Q3 2020 Dow Inc Earnings Call
Please standby we're about to begin.
Good day and welcome to the Dal third quarter 2020 earnings call you may signal to ask the question by pressing star one at any time during todays presentation. Also today's call is being recorded I would now like to turn the call over to Colin K, Vice President Investor Relations.
Please go ahead ma'am.
Good morning, everyone. Thank you for joining us to discuss the third quarter financial results for now we're making this call available via webcast and we have prepared slides to supplement our comments. During this conference call are posted on the Investor Relations section of girls website and through the link to our webcast I'm calling to invest.
The relations Vice President for Dow and joining me on the call today are Jim Fitterling, Dow's, 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 news release and slides.
During our call we will 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 uncertainties. Our actual performance and results may differ materially from our forward looking statements Dow's forms 10-Q, and 10-K include detailed discussions of principal risks and I'm.
Certain factors, which may cause such differences unless otherwise specified all financials, where applicable excludes significant items will also refer to non-GAAP measures.
A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release in the slides to supplement our comments today and on the Dow Web site.
On slide two you will see our agenda for the call Jim will begin with the third quarter highlights and discuss the operating performance of the segments Howard will share an update on our progress against the actions. We are taking to further enhance our financial strength and then provide our market outlook and modeling guidance, Jim will close with some remarks on does progress towards our sustainability Tom.
Guidance and our competitive position for growth following that we will take your questions with that I will turn the call over to Jim.
Thank you Colin and thanks to everyone for joining us on behalf of the Dow team. We hope for you and your families are healthy and safe.
Starting on slide three in the third quarter. The Dow team delivered strong operating cash flow in line with a year ago period, Despite lower earnings as a result of the pandemic.
As the global economy began a gradual recovery, we capture demand growth from the second quarter lows across all segments, our polyethylene business achieved 3% volume growth year over year and on a sequential basis total company volume increased 9% with all businesses and regions achieving demand gain we saw.
We saw strength across furniture embedding appliances packaging construction and automotive end markets.
These results enabled us to deliver revenue that exceeded our original guidance and a more than 700 basis point improvement in operating EBIT margin versus the prior quarter sequentially every segment and business posted margin gains led by the Polyurethanes business and the packaging and specialty plastics segment.
Dow generated solid cash flow delivering $1.8 billion in cash flow from continuing operations free cash flow was $1.5 billion up more than $150 million versus the same quarter last year, continuing our track record of improvement every quarter since spin on a year over year basis, our cash flow conversion.
Was 119% versus 96% in the same period last year, we returned $518 million to shareholders through our industry, leading dividend and continued to reduce net debt by approximately $1.1 billion in the quarter down a total of more than $1.8 billion year to date.
These results were underpinned by the early actions, we took at the beginning of the pandemic, which enabled us to benefit from the start of the recovery last.
Last month, we announced details on our restructuring program, which will deliver $300 million in annual structural cost improvements.
We finalized the sale of our North American rail assets in September and announced a second infrastructure divestment for select us Gulf Coast Marine and terminal operations both.
Those actions are aligned with our best owner mindset and are expected to deliver total cash proceeds of nearly $1 billion by year end we.
We also enhanced our financial flexibility, increasing our cash and committed liquidity to greater than $13.5 billion and improving our liability profile with a 2 billion dollar debt neutral bond issuance, we now.
We now have no substantial long term debt maturities due until the second half of 2024, and we are on target to deliver on our previously committed 2020 operational expense reduction of $500 million.
Finally, we advanced our efforts and sustainability to create new opportunities for growth drive innovative solutions for our customers and increase efficiencies throughout our operations.
Thousand discipline and focus on capturing value from the unfolding recovery has positioned us to keep building on our strong performance further enhancing our competitiveness and advancing our ambition.
On slide four ill provide a review of our segment results.
The improving economy, though uneven allowed us to increase our operating rates across the enterprise, which are now approaching first quarter levels operating EBIT for the enterprise increased by $704 million sequentially volume.
Volume in the packaging and specialty plastics segment rose, 1% year over year as plastics demand remained resilient and our year to date polyethylene volumes exceeded the same period in 2019.
While company net sales declined 10% versus the year ago period, primarily driven by lower global energy prices packaging and specialty plastics segment price increases supported a 14% improvement in sales versus the prior quarter API.
Operating EBIT was 647 million down from the year ago period, as targeted expense reductions and volume gains were more than offset by overall margin compression. However on a sequential basis. The segment grew operating EBIT by $329 million and expanded operating EBIT margins by 630 basis.
Right.
Driven by solid consumer and industrial sector rebounds, the packaging and specialty plastics business captured strong year over year demand growth in flexible food and specialty packaging.
Infrastructure, consumer and transportation packaging and health and hygiene applications.
And compared to the prior quarter the business delivered local price gains in all regions and double digit gains in the United States, Canada and Latin America.
Moving to the industrial intermediates and infrastructure segment operating EBIT was $104 million down from the year ago period, due to weaker demand and margin compression on a sequential base.
