Q4 2020 Dow Inc Earnings Call
Please standby we're about to begin.
Good day and welcome to the Dow fourth 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 Colleen Kay.
Please go ahead ma'am.
Good morning, everyone. Thank you for joining us to discuss the fourth quarter financial results for Dow We're making this call available via webcast. We have prepared slides to supplement our comments. During this conference call are posted on the Investor Relations section of Dow's website on <unk>.
Tore webcast.
I'm, calling K Investor Relations, Vice President for Dow and joining me on the call today are Jim <unk>, Dow's, Chairman and Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer.
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.
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.
Sales forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.
Unless otherwise specified all financials, where applicable exclude significant items. We 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 that supplement our comments today and on the Dow website.
On slide two you'll see our agenda for the call Jim will begin with the fourth quarter and full year highlights and will discuss the Companys operating segment performance Howard will share an update on SEDAR and then provide our market outlook on modeling guidance. He will also outline dow's digitalization acceleration plans finally, Jim will provide an update on.
On our sustainability initiatives and market growth opportunities that are helping to further advance our competitive advantage in 2021 and beyond as the economic recovery progresses.
Following that we will take your questions with that I'll turn the call over to Jim.
Thank you Corrine and thanks to everyone for joining us we hope that you your families are healthy and safe.
Starting on slide three in the fourth quarter. The Dow team delivered results that exceeded expectations with sales and EBIT growth year over year and sequential net sales increase of 10%.
As the global economy and market fundamentals continue to improve demand drove volumes above or in line with pre COVID-19 levels across all operating segments, we captured strong durable goods and construction demand we grew volume and do it yourself architectural coatings on home care sectors, and we continue to benefit from solid.
Demand and pricing momentum in packaging applications supporting on sequential net sales increase of 12% in our packaging and specialty plastics segment.
This volume increase combined with improved pricing and margins, particularly on polyethylene and polyurethane applications delivered 5% revenue growth and higher operating EBIT year over year. We supported these strong top line results with our cash flow conversion of 93% in the quarter driving our full year.
Year rate up 30% versus 2019 cash from continuing operations was $1 7 billion in the quarter and free cash flow was $1 4 billion.
Working capital was a $236 million source of cash even with increased sales. We completed the sale of select U S Gulf Coast Marine and terminal operations on assets delivering another strategic non operational cash lever and improved financial and operational performance that's the Dara.
It was a key contributor in delivering positive year over year equity earnings. We also maintained our disciplined approach to capital allocation completing additional deleveraging as we reduced net debt by $837 million in the quarter and we continued to reward our shareholders through our industry leading dividend.
Overall, our fourth quarter performance was a strong finish to a year where team Dow successfully overcame significant macroeconomic and other external challenges.
On slide four is a brief recap of our full year achievements.
We adapted quickly to the global pandemic and our agile approach to managing volatility in the markets combined with our prudent adjustments to capital expenditures.
Active cost reductions working capital intervention plus delivery of unique cash levers supported demand growth year over year in packaging applications on <unk>.
<unk> $500 million structural improvement in working capital a strong uplift in cash flow from operations.
Free cash flow of $5 billion and more than $2 6 billion and net debt reduction and continued cash returns to shareholders through our industry leading dividend.
We achieved all this while also making significant progress toward our ambition to be the most innovative customer centric inclusive and sustainable materials Science company in the world.
We found new ways to serve customers in a virtual world.
We launched Dallas mobility science platform to better serve an attractive market vertical we reinforced our commitment to inclusion and diversity through our bold framework to address systemic racism and inequality and followed through with actions aligned to that framework and we launched new aggressive targets to help eliminate.
On a plastic waste and reduce carbon emissions.
I am incredibly proud of how the Dow team delivered solid performance and showed tremendous leadership on critical issues throughout 2020.
Moving to our segment performance on slide five as I mentioned earlier ongoing improvements in the macro environment drove sequential sales gains across all segments and geographies, allowing us to reach year over year revenue growth during the quarter for the first time since the start of the pandemic in.
In the packaging on specialty plastics segment operating EBIT was $780 million up more than $130 million versus the same quarter last year and sequentially.
Resilient demand tight market.
