benefit from the steep sort of.
Slightly heavier feeds oil price declines in the lake.
Margin wise.
Good morning as non.
So as ours input costs are are relatively fixed and so on lot of the volume instant arm is going into the Asian markets in the middle Eastern markets and so we did see a recovery in those markets in the second quarter sides and the ability to move those was good they were down some on.
Operating rate because just the impact of the automotive and the construction sectors had on them.
But as the oil price recovered through the quarter that actually helps with our that held pricing in Asia and that often obviously helps our margin. They also had have done well and continue to do well on plastics. So.
Quite a big portion of their output is on the plastic side of the equation.
Densities done pretty well.
Nicely density asset there and packaging has continued to be strong throughout this pandemic. So I think that combination of things has helped them out and had been doing a lot obviously on their own.
Keep costs under control and minimize costs.
Our next question comes from Jeff Zekauskas with JP Morgan.
Thanks very much.
I also have a couple of questions on star off so some of the EBIT at Cidara.
Has been negative for a few quarters.
So it is the way that we should understand that.
That losses in MTR by our offsetting income contributions and polyethylene is set the main dynamic or are there other dynamics.
And secondarily.
In the in the changes in the supply agreements.
To assist mean that cidara is being extended or does it mean that it staying the same but ER raw materials flowing in might be different.
And then lastly, do you expect to still contribute money to Cidara in 2021, or 2022 or you won't are you can't tell.
Morning, Jeff. Thanks for the question three questions in one so I think thats. Its one question what three parts I think very good.
I think you know I can't comment on the E bid the different business units in sooner I don't have that in front of me on I can tell you that plastics has performed better than Isocyanates and polyurethanes.
And that that is improving and so maybe Howard you can comment a little bit on the other two parts of Jeffs question on the feedstock agreement and the next steps. So the feedstock agreement first Jeff I agree is we don't disclose that level of detail, but you're absolutely right I may not know polyolefin Jane.
It is definitely doing much better.
On the on.
What was the second question. It was amounts of feedstocks is that we hope they are not know so that we are not expanding sundar as a framework agreement in executing additional feedstock flexibility so with additional ethane allocation.
As well as extending the natural gas allocation for a number of years, so basically that increases feedstock flex in the range of 30% to 40%, but it's not expanding and then your third question. Your third part of the first question.
Around 2021, and beyond love, we're going through the lend to re profiling today, we still expect 500 million in cash to go into during this year when our target remains that starting in 2021 Sundar will be cash flow self sufficient that is the target.
And then it's a it obviously is contingent on the successful re profiling of the debt.
Okay.
Well take our next question from Frank Mitsch with freemium recession.
Yeah.
Good morning focus a bit of a broader question.
Obviously, there's been a lot of restructuring that's been going on with the combination of than the separation.
Down upon then you announced this morning, the 6% head count reduction.
Which was a bit of surprise at least to me.
Over what time period do you plan on executing that and.
I guess as might be a little bit unfair, but I mean should we be taking this as a sign that Dow is not seeing a return to pre pandemic levels for several years or how should we think about it.
Good morning, Frank I think a couple of things too to take into consideration as we look at it.
Obviously, we're seeing volumes come back now we also need to see margin improvement to get back to pre cobas levels. We have some industries that we serve that have been hit pretty hard so automotive and construction has been hit pretty hard we're seeing people go back to construction sites, but on existing projects and we're way.
Auction closely to see on new construction projects get permitted and a fair amount of product that we sell moves into products that help support the construction market. So we're watching that on the consumer side those demands and volumes look much better and so we need to see ourselves get to a point where.
Operating rates and margins improve.
Before we get ahead of ourselves we did finish in the second quarter, all the IP separation from Dupont. So thats, good we're going to swing.
T activities over to digitalization to help better serve our customers. We've had good success, there and silicones.
We're making great progress there and coatings.
We want to take hold platform over two and E. Commerce platform that can make it easier for customers to interact with US we turned on a lot of capabilities for them in the second quarter. So what we're trying to do is look at how to be more efficient as we move forward and also look at our structure in terms of the fact that we.
I don't expect us.
Moving capex up until we get back to pre Copeland type volume levels and margin levels and so that that would mean, probably a couple of years before you see us ramp back up into that space and Frank. This is Howard to answer your question on run rates are targeted to be at a 50% run rate on that restructuring program.