On a sequential basis. The segment grew operating EBIT by $324 million and expanded operating EBIT margins by more than 1200 basis points driven by significant volume recovery in polyurethane applications as demand grows for durable goods and construction end markets the call.
The polyurethanes and construction and chemicals business reported a net sales decline year over year, despite benefiting from demand growth in furniture, bedding and appliances compared to the prior quarter. The business delivered double digit volume growth in nearly all regions with particular strength in consumer durables construction and automate.
Motive end markets as a.
As a result of rising demand, we increased operating rates by approximately 20% over the second quarter.
The industrial solutions business reported lower net sales versus the year ago period, driven by decreased local prices and volume sequentially. The business captured increased demand primarily from solvency and intermediates as industrial markets began to recover and finally, the performance materials and coatings segment reported operating.
EBIT of $75 million down year over year, primarily driven by margin compression in merchant site oxygen and reduced demand due to the pandemic. However sequentially. The segment grew operating EBIT by $48 million and expanded margins by 220 basis points led by demand recovery and formulated sales.
The cones products and coding.
The consumer solutions business reported a decrease in net sales versus the year ago period continued resilient demand in home care applications was more than offset by weaker demand year over year and automotive construction and high end personal care as a result of the pandemic.
Compared to the prior quarter the business delivered volume gains as industrial manufacturing activity high rise building projects and mobility and transportation began to improve that.
The coatings and performance monomers business achieved volume growth in all regions, except the United States, and Canada, which were flat versus the year ago period demand increased in architectural coatings as residential construction market dynamics strengthened and consumers continue to do it yourself projects as a result the.
Business captured sequential double digit gains in nearly all regions.
Turning to slide five our feedstock flexibility was again, a key enabler of margin expansion contributing to the sequential operating EBIT margin improvement in the quarter.
Feedstock costs were higher than anticipated entering the quarter, however, our flexibility and agility to optimize fees and real time asset by asset and furnace by foreigners allowed us to capitalize on our cost curve advantage and drive incremental margins we.
We purposely built this capability both people and assets around the world over many decades to take advantage of raw material and co product market dynamics.
On the us Gulf Coast ethane and propane have been the cost advantage feeds for more than 90% of the time over the past decade Dow's.
Dows, leading ethane and propane flex capabilities and our ability to reduce NASA to zero have given us a competitive advantage. This is especially true in these volatile derivative markets, which have constrained operators, who are more reliant on NAFTA.
Altogether. This will continue to drive substantial value for down not just in North America, but also in Europe or Dow's LPG range is four times greater than the industries.
And these advantages extend to downsize in Argentina, Canada and at our joint Ventures in Asia Pacific and the Middle East, where we have optimized mixed feed cracker capabilities.
Our feedstock flexibility advantage as reflected in the strength of our margins as showcased in our annual benchmarking results and with that let me hand, it over to Howard for more color on our financial results.
Thanks, Jim and good morning, everyone moving to slide six through 2020, we have continued to improve our liquidity and liability profiles execute against our unique cash levers and strengthen our competitive cost structure, our discipline delivered a cash flow conversion of 117% on a trailing 12 month basis, which is more.
More than doubled since then.
This cash generation has further strengthened our financial profile, we increased total cash and available committed liquidity by $1.5 billion at quarter end to more than 13, and a half billion, representing a 28% increase over the end of 2019 over there.
Over the same period, we also reduced net debt by $1.8 billion with an ending quarter reduction of $1.1 billion.
As Jim mentioned, we also continued to prudently manage our liability profile as well.
We extended our next substitute debt maturity out by another year now to mid 2024 with a debt neutral bond issuance in the quarter. This.
This disciplined approach to prioritizing cash has enabled us to continue to improve our balance sheet, even through the pandemic something that has been a challenge to many in our industry. In fact, our best in class free cash flow yield to end conversion rate have driven a further reduction in our net debt to cap ratio since year end 2019.
Reflecting our improved leverage and positioning us well for the recovery we all.
We also continue to advance our unique to Dow cash levers, which are set to deliver over $1.5 billion in discrete cash tailwinds for the year.
Entering the third quarter, we had already delivered more than $700 million in cash we were able to close our rail infrastructure asset sales three months earlier than originally planned resulting in a cash proceeds of more than $300 million and we announced plans to divest select marine and terminal infrastructure assets that targeted close for this.
Transaction in early December with more than $600 million in cash proceeds expected.
These transactions strategically targeted non product producing assets and demonstrate our best owner mindset and culture benchmarking, while locking in long term cost advantage access to these services early in the year. We took additional actions to further streamline our cost structure and boost our competitiveness in response to the Coca 19.
Pandemic.
Last quarter, we increased our 2020 operating expense reduction target of $500 million and we are on track having delivered approximately 60% year to date.
And our focus on releasing cash from our balance sheet has resulted in a decrease of more than $700 million in working capital over the last 12 months. This has been aided by our structure working capital interventions, which contributed to the $137 million release of cash for the quarter, even with sequentially higher sales and we will continue to do.