Apply low inventory levels and disciplined price volume management enabled strong polyethylene pricing momentum and margin expansion, notably operating EBIT margins expanded 180 basis points year over year, and 100 basis points sequentially compared to the prior quarter net sales.
<unk> increased 12% price gains continued across all regions and most applications, particularly in consumer packaging and the business delivered higher volumes with broad based demand growth.
Packaging and specialty plastics business continued to see strong momentum through the end of the year sales were up year over year, primarily driven by steady volumes and improved polyethylene pricing, particularly in food and specialty packaging as well as health and hygiene applications.
Impaired to the prior quarter the business delivered local price gains in all regions, including double digit gains in the U S, Canada and Latin America.
Moving to the industrial intermediates and infrastructure segment operating EBIT was $296 million up $75 million year over year, and up $192 million versus the prior quarter supply and demand fundamentals in polyurethane and construction and chemicals as well as higher equity earnings from improved per.
<unk> drove this result.
On a sequential basis significant improvement in margin over raw materials drove operating EBIT margins up more than 500 basis points more than offsetting typical seasonality.
Polyurethane and construction chemicals business reported a double digit increase on net sales year over year and sequentially.
The year over year increase was primarily due to higher local prices with gains in all regions, except Latin America compared to the prior quarter sales growth was driven by strong local pricing in furniture bedding and appliance end markets.
The industrial solutions business reported flat net sales versus the prior year period.
Currency tailwind on higher volumes and solvents for coatings industrial fluids electronics, and pharma applications were offset by pricing and industrial manufacturing applications compared to the prior quarter net sales were up double digits due to sequential improvement in price and volume as the industrial.
Real markets continued to recover and consumer end markets remained strong and finally, the performance materials and coatings segment reported operating EBIT up $50 million down year over year volume growth in downstream silicones and coatings applications was more than offset by price and volume declines in <unk>.
<unk> sales.
On a sequential basis operating EBIT was down $25 million is margin expansion in silicon applications was overcome by seasonality and coatings end markets.
The consumer solutions business reported a decline in net sales business captured solid demand growth in home care consumer and electronics and high performance building applications.
These gains were more than offset by continued weak volumes in upstream siloxane and in high end personal care applications, such as cosmetics as a result of paused social and workplace activities on a sequential basis volumes improved on recovery in mobility and transportation as well as <unk>.
Sumer and electronics and markets.
The coatings <unk> performance monomers business achieved higher net sales year over year with volumes up double digits. The seasonality impact was moderate and the business captured resilient demand for architectural coatings as consumers continue to focus on do it yourself projects at home.
Sequentially. The business also experienced positive pricing momentum, particularly in Accra lights, which was more than offset by seasonal weather related declines for coatings applications in the northern hemisphere.
And now I'll turn it over to Howard for an update on SEDAR on our financial outlook and our plans for digital acceleration.
Thank you Jim and good morning, everyone turning to slide six the strong supply and demand trends that continue to benefit our packaging and polyurethane businesses. This quarter also benefited to Dora the joint venture again delivered improved financial and operational results driving equity earnings higher by more than $130 million a year over year.
We expect solid market fundamentals and an improving economy to continue to benefit the joint venture in 2021 supported by Sundar as feedstock flexibility and enhanced global cost curve position.
We are also very pleased to report on SEDAR declared project completion on the fourth quarter were moving down $4 billion share on the guarantees that supported the joint venture's debt.
In addition in January of this year, Dow and Saudi Aramco and <unk> reached an agreement in principle with the remaining lenders and investors on key terms for its debt re profiling with formal agreement is expected to be completed within the first quarter.
As a result of the Dara is expected to be cash flow self sufficient going forward.
Key provisions of the re profiling include an extension of the contractual debt maturity from 2029 to 2038 modified repayment schedule align with the darice projected cash generation profile, including a grace period until June 2026, during which interest only payments on.
Mired no upfront payments of principal and limited support in the form of much lower sponsor guarantees of <unk> profiled debt and proportion of the sponsors ownership interest.
The impact of Dallas commitments are expected to include the following which are in proportion to Dow is 35% ownership interest in <unk>.
Now I will provide guarantees for $1 $3 billion on SEDAR as debt effectively replacing approximately $4 million of prior guarantees.
Now I will provide guarantees for its portion of our interest payments due during the grace period.