And by the end of the second quarter next year and 90% by the end of next year.
Our next question comes from P.J. Juvekar with Citi.
Yes, hi, good morning.
My question isn't related to your ethylene crackers and how did you ethylene cracker margins compared to your utopian asset, let's say for the month of July because still Qs kind of crazy with raw materials. So.
So maybe you can talk about July.
And Jim you talked about the limit on feedstock flexibility was your ability to dispose off due today.
So as the economy's open up and butane demand improvement autos and all that do you anticipate change in your feedstocks in us sort of Europe as a.
Before nine becomes.
Morning demand.
Good morning is doing.
Ethylene margins came under some pressure in the us at the beginning of the second quarter, obviously, because what happened was.
You asked in the Canadian economies were essentially shut down for the quarter and and it took a while for the export channel to open up for polyethylene and volumes to star moving back into Asia and other economies around the world. So.
Very dynamic difference between the first six weeks of the quarter first two months of the quarter in the last month as of quarter were resolved volumes, increasing almost everywhere.
I'd say European ethylene margins improved because.
Naphtha got as long as $150.
In the first part of the quarter in April, but then at steadily ramped up is oil came back so we.
We got whipsaw, the little bit the industry did.
By this massive drop in oil and then the recovery through them through the rest of the quarter.
So it's it's improving now I would say, we're starting to see some margins come back in ethylene ethylene span.
Tightening up there's been some outages that have extended theres some outages coming in Q3 that we expected we're going to happen in Q2, but have been delayed for some reasons and into Q3, and so I think we're going to see things on ethylene remain relatively tight.
We are co cracking morrissey for so we have the ability was flexibility to crack C zone, a little bit of a penalty for that.
But the biggest problem on on naphtha cracking on the golf is just the by products.
Refinery rates down there back into the seventies, now, but thats still relatively low with the gasoline pools and the other pools being low.
Rubber being down due to automotive demand and construction demand.
What you see is that it's very heavily favoring ethane cracking and ethane and propane cracking because you create less by products. So I think we were able to navigate that relatively well because we were basically 80 20 ethane propane on the goal in the corner.
And.
We were able to co cracks on crude see force and so I think that gave us a little bit of an advantage and we didnt have to fire sale by products and we didnt have to cut rates just to make manage those balances.
Our next question comes from John Mcnulty with BMO capital markets.
Yeah. Thanks for taking my question in the in the second quarter, you had a number of facilities that you that youve temporarily shut down our idled and reduce the production levels is there a way to to quantify what that negative impact or the cost was of doing that and as we look to threeq you should we be kind of reversing that.
And then I guess an associated question would be.
As far as some of the fixed cost absorption issues should we be thinking about any hitting in three Q on on maybe inventory working its way through the PML that might be a little bit higher cost because of all those actions how should we be thinking about all that.
Yeah, Howard why don't you take a shot that hey, John Yeah. When you think about the assets that we idled because the pandemic I would say, it's a rough roughly about $140 million of lost EBITDA as a result of as a result of those those idlings, obviously as we bring that back you'll start to see the incremental margins come back it really is operating.
Rate related and you look at the you look at the guidance that we gave for the third quarter clearly we're looking for.
I'd say the biggest increase but obviously off of a much lower base in industrial intermediates and infrastructure as a lot of those durable goods manufacturers start and started back.
Their production like the automotive folks, but you'll see improvements you should see improvements in all three segments industrial intermediates the most.
CNS pita lease just because it was the most resilient.
We talked about in the prepared comments, but our polyethylene demand was up sequentially and up versus the same quarter last year, 6% that went into packaging.
And I'd say on on your inventory question, John our inventory units were down 10% year over year and so as those units come back on will be meeting that demand with improved operating rates. So we're not planning on.
Putting a lot of material into inventory, we're planning on main maintaining tight working capital discipline.
As we talked about earlier in the year all throughout the year and then matching valves operating rates to the demand that we see coming through.
Well take our next question from Bob Court with Goldman Sachs.
Thank you good morning.
Good I'm curious how you see regional dynamics in the polyethylene world playing out it seems like.
At the height of the pandemic.
Problems us.
Let me down inventories get greatly in aggregate pricing power.
Maybe the naphtha based crackers are starting to lose that that way of life ahead is.