One additional structural working capital improvements going forward.
We also finalized our restructuring program in the quarter recording a $575 million charge comprised of severance exiting disposal activities and asset write downs with a two year payback period. The program is expected to double over a total annualized EBITDA cost savings of more than $300 million, achieving a run rate.
50% by mid 2021 and substantially complete by the end of 2021.
The asset shutdowns target, primarily small scale production facilities as we continue to balance supply to regional needs and will not impact our ability to meet customer demand.
Altogether, our actions are producing increased financial flexibility and enhancing our competitiveness as the economic recovery gains momentum now.
Now moving to Cidara on slide seven.
Consistent with the growth captured in our core packaging and polyurethane businesses from the ongoing economic recovery. Sadara is also benefiting from end market resilience end markets supply tightness as a result, the JV financial and operational performance continues to improve with an equity earnings uplift of approximately $100 million year.
Over a year and dow's expected contribution for 2020 has now been reduced by 20% to no more than $400 million.
In addition, the structural changes that will be implemented to enhance the darice long term feedstock flexibility through additional ethane and an extension of natural gasoline allocation will improve its position on the global cost curve.
Dow, Saudi Aramco and Cidara continue to make good progress toward debt reprofiling with the lenders we remain on target to have an agreement to Reprofile Sadara project financing debt by year end.
Turning to our market outlook on slide eight in the first half of the year. We took aggressive action in response to the pandemic to reduce production to match demand well ahead of the industry the economic.
Recovery has generally progressed as we expected however, the pace in the third quarter, particularly in durable goods end markets was faster than anticipated and.
In response, we quickly increased operating rates by double digits across the enterprise from the June low. This deliberate approach has enabled us to build cash and reduce net debt going for.
Going forward Dow is positioned to capture a significant upside as the economic recovery strengthens.
Indicators are signaling stabilization in key markets and geographies PMI. For example has increased across China, EMEA and the us and the US housing market is up 20% year on year.
The underlying demand trends combined with continued low inventories are leading to tight market conditions, which presents additional opportunity for our portfolio to ramp our operating rates higher.
Turning to our modeling guidance on slide nine.
Moving to the fourth quarter, we expect the economic recovery will continue to improve driving sequentially higher business results, but tempered by typical seasonality, which has historically been anywhere from a 3% to 5% sequential impact on sales and a 5% to 10% impact on EBIT for modeling purposes. We suggest you use the midpoint of.
Those ranges and as the quarter progresses, and things materially change, we will be sure to provide an update.
We see total sales in the range of 9.5 to 9.8 billion. The strength, we saw in the third quarter in key value chains like polyethylene and Isocyanates is expected to continue as durable good end market demand further rebounds, and packaging demand continues to be resilient and.
As usual, we're highlighting the key drivers in the quarter on a sequential basis in the packaging and specialty plastics segment, we expect the robust consumer driven purchasing behaviors to continue for our packaging applications and with industry inventory levels at five year lows, we see support for the recently nominated October price increase.
In the industrial intermediates and infrastructure segments, continuing demand recovery in the automotive construction and furniture and bedding markets should continue to support price increases in the fourth quarter with some offsetting seasonality.
And finally in the performance materials and coatings segment as usual normal seasonality in the northern hemisphere will be a headwind for coatings in the quarter, However, orders and automotive electronics and construction end markets should provide demand gains for our differentiated silicone offerings.
We do expect a $100 million or higher turnaround spend sequentially as we had a delay from the third quarter due to the hurricanes on the us Gulf Coast. However, we are still on track to lower our turnaround costs by $100 million for the full year versus 2019, and deliver our 500 million dollar expense savings as well.
I'd like to emphasize that this near term guidance is based on our assumptions for our continued yet uneven recovery, we expect a rebound off that first half flows that benefited our third quarter results to continue growing at a moderate pace through the fourth quarter absent any significant second wave pandemic impacts.
We remain confident that the decisive actions Dow has taken this year will continue to differentiate us in that environment with that I will turn back to Jim.
Thank you Howard please turn to slide 10.
In addition to our strong financial performance throughout this turbulent year now also launched breakthrough sustainability targets earlier this year focused on reducing our carbon footprint and addressing plastic waste. So.
Sustainability is not a new concept it down in fact for decades. It has been a defining factor in how we make decisions to run our operations and innovate new products. These.
These new targets reflect our long standing commitment to apply our material science expertise to address the world's most pressing issues we are now.
We announced our intention to reduce down to net annual carbon emissions by 15% by 2030 and achieve carbon neutrality by 2050, new enabling process technologies will bring carbon efficiencies to our operations and provide higher earning such as our F. CDH technology being scaled up at our cracker.
And Plaquemine, Louisiana, as well as increasing dow's renewable energy purchases at very competitive costs across the United States in Latin America, and accelerating technology to electrify ethylene steam crackers.