Our pro rata share of any potential shortfall, which based on <unk> current performance. We do not expect will be funded by a new $500 million revolving credit facility and Sundar on guaranteed by Dow. This is expected to be established in the first quarter of 2021.
And finally, Dow as existing $220 million letter of credit related to the guarantee of one futures to Dara debt service payment will also be canceled.
As a result of these actions the company does not expect to provide any further shareholder loans or equity contributions to sundar.
Let's now turn to our modeling guidance for first quarter on slide seven.
We exited the fourth quarter with increasing strength, which is carried over into the first quarter.
The ISS manufacturing new orders index is trending at its highest level on 10 years. In addition, low interest rates are supporting a resilient housing market and Dr. <unk> nation trends are driving U S housing starts at our highest point since 2006.
We expect sequentially higher business results in the first quarter with total sales on a range of $10 seven to $11 2 billion driven by ongoing strength on our polyethylene and polyurethane value chain is improvement in our silicones franchise and supported by our U S Gulf Coast ethane advantage.
We will see some headwind sequentially with higher turnaround costs and the reversal of approximately $50 million in one time benefits from the prior quarter.
In the packaging <unk> specialty plastics segment, we entered the year with good pricing momentum continued solid demand and elevated breakeven points for high cost naphtha producers as a result of increasing oil prices. We expect these dynamics to be sustained through the quarter.
The industrial intermediates <unk> infrastructure segment will continue to benefit from strong consumer durables demand supported by automotive and housing sectors and improvement in industrial end markets. These trends combined with industry supply limitations and low inventories should support pricing uplift, although we do see some cost increases.
From rising propylene pricing as well.
And finally for performance materials and coatings, we expect silicones to benefit from ongoing demand expansion in consumer end markets, particularly in electronics home care and mobility, where our innovation advantages, we will continue to allow us to capture additional growth opportunities.
Coatings, we expect DIY demand to remain elevated through the first quarter as consumer home improvement trends continue.
There will be some turnaround headwinds on the quarter, including completion of a turnaround at our siloxane plant in China that was shortened in the first half of 2020 due to COVID-19 related labor and supply issues.
Turning to slide eight looking at the full year, we see strong market fundamentals in many of our key value chains, continuing to drive improved operating performance year over year.
And although we expect the pace of recovery to moderate it is still likely to be uneven quarter to quarter as the vaccine distribution and new strains evolve.
As usual, we're providing you with our best full year estimates of several income statement and cash flow items, which are noted on the slide.
Consistent with our capital allocation priorities and based on our improved forward outlook versus 2020, we're increasing our capital expenditure target year over year to $1 $6 billion and we're targeting an additional $1 billion in deleveraging.
So dara as previously mentioned will be a $350 million tailwind for the year with no planned cash contributions.
We expect equity earnings to be flat year over year as the margin resiliency, we see across the portfolio and is offset by higher planned JV turnaround expenses.
Total turnaround spending will be up versus the prior year as we continue to ensure the reliability of our facilities and as mentioned last year, we expect our $300 million EBITDA restructuring program to be substantially complete by year end.
We're also providing a share count estimate for the year. However, assuming a sustained EBITDA improvement we will look at re instituting our share buyback program later in the year for the purpose of covering dilution and finally, we expect our full year tax rate in the 23% to 27% range.
Moving to slide nine the events of 2020 provided an opportunity for us to rapidly accelerate our focus on the value of digitalization through our digital advances and capabilities, we were able to continue innovating and improving the customer experience and optimizing our operations. It has become clear that the.
Escalation of digital interactions and transactions driven by COVID-19 will only help us accelerate the delivery of our ambition and be an important part of our customer experience in the future.
So building on the solid foundation today, we're announcing plans to further advance our digitalization efforts by investing in three key areas.
First expanding digital tools like machine learning and advanced digital modeling to accelerate material science innovation and put innovation capabilities directly in the hands of our customers.
Second further enhancing our E commerce buying and fulfillment experience for our customers and third adopting additional real time digital manufacturing insights operational data intelligence and demand sensing all to enhance the productivity and reliability of our operations.
We expect these actions to deliver more than $300 million on incremental annual run rate EBITDA generation by year end 2025, with an additional one time $100 million improvement and structural working capital efficiencies.