Is your expectation as we go through the second half and into 21 that is global demand.
Less than supply you'll start to see what we sell at the end of 19 were.
And Asian.
Trackers and in the European start to.
Take some of that excess supply out in the us industry starts to pull ins that rate again or do you think it's more.
Measured globally were.
All regions are going to add to keep rates in check.
Supply demand balance.
Good morning, Bob Thanks for the question I with what we saw in China coming out of the third quarter and going into the fourth quarter and volumes plus the fact that NAFTA have moved up to $350 a ton zones, almost a 200 dollar to an increase from the beginning in the quarter till the end.
For the quarter.
It's also helped support pricing movement up in Asia, and I think the volume and the pricing movements are going to continue our outlook on on oil obviously is going to continue in this range, maybe higher could get in science $48 by the end of the year, but somewhere in the range of where we are today in that kind of.
Ballpark.
I would say as the demand comes back in automotive.
Especially in construction.
And that complements the really positive demand that we've seen in consumer food packaging specialty packaging health and health and hygiene markets.
I think you're going to see rates tighten up we are seeing right now in some of the naphtha crackers had them at reduced rates. So so may be down 20% off of the rates that they were at the beginning.
Second quarter, we have some that are idled.
MTO is is that essentially out of the money until oil gets back a bomb something like $50 apparel. So I think what you're going to seize the European crackers have improved margins have improved that was our results in the second quarter I think I just data would support that.
And with the ethane advantage coming back and enough ethane rejection in the us Gulf Coast Thats going to help the U.S. position.
And I think we're starting to see some polyethylene come on some of the ethylene side of the house and starting to tighten up a little bit.
Our next question comes from Chris Parkinson with Credit Suisse.
Thank you.
Just on the polyurethane side is that in construction and I just how do you see the demand spectrum you hit on this a little bit how do you see the demand spectrum evolving in 2021 versus 2019 level. So put simply if you were to index your outlook for the key end markets.
19 versus where you see supply trends heading in the 21, just how would you assess supply demand dynamics as well as spreads just any additional color there. Thank you.
Yes, So I think when you look at volumes and NPU and you look at that segment, we talked about volumes being down 20%.
And prices not being down on top of that.
What we're starting to see is automotive production is coming back automotive is.
Back at about 80%, maybe as much as 90% of where it was an Asia.
It's not back to those levels yet in the U.S., but it's trending back in that direction I think it will take polyurethanes a little longer to come back then plastics for example, because that demand is going into much more ratable consumer applications.
So so our view would be you'll probably see polyurethanes.
Back above breakeven operating rates before the end of this year and then next year, you'll start to see them building some positive trends and maybe pre cobot levels may be out to the 22.
Kind of timeframe.
Well take our next question from Steve Byrne with Bank of America.
Yes. Thank you your your monthly.
Volume trend flies were helpful.
Jim you mentioned that.
You're seeing from cancellations in ethylene polyethylene and isocyanate projects can you elaborate on that and perhaps.
Bringing it by addressing what you see in terms of.
The global supply and demand outlook fruitful for those commodities over the next year.
Yes, so operating rates.
Obviously came down due mainly because the economies where shutdown I would if you go back to the beginning of the year January February.
We were off to a rocket starts at the beginning of the year and then it was good economic shutdowns that really locked everything in during the months of March and April and May April and may be.
The two worst.
And so I would say operating rates for onsite ethylene polyethylene right now are pretty much like they were last year and the volumes are continuing to build.
We're seeing some obviously projects that we thought we're going to be completed this year are still being under construction and haven't started up and they're moving out.
And we're also seeing investment decisions moving out and we're seeing projects, including ones that we had on the books.
Moving out and line said to the team here and so our view is that we need to get ourselves back to pre cobot type demand levels before we start talking about capex and growth beyond that.
And we've got to get some better visibility I like what I've seen in the month of June I like what I'm seeing in July and the outlooks for August.
What we got to get ourselves on a longer term visibility here and some buildup in rates and some momentum going into this.
Well take our next question, Kevin Mccarthy with vertical research partners.
Yes, good morning, as part of your New 300 million dollar restructuring plan I think you've mentioned, we'll be exiting some uncompetitive assets. In addition to the workforce reduction so wonder if you could comment on.
On the nature of those assets, what what the aggregate size.