We also continuously innovate new products and solutions to help our customers meet their sustainability commitment and lower their carbon emissions. For example, our son's fears bio SPF booster and managed care style polymers are products that meet our customers' requirements for more sustainable personal care solution.
Secondly, we announced several actions to further our leadership role in driving a more circular economy by two.
By 2030 that will help stop the waste by enabling 1 million metric tons of plastics to be collected reuse to recycle through direct actions and partnerships for exists.
For example, our work with partners around the globe to construct infrastructure like polymer modified asphalt roads and to make products with post consumer recycled plastic.
By 2035, we will close the loop, enabling 100% of Dow products sold into packaging applications to be reusable or recyclable.
We are developing circular economy solutions, such as investing in advanced recycling and offering recycled plastics with our recycle ready technology as part of our product portfolio. We are all.
We are already seeing the benefits of our actions as the market adoptions for these new solutions continues to grow and enabled us to drive lower costs and higher sales throughout our businesses.
Sustainability will continue to be a critical driver of long term value for now and our shareholders and close.
In closing on slide 11.
Our strengthened financial flexibility disciplined focus on cash and the actions we have taken to reduce structural costs position us well to continue delivering value for Dow and our shareholders. Most of our markets have already seen significant improvement and as the recovery broadens, we will begin to see higher margins as differentiate.
Parts of our portfolio returned to more normalized growth.
Our functional polymers polyurethane systems, and silicones businesses as highlighted in our annual benchmarking deliver premium margins and represents significant EBITDA and margin uplift as social and workplace activities resume and durable goods demand continues to increase.
In the meantime, we remain focused on strengthening our financial position unlocking additional cash upside and successfully re profiling cidara that this financial flexibility will further enhance our competitiveness as we move forward affording us an ability to seize the right opportunities for growth.
We are also advancing dow's commitment to ESG as we pursue our long term ambition to become the most innovative customer centric inclusive and sustainable material Science company in the world driving long term growth as consumer demand rises for innovative more sustainable solutions.
These actions are underpinned by our unique consumer focused portfolio that has broad geographic product and market reach as well as industry, leading feedstock flexibility combined with our focus on low capital intensity investments digitalization and innovation, we will continue to drive superior performance.
Relative to our peers now I'll turn it back to Colleen to set up the Q and a.
Thank you Jim now, let's move on to your question.
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Okay.
And our first question, we'll hear from David Begleiter with Deutsche Bank.
Hey, good morning, Tim.
Jim and Howard in terms of your capital allocation measure strength has improved especially with the debt refinancing.
Our free cash over the next two three years.
Heading for the use that cash sales to be buybacks could be some bolt on M&A is could be investment in the business organically.
Thank you.
Morning, David Thanks for the question and.
And obviously, we have done a great job managing cash and delivering cash from machine.
And as you say, we've paid down about $2 billion of debt. This year. So as we look at next year and in the next couple of years, we're working on scenarios, where we could be able to with discipline increase that capex from the $1.25 billion that we have this year.
Most of that $1.25 billion is going to safely and reliably reliably operate the plants today and growth capital and downstream businesses like Ana our industrial solutions business Polyurethanes systems, and formulated silicones businesses as.
As we free up a little bit more capex is going to go into quick payback projects, especially think anything that that hits reliability and really improves things like cracker reliability come to the bottom line pretty quickly. So you should see that and then once we get back above cobot demand.
Growth levels will start to look at more downstream capex investment, but I would say, we'll open it up gradually and will ramp up as we see the demand improve as.
As far as M&A I would think.
Any bolt on M&A would be relatively small I don't know Howard if you want to comment on that you had no but no big Bang M&A, Dave and I would say that in addition, and continuing to support our leading dividend. We also want to continue to de lever. So we haven't set a target yet for next year. We're ahead of pace. This year as you pointed out I will.
Set a target I'm sure on the next earnings call, but.
But you know it will be in the 500 million to a billion ranges as a first pass base and what we see today.
Thanks, Jonas Oxgaard with Bernstein.
Good morning, guys.
Yes.
A two part of hail mind on Sadara.
Im looking at the closest you had and.
You are talking about $400 million cash in and if I'm looking at the combined EBITDA, even if I assume Q4 is the same as Q3 is only about 160 million with 250 million of interest.
And just is not going down so.
So my first question has where has all that cash Gordon.
Is that to do the changes in the in the plants that you're talking about and then the second part of the question is how should I think about 2021 here that you're talking about cash.
Sustainable cash sitting on the cash flows, which I'm assuming zero cash in for Tao.
How do you plan to get there because that seems to require pretty significant increase in EBITDA for 21.
Yes, John this I'm going to let Howard on packet, but a bit just remember the cash that's going to end. This was our is our portion of the principal repayments on the project financing, which is why the debt re profiling by the end of the year as a big target for us So Howard whether new impact like the EBITDA Recon and also proud.
Gross on how we're doing on debt Reprofiling, Yeah. Jonas Good morning look I think the let me start with the stars operation operational performance and I would say that they're on their third quarter numbers were $100 million improvement from an.