To realize these gains we will spend approximately $400 million over the next two years with an attractive risk adjusted return on investment exceeding our internal hurdle rate and an expected payback of less than three years. Our goal is clear our digital acceleration will help us continue to transform how we work and importantly, how we engage.
With our customers with that I'll turn it back to Jim.
Thank you Howard and please turn with me to slide 10 for more than three decades sustainability has been an imperative to our business and last year, we announced new breakthrough targets focused on reducing our carbon footprint and addressing plastic waste.
We see these targets as a catalyst for growth and innovation.
We've discussed with you our progress on key initiatives to advance a circular economy for plastics and today, we want to provide visibility on our comprehensive approach to reducing carbon emissions.
Over the past 15 years, Dow has reduced our overall emissions by 15%, while growing our business and we see a viable pathway to reduce our net annual carbon emissions by another 15% by 2030.
This pathway begins with targeting further efficiencies and optimization at our sites.
Sourcing renewable energy and clean power and implementing new emission management technologies.
We are working with utilities and regulators to supply clean purchase power to a majority of Dow sites by 2030.
We're making good progress last year, we increased our agreements to purchase cost competitive renewable energy, and Kentucky, Texas, Brazil, and Spain, and we're preparing for the full transition of Archer news on operations.
We're also working to optimize the energy efficiency of our sites by lowering our energy use and developing breakthrough technologies, such as electric ethylene steam crackers carbon capture and sequestration and the potential use of blue hydrogen.
Now could be among the first in the industry to do so by 2030.
We recognize that achieving these goals will also require a partnerships with governments regulatory agencies and other external groups to support the economics of these technologies and evolve regulatory frameworks to focus on emissions reduction.
Widespread support for Decarbonising emissions is driving demand across the value chain and Dow is well placed to continue to lead and benefit from this evolution.
Many dow products lower our customers' emissions more than the carbon emissions used to produce them.
Enabling lighter safer and more fuel efficient automobiles more energy efficient buildings and foods that stays safe and fresh longer all critical for world set to add 2 billion people by 2050.
Ultimately Dow wins by making our cost to implement this transition are lower than our competitors and the value of our products higher.
Our objective is to establish a resilient portfolio of lower carbon footprint products to meet rising demand capture market share and grow value, while reducing emissions for Dow our customers and the planet.
Moving to slide 11, as we look to 2021 and beyond we are well positioned to capture additional value growth.
Throughout the pandemic, new consumer behaviors emerged that have driven strong demand for our products and we expect these trends to continue benefiting Dallas consumer led portfolio, even as the pandemic diminishes.
Consumers have become accustomed to new ways of purchasing and interacting Inc.
Increased in home delivery and takeout dining paired with heightened awareness of food hygiene and security will sustain demand strength for food and consumer packaging.
The resilient housing market is creating higher demand for durable goods, such as furniture and appliances and more time at home also leads to consumer spending on home improvement, including do it yourself coatings on.
Ongoing public caution about COVID-19, even after widespread vaccine distribution we.
We will support continued demand for health and hygiene applications.
We also believe that as vaccination rates increase and we turned the corner on the pandemic there will be improving demand as travel entertainment sports and construction industries and other social activities returned to normal.
Market indicators are showing above GDP growth across several sectors and as a result, we are beginning to see economic recovery broadened across our portfolio and in many of the end markets that we serve which is benefiting our higher margin consumer solutions business.
Early this increased confidence is also improving demand in our functional polymers portfolio, which serves a mobility infrastructure and construction sectors.
Finally, as we look ahead.
Unmatched materials science portfolio is uniquely positioned to address global Mega trends and shifting post COVID-19 trends, providing additional higher margin growth opportunities for Dow.
Dow solutions meet increasing consumer needs for new sustainable innovations such as post consumer recycled plastics and renewable energy made polyethylene in 2020, we tripled sales of product made with renewable bio based feedstocks.
As the need for renewable energy increases globally, so will demand for Dow solutions that enable wind power and solar production facilities.
Our heat transfer fluids are used in more than 40 large scale concentrated solar power plants around the world and through our Dow Axa joint venture, we provide polyurethane carbon fiber systems that deliver a stronger and lighter composite materials for wind blades.