You know that bucket would be and what timing, we should expect for out for those announcements.
Yes, let me let me just make a comment on the top so we announced $300 million and workforce reduction and that is.
Just people related.
The asset shutdowns than any charge, we take for that would be over and above that number we're working through all the details of that right now the way we looked at that Kevin was we look we had done some work here.
To take a look at their footprint of the company and where we wanted to be in a decade and with this pandemic I think a challenge us to take a look at which of these assets are struggling right now and may for the long term struggle to be competitive in any scenario and that's where we're focusing in on so it isn't up.
A wholesale business unit, it's as one off assets here and there.
That are at the long the wrong end of the cost curve and that's what we're focusing in on Howard maybe you can help them a little bit with how to quantify that yeah Ami Kevin. Good morning, I would say look we're still working through the accounting obviously in each one of the decisions, but if I would to ballpark. It today it will be roughly a total charge.
Each of about $1 billion, plus or minus $300 million is kind of the range that the that were in obviously 300 million as it related to severance and then the other two thirds then related to either asset. After you know asset actions or contract termination fees. It would have to be paid based on the assets.
No almost no cash out this year and.
Vast majority the cash out in 2021 and 2022.
And then a little bit of a tail there at the end.
Our next question comes from Matthew Blair with Tudor Pickering Holt.
Hi, Thanks, good morning, everyone.
Just wanted to clarify on the 350 million Opex.
Expense savings.
How much of that was realized in Q2 and and do you have any targets for Q3, and then also do you have a breakdown by by segment. Thanks.
Yeah, I would say a is good morning, so 20% of that Threefifty was done in the second quarter. So you'll have 80% of that Threefifty that will come through in Q3 and Q4 and then obviously this morning, we upsized. The 350 to 500, so all of that Upsize 150 will come in in the third in the fourth.
Corridor as well.
Our next question comes from Laurence Alexander with Jefferies.
Laurence Good morning, you there.
Good morning, sorry about that they can can you.
Just to flush out a little bit your thoughts on permanent shutdowns versus new projects that are delayed.
And your restructurings, how much capacity over the last say last year and then once you have plan now.
What's your kind of net volume reduction across the portfolio and are you seeing sort of permanent permanent assets closures of existing assets in the different change that you operated or is it just on new projects are being delayed.
Yes, the arms good morning, I would say I'm seeing right now rate cuts in Asia on crackers as I mentioned as much as 20% we've seen some new projects that are sitting idle such as the rapid project in Malaysia.
We've seen some shutdown older crackers not not much.
Where newer crackers were bill and have been started up.
But we haven't seen much of that yet and the margins that have been in.
I have meant that there has been positive cash out of running the units. So we haven't seen that kind of pressure on those margins were seeing a little bit of issues on that are going to positively impact operating rate.
Due to operation of the assets or could be things like by products and the inability to move by products. It could be things like maintenance. You know these assets are are designed and they run better when they run hard so when you try to run them at reduced rates, sometimes things happen.
And.
So we've seen some of that we've seen postponements of turnarounds.
So maybe about 8% capacity losses in EMEA in July right now.
In spite of the fact that you had a couple of outages that were pushed out so you're seeing the age of some of the fleet start to show up and start to show up when you're trying to flex things and I think thats, having an impact Laurence I also think you got to look at the CTO MTO assets. There is about six and a half million metric tons of C.
Tio MTO and those are hard pressed to generate positive cash flow of oil is below $50. A barrel. So that those are also potentially in jeopardy is that if oil stays in that range. Our look right. Now is that if you just looked at the cost curve. Today. There is about 21 million metric tons is about 11% of ethylene.
And capacity that that risk either due to age scale high conversion costs. The vast majority of that's in the Pacific and in Russia, So more than half of that is in the Pacific in Russia.
Three to 4 million tons in the U.S. and in North America. So those are the ones that were keeping an eye on and we can talk to you offline about it as well if you want to talk about individual projects.
That concludes today's question and answer session. At this time I will turn the conference back to call me K for any additional for closing remarks.
Thank you everyone for joining our call today, we appreciate and appreciate your interest in down for a reference a copy of our transcript will be posted on does website within 24 hours. This concludes our call. Thank you and have a great.
Let's get that does conclude today's conference. We thank you for your participation you may now disconnect.
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