From an equity earnings perspective versus the same quarter a year ago. They also saw sequential improvement and I would also say that they are on track right now to have a better 2020, then 2019, which I would say most folks in our industry can't say that so I think there are operational performance is doing very well.
Taken cost out obviously there are also benefiting from the snap back in demand that we've seen in a durable goods areas in the urethane chain as well as the resilient demand that we've seen in our core business and packaging.
When you think about where the money's going Jim Jim hit it on the head, which is remember right now its project financed project financing means they've got about $1 billion. A principle that are coming due every year. So that money is going to principal pay down.
That's why we're so focused on the re profiling and I would tell you that we made really substantive progress with the PC games that are in the syndicate.
In the third quarter were now in the process of engaging with the commercial lenders and this the cook investors and we remain on track to get a deal done.
By the end of the year. So we're feeling really good about that and remember that the re profiling our targets on re profiling is first to dora to be in a position of cash flows self sufficiency by January one and so that is that is the thought process and we're on track to make that happen, we don't havent done.
We still have work to do but watch this space I'm really pleased with the team we get Saudi Aramco Sadara and the dollar treasury teams that are working collaboratively.
With each of the lenders in the lending syndicate, so more to come but good progress so far.
The next one is on to Vincent Andrews with market Stanley.
Thanks, and good morning, everyone.
Building on your comments about the strength in polyethylene markets and your expectation for pricing in October maybe you could just help us understand how you're anticipating that the balance of the quarter playing out in a normally November December in particular, we tend to see some price declines. So do you think those will be.
There will be price declines or do you think that the demand strength that you're seeing there is robust enough to to keep those at a minimum.
Despite the fact that there's a good amount of Chinese capacity coming and then just what's your expectation for ethane as these new crackers starting out as these.
As crackers restart post hurricane outages. Thanks.
Morning, Benson good question and let me I'll take the first and then I'll come back to ethane I think.
I think one of the reasons, we had better performance in third quarter was demand was stronger for longer than we expected and inventories were lower than anybody expected. We also had higher operating rates at Dow, but also throughout the industry and we did have some impact from quite a bit of color.
Passive the offline as we ended the third quarter. My expectation is demand is going to continue to be strong. It's been stronger polyethylene demand has been stronger year over year every month, all year long, even even through the second quarter, which was a very sharp downturn, so I think that bodes well.
For pricing through the quarter and I think our average price through the quarter will probably tick up slightly.
Remember it started low and it ended up about 12 cents through the quarter in the us in the third quarter in the us.
I would say we will hold on to that maybe took up slightly on average for the quarter on as.
On ethane there has been a lot of speculation on what's going to happen with ethane I would say natural gas looks to me like it's going to stay about where it is it might rise to as much as 350 through the winter, but I'd.
I don't see anything that would indicate that theres going to be a big spike up in natural gas and on air.
And on ethane you have to remember the frac spreads as they improve bring a lot of ethane to the market. What we saw in June and July of Frac spreads got up to a $1.50 a million between you and that was enough to bring 300000 barrels per day of ethane to the market. So I expect frac spreads will increase a little bit we might see ethane prices.
Bump up a couple of cents in the fourth quarter from where they've been but as those frac spreads increase people are going to bring some more capacity into the market.
Next the midline, Jeff Zekauskas with JP Morgan.
Thanks very much.
In in your geographic description of their growth.
I thought the results were different than what I would have expected in that in the us and Canada. Your volumes were down nine in Europe. They were up four in Asia They were flat.
I would have thought today should have been stronger in Europe weaker makes us stronger.
Can you talk about those overall trends and whether you expect that to continue and then quickly for Howard.
Accrued and other liabilities moved from 2.7 billion to 3.4 billion this quarter.
Sequentially, what's what's normal number for accrued and other liabilities are down.
Good morning, Jeff I'll I'll take the.
Geographic question and I'll, let Howard talk about the liabilities.
I would say no.
The recovery is probably more market driven globally than it is geographically driven we've seen similar patterns in all the geographies on on what's coming back in the market, So food and specialty packaging industrial packaging, we saw big tick up in construction.
Durable goods electronics, all up appliances up and we saw that across all the markets. We saw automotive make a big comeback.
I would say would want to get into region by region would just be differences that you might see in a region. For example, Sitelock Saints was a bit slow in the third quarter and in Asia, and we have a pretty sizable footprint there.
And then Polyurethanes, obviously is a big footprint in Europe, and while it ticked up a globally, we still have some room there to grow so I wouldn't read much into it from a geographic standpoint, I think the markets are continuing to prove I think Latin America, probably made one of the stronger snap back.
That we saw.
We saw especially Brazil, and the third quarter. So we're keeping an eye on that but it's really more market driven and Howard you want to touch liabilities, yes, Jeff Great question I'm impressed with your diligence in the back of our press release look I would say that the 3.4 billion number is definitely.