Electric vehicle sales are on the rise with 2021 growth projections exceeding 2020 records and our mobility science platform focuses on delivering innovative products to enhance automobile connectivity.
Waiting comfort safety and sustainability.
Lastly, we see meaningful opportunities to support the rollout of <unk> broadband networks. For example, last year, we launched new high performance thermal gel that promotes both environmental sustainability and efficient assembly of our central <unk> infrastructure.
Underpinning these <unk> of the global foundational advantages and discipline that set Dow apart.
Our unmatched portfolio global scale low cost structure and industry, leading feedstock flexibility gives us a competitive edge further the actions we took in 2020 to bolster our financial position, including the execution of our restructuring program and our disciplined focus on cash generation.
<unk> provides the financial strength and flexibility to support our growth trajectory in line with our financial and operating playbook.
To close 2020 was a challenging year for our world.
I could not be more proud of team Dallas performance, nor could I be more confident in our future <unk> competitive advantages are clear we have significant growth opportunities ahead of us and the actions that we've taken position us to outperform our peers with that I'll turn it back to Colin to open up the Q&A.
Thank you Jim now, let's move on to your questions I would like to remind you that our forward looking statements apply to both our prepared remarks and the following Q&A operator, please provide the Q&A instructions.
If you would like to ask a question. Please press star followed by the digit one if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please limit your question to one question only once again star one and all.
Your first question, we'll hear from Bob Court with Goldman Sachs.
Thanks, very much good morning.
Jim.
Maybe you could give us your your appraisal of what's going on particularly in the polyethylene markets.
<unk> was certainly a surprise the resilience of demand was quite good and I guess, the fear of a wave of capacity overwhelming the industry didn't materialize, but how do you sort of see the supply demand setup going into 'twenty one.
Yes, Bob I think as the year progressed, we saw continued strong demand in polyethylene and towards the end of the year, we saw ethylene start to tighten up and ethylene margins improve and so that led to some pretty sharp increases in the fourth quarter you saw pay.
Margins were up in the fourth quarter about seven cents per pound in the U S. About 13 in Europe and up about 10 cents in Asia.
Thank you.
The other thing that happened was as those ethylene margins increased here.
<unk> had some wintertime activities that drove some of the cost to manufacturer up.
In China.
So you saw competing technologies like coal to olefins.
Coal prices were up $200 to $200 a ton.
Mainly because of the polar vortex and the fact that they were having some squabbles with the Australians about coal imports.
So when they werent weren't able to get it.
We also saw LNG exports in LNG demand is up sharply throughout Europe, and also into Asia, and so that that helps.
<unk> strength on top of the fact that you had these rising prices and inventory levels were low really all came together to drive that and by the way demand still continues to look good in the first quarter inventory levels are still low operating rates are good in the U S Gulf coast, our operating rates.
We're in the mid 90 in the fourth quarter.
So we're going to continue to see I think a good margins in the business.
And next we'll move to P J <unk> with Citi.
Good morning, Jim and congratulations on your goals for sustainable energy and renewable resources.
So about the sustainable electricity that you talked about to get into your crackers.
How do you plan to do that but would you outsource all debt or utilities or would you invest in renewable energy, possibly with some partners. How do you get to that goal by 2030 on what kind of Capex do you need for that.
Yeah, Good morning P J.
Look I think you think about sustainability for us from on electricity standpoint on on two fronts. We have a lot of electricity users that are not for the crackers and obviously there were looking to alternatives wind and solar.
To replace.
Our current capacity and those are cost competitive today and so we've made a big moving that direction and we we have about 580 megawatts of alternative energy under a contract and we're increasing every year. Our goal is to have 750 megawatts or more by 2025.
And I mentioned some of the sites on the script that we'll go through that.
The second thing I would say is on the crackers, we're looking at a combination of things not just electrification we have a partnership with shell going on right now to try to prove out electric cracking.
That is a longer term development in the near term. We're also working on a free.
<unk> of fluidized catalytic cracking to go from ethane to ethylene I've talked about our <unk> process to make propylene out of propane, we're piloting that in Louisiana that will be.
This year and up and running next year.
And we believe that can give us a 20% reduction at least in Seo to emissions.
And a very good scale technology, we can achieve economies of scale. It maybe 150000 tons per year.
Capex.