Greece as the biggest driver is the restructuring right. So we announced this week that we announced the restructuring of 6% of our labor cost and so we accrued in the quarter for all of the charges and that obviously comes into the accrued current liabilities the other item.
As with the higher performance there is a slight increase in the performance comp expectation Thats an annual bonus program, we'll see how the fourth quarter turns out but those are the two big drivers of the increase so that 3.4 number will move around but as you get through 2022 and 2023 it will come down.
Around by about a $300 million, which was the biggest chunk of the step change because of the accrual.
Well, the Dodd, Frank Mitsch with Permian resets.
Good morning folks and.
Impressive quarter and.
It came in at 18, 19% higher than the guidance that you offered in the middle of September so.
Obviously you ended the quarter.
On a tear can you talk.
A bit more about how that how that surprised you and here we are three weeks into the fourth quarter in our houses.
How sustainable is that higher level of performance.
Yes, good morning, Frank Thanks for the question and I would say a few things that changed we.
We had expected to have turnarounds in the third quarter and because of the Hurricanes turnarounds came in lower by $50 million in the quarter now some of that slides now and as a fourth quarter, because we had to take the plants down and.
And we had about $200 million of improved polyethylene in isocyanates pricing strength.
Between when we guided in and the end of the quarter. So I think those are the two big things. The other thing I would say and just credit to the team Dow fantastic job of blocking and tackling price volume management and running the assets. We moved quickly in second quarter to take operating.
Rates down to match demand and manage cash and liquidity and we did that really well.
And then we brought them up quick as we saw in third quarter that things are improving and I think we capitalize on both ends of that curve and so and then on top of that we were a little bit lumpy too we have to say that that we did not get a direct hit from the hurricane. So we were able to navigate through the.
And get the plant back online relatively quickly those would be the big moving parts.
Next we have five Clark with Goldman Sachs.
Thanks, very much Tim I'm wondering you said since volatility in regional margin pads for the polyethylene business over the last year DC ramifications sort of broadly on future expansions do you think this is going to kill some ambitions globally or no.
Can you give us some perspective on how you see this next wave of polyethylene that might come into the market over the next couple of years.
Yes. Good morning, Bob Good question I think it has shown some.
Substantially and I think it will continue to kill some more and on top of what you talked about on demand you've got to remember there is a lot of pressure on the industry right now to be able to get carbon reductions and gets cotwo emissions down. So as you continue to bring on new capacity people are going to look.
With that new capacity and they're going to look at your carbon footprint and try to determine what what are you doing to your total carbon footprint. In this one of the reasons that we're working on about four technologies in the process technology side in the ethylene production and propylene production area that are all geared towards being able to build future.
Plants that could potentially be zero carbon crackers.
And also being able to retrofit existing plants, where we might be able to get a 20% to 40% reduction in cotwo footprint. So we're doing that for ourselves, but we're also doing that because we think that could be a revenue in licensing stream for us going forward. So.
So I would I would stay tuned, but I think you're starting to see people pull back a little bit on projects and that's why we pivoted pretty quickly to manage cash and liquidity through this so that when we get through the pandemic, we come out with a strong balance sheet and we have the capability and the flexibility that we need.
Not only grow but to do it in a way that helps bring that carbon footprint down.
John Roberts with U.P.S. will have our next question.
Thank you.
Two of the contributors to polyethylene strength I think were low channel inventory going into the recession in a temporary switch away from recycled plastic towards Virgin have inventories normalized in the channel and are you seeing any signs of a move back towards recycled.
I would say inventories at the end of the third quarter continued to be low in fact, they probably went down at the end of the quarter from where we started at the end of the second quarter. So I don't see any change there and on Virgin.
Plastics John.
I think today with recycle rates and we see this as well when people are looking to recycle plastics back into new materials, it's requiring virgin materials to blend with that capability. So I don't think recycling necessarily displaces all the Virgin material I think you still need plenty of Virgin.
Materials to make of quality that you need for that end spec I think that will change over time, but it isn't going to be an impact over the next couple of years.
Next we'll hear from PJ Juvekar with Citi.
Yes, hi, good morning, Jim and Howard.
When a good question.
Good question and say look since it.
It's weak due to excess supply and say look since so.
How quickly can you get your mortgage and say look sense into downstream silicones and would that cause overcapacity in silicones and.
And my second question is.
You talked about based on our mindset, you've done some divestitures here, which.
So that will be a long term holding for you post your bank agreements. Thank.
Thank you.
Yes, PJ on the on the site along Seans question I think I think the real issue is just a day.
Dressing the merchant sales things capacity. So we've done some things obviously to take some of that capacity idle and that was part of the third quarter charge that we put in there. So we're going to idle a little bit of capacity inside log sales for downstream silicones very diverse markets I think we can continue.
Due to invest in downstream silicones formulated silicones investments and continue to chew up that merchants analog things business without getting into an oversupply situation. So we see it in automotive we see it in construction all very strong it goes into appliances that goes into all kinds of food packaging and specialty packaging.
So I think you're going to see there plenty of growth areas for the downstream so locks.
Silicones without really overpowering that.
And as for Saddam.
First things first our goal here is to get this is our refinanced and get that $500 million a year off so a $500 million cash improvement every year for now.
And then when we get past that will start to have a look at long term, where we think can happen sooner is improving you can see it in the race in third quarter and we're not we're not it's Michael averages yes.
In terms of EBITDA growth. So this is what is our can do at some pretty low levels, we probably got another 20.
20% up before we get to cycle averages on on EBITDA, and we'll take that into account and look through the cycle and what the outlook is.
Before we get into any discussions about that.
Yes, some of the Steve Byrne with Bank of America.
Yes, good morning, I wanted to drill in a little bit more on this this 300 million cost savings initiatives.
How much of that would you say is X or head count reduction.
Versus workforce costs like like kidney.
And the other bucket could be the asset rationalization, what do you think the net benefit could be in 2020 warning in Cogs wellness Gionee.
Howard you want to take that and kind of unpack what the costs are yeah look I would say from a hard dollar savings standpoint, you should expect about 150 million to drop to the bottom line in 2021, and then the balance of the 300 another 150 in 2022.
Includes a 6% reduction in our workforce costs. So that doesn't mean, 6% head count I mean, obviously were trying hard to trim. The high end of the pyramid. Obviously, we're also looking as of streamlining when you think about it from a segment level perspective, it's about.
A little bit more than a third and PSP and then the balance split between industrial intermediates and performance materials and chemicals.
And we'll move on to Laurence Alexander with Jefferies.
Good morning, guys. Just a question about the costs or burdens from New York TSG initiatives are there was the direction you're going I guess could you touch on your current thinking about the Capex will return on capital on recycling versus version plastic.
And for the carbon neutral targets, how disruptive would it be for Doe to pull forward that target by say 10, or 15 years, if that's the direction the political wins and flowing.
Yes, good morning, Lawrence, Let me, let me talk a little bit about on the carbon side clearly.
Clearly the source of carbon emissions comes from generation and power burn.
Burning natural gas and burning natural gas in the furnaces in the cracker.
On energy alternative energy, we have a target to create two contract as much as 750 megawatts of alternative energy wind and solar and most of that is competitive or less expensive than what we produced today. So that has on that value add to it obviously.
Finally, we can't do everything there becomes a limit on what I can do with wind and solar because I need 24, seven available dispatchable power and I need steam and so as we look at the future growth we're looking at.
Cracking and process technology around CDH, which is a way to make propylene out of propane and do it with about a 20% lower.
Carbon emissions and that I think can be equal to or better than return on capital than what we typically approve.
Our projects.
We're also working on and these are all smaller dollar right now pilot scale activities. We're also working on that same technology for ethane to ethylene, it's obviously, a little bit tougher to make that happen that could be as much as a 40% reduction in C O two footprint.
Obviously pulling things forward will depend on those technologies proving themselves and then looking at the total capital that we have to spend over time to make that happen and as you know some of these assets are very profitable. So you want to have a game plan for how you do this over time.
I would say the other area that we've got to be sensitive to is that.
On the recycling side is recycling.
Is going to need public policy as well as recycling targets to make things happen.
One of the reason that doesn't happen today is because it's more expensive to recycle that it has to make virgin material. So one of the things we're working on around the World Europe, United States as well as what is the policy needs to look like.
The linear economy, the cheapest thing to do is for your plastic ways to go to a landfill and obviously if we stay in a linear economy, we run the risk that theres more plastic waste ends up in places like the ocean, who want to close that we've got to create the right incentives to close that loop and bring it back in this technology to do it.
Today.
More than 80% of what we make today can be completely recycle but.
But it isn't and that really has to do with local policies and costs and we've got to tackle that issue.
Well move on to Christopher Parkinson with credit Suisse.
Hi, good morning, Vince carrying on for Chris.
I was just wondering demand for polyurethane morning commence upon hearing things clearly improved substantially in this quarter I know thats a little bit early but can you discuss any preliminary demand trends, you're seeing or Q and maybe how you view 2021 versus 2019 demand levels that would be.
Helpful. Thank you.
We saw double digit volume growth.
Quarter over quarter, and primarily was driven by consumer durables appliances, construction and automotive end markets. So they're up although some of them are still below last year's levels. Automotive for example is up but it's still below 2019 levels.
I think it's going to continue appliances are still very very strong and there's a lot of backlog on appliances and the supply chain.
After what we went through in the second quarter and into the third quarter. The supply chains are tight in some areas. So you're seeing a lot of backlogs and were catching up with that demand. So I think it's going to continue through fourth quarter for sure.
And then we will keep an eye on how it goes beyond that.
China I would say already in almost all markets has returned to pre cope with levels and so we may actually start to see overall growth in China, which would be good I would say some markets.
In the rest of the world like appliances.
Packaging are at pre koeppen levels, but not the non all and automotive is still shallow to pre coven levels and probably will be for a couple of years I expect.
Well move on to Kevin Mccarthy with vertical research partners.
Good morning, Jim just to continue the dialogue on Polyurethanes. So just curious to hear your thoughts on the supply side, we've seen a number of force measure.
Colorations can you speak to where you think inventory levels are in and the API and polyols as well.
As well as operating rates and prospective pricing outlook in the chain.
Yes, good morning, Kevin things are tight as a drum right now on MD I and propylene oxide.
Okay, Polyols, maybe a little bit better, but its propylene oxide that some pretty tight right now and I think thats going to continue.
Obviously, when you have an upset in Isocyanates operation.
You want to get it back as soon as we can but.
It sometimes takes a while to get back up and get lined out. So I think things are going to be tied to the fourth quarter.
Could extend into the first quarter, we're managing we're working very closely with customers to try to keep them running and try to keep enough allocation to everybody. So that we can support them through but it's a lot of heavy lifting by the team right now.
And we'll move on to slide <unk> with RBC capital markets.
Good morning, Thanks for taking my question I guess I just wanted to get your thoughts as a similar type of question, but there's no.
There has been some some chatter.
Essential restocking in certain end markets.
Maybe the first half of 21, I guess would you agree with that I'm. Just curious just because it seems like some of your markets you are back to normal levels.
Maybe in construction and so on and use and you mentioned, China is kinda back there, but maybe if you can touch on automotive and construction in some of these areas do you expect more restocking in the first half of next year, what are we kind of back at normal levels.
Hi, a room and I'm not sure I would characterize it as restocking or just getting back to target levels of supply I think we've we've dipped in and some of the supply chains below target inventory levels and that's made them.
Supply chains, less robust and on top of that you've got.
Global trade issues, which really complicated some of the supply chains as well. So I think I think people would like to get back to normal inventory levels I'm not sure I would call that restocking or stocking up I think just get back to a more resilient supply chain because we're doing this today and has taken a toll on people.
The second thing I would say is that coming out of covert we're pivoting to more digital capabilities in one of the things that we're able to do with digital channels is have better line of sight to market demand and were able to match operating rates to demand and so I think you're going to see a change in behavior.
In terms of how people operate that they're going to have a much better visibility on the demand side and they are going to be able to tight race that and so you won't see big swings up and down in inventories you will see see things be more tightly managed especially in a period of time like this where cash is king and you need to focus on cash.
On liquidity.
Some of it back to John Mcnulty with BMO capital markets.
Yes, thanks for taking my questions. So maybe a bit of a follow up to what you were speaking to earlier on the on the packaging and specialty plastics area. When I look at the outlook you guys have for for Q versus Threeq to the flat to up 3% or so I guess to me. It seems it seems like something's missing here, because the pricing looks like it should be.
Should be solidly better than that the demand environment, given low inventories also sounds like it should be at least a modest improvements. So are there are there other puts and takes that we should be considering or is it just a conservative outlook I guess, how should we be thinking about that.
Yes.
I'm remember I talked about the turnarounds so the turnarounds that.
We're in third quarter that got moved into fourth quarter are going to hit.
Packaging and specialty plastics segment.
And so they get most of that $100 million costs, you can add back we had about a 50 million dollar.
Impact in the third quarter from Hurricane Lora, you can add that back so a $100 million of turnaround costs take 50 off of that.
So you've got that.
That which is weighing on it and then we're expecting ethane price to go up a couple of cents during the quarter. Those those are the biggest moving parts.
Next we'll move on to Jim Sheehan with Trust security.
Good morning.
Just on your sustainability initiatives, what are the incremental cost of reducing the carbon emissions and collecting the 1 million tons of plastics recycling by 2030, and and close the loop with that increase or decrease your mid cycle EBITDA and roughly by how much.
Jim I don't know that I would characterize the carbon reductions as incremental costs I think as you look forward it will be reflected in where we decide to spend our capital spending and how we decide to improve those assets we want.
We want to do this in a way that is neutral or positive to the Companys results. That's why we're focusing in on process technology and could taluses as a way to do it.
And those are the near term improvements that were looking to make and also remember that we have older assets in the fleet and so some of those that are at end of life have some of the higher carbon intensity and carbon footprint. So we decide to do with older assets can have a big impact as well.
In closing the loop it isn't like we're going to pay to close the loop in the marketplace. There is market demand for recycled materials and so we're working with partners to create innovative solutions to make that happen and we're working with the marketplace to get the capital markets evolve. So we're working with them.
Well like the recycling partnership closed loop partners and we're trying to come up with business models that in and of themselves are sustainable and that will allow that plastic to come back in.
And in some cases get blended with Virgin plastics to make the final end product.
That concludes today's question and answer session. At this time I'd like to turn the call back over to Colleen K for any additional closing remarks.
Thank you everyone for joining our call today. We appreciate your interest in doubt for your reference a copy of our transcript will be posted on dows website within 24 hours. This concludes our call have a great day.
But that will be the end of today's call. We thank you for your participation.
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