If you look at what we're doing in parallel we're looking at Eth and that could have the potential to reduce our emissions by 40% or more still using.
Gas as a feedstock in the crackers are gas as a fuel and the crackers. So we've got several technologies that we're looking at and we're also looking at blue hydrogen.
Also as a way to.
Try to get a more concentrated C. O two streams. So that we can combine that with carbon capture and sequestration to be able to reduce carbon emissions.
And next we'll move to Jeff Zekauskas with J P. Morgan.
Hi, Thanks very much.
And.
Propylene is going up really quickly.
Are your acrylate prices going up.
Propylene prices are going up that as our acrylate margins likely to be squeezed in the early part of the year or widen in the later part of the year, how do you assess that.
For Howard in the on.
Operating cash flow in 2020, how much of operating cash flow came from asset sales or legal settlements.
Good morning, Jeff Let me see if I can cover propylene first and then I'll flip it over to Howard Yes.
Spot prices have increased and it's a combination of reduced supply because ethane has been the preferred crack in the crackers and propane has been much more expensive again due to that.
Polar vortex I was talking about in Europe and.
Asia driving these prices up.
That means ethane has been the crack and so you don't have as many byproducts and that's shortage bet on propylene and then on purpose propylene.
You've had a raft of issues on through on purpose propylene production on which has meant there hasnt been as much there.
And so that has tightened things up I think acrylate, they're holding up well because demand has been good downstream demand has been good. So there has been some price improvements do it yourself architectural coatings are growing in.
In fact, they were the big winter last year in terms of market share I expect the contractor side will come back. This year. However, you want to talk about the cash yeah. Good morning, Jeff in the two the two.
Best owner.
Infrastructure sales, a little bit more than $900 million, if you add them together between the marine and one that we did this past quarter in the fourth quarter and then the and on the rail infrastructure than we did in the third quarter, and then I would probably top it up to $1 billion with some of the other miscellaneous land sales on asset sales that we did that were smaller.
The next day move to David Begleiter with Deutsche Bank.
Thank you Jim polyurethane has strong end to the year, how do you foresee that business progressing into Q1 and for the rest of the year both on prices and margins. Thank you.
Good morning, David Thanks for the question that the markets that I mentioned automotive furniture, and bedding appliance and construction are very solid right now.
In the energy space on oil and gas.
Pace is a little bit challenging and so we see the trajectory that we had in isocyanate and polyol <unk> in the second half.
<unk> to move up in first quarter due to supply limitations.
It's hard to keep things on the shelf like mattresses and furniture, while we've got these strong housing drives that are going on.
We are seeing the automotive sector come back obviously, we saw it big on electric vehicles would set records in 2020, and I think we're gonna crossroads in 2021, but internal combustion engine vehicles coming back as well and that and that is good demand and strong order patterns.
Even without.
Some of the bigger capital intensive markets being back on stream. So like the large scale industrial construction those types of markets.
So I think we're I think we've got a good demand pattern ahead of us housing.
Housing starts is a very very solid sign highest we've seen since 2006.
So that drives a lot of content for our products.
And we'll move on to Laurence Alexander with Jefferies.
Good morning, I guess two housekeeping questions can you it's been a while since we've had normal seasonality. So how do you think about normal seasonality playing out.
With respect to Q2 and Q3 relative to Q1.
Good morning Laurence.
I think I understand your question. So let me see if I get it and then I'll ask Howard and in case I didn't.
Normal seasonality that we typically see a strong second quarter, but having said that we would go into first quarter. This year with supply chains being relatively lean very little inventories and on almost all of them.
And we've got strong demand going into the first quarter. So it feels like you have a first quarter second quarter pretty strong season.
And we typically see second quarter on into third quarter being the strongest part of the year.
Zinc because of tightness, you're going to continue to see that secondly last year. There was a lot of unplanned activities and things like polyethylene that took a lot of capacity offline. This.
This year, there's a lot of planned activity for turnarounds because of activity that didn't happen last year due to COVID-19. So youre going to have on a planned basis almost the same amount of capacity offline. As you did last year before you ever get into any unplanned events and those those things to me being a per.
Pretty strong start to 2021, and I'm optimistic that as the vaccination rates improve we're going to start to see people return more to normal and we certainly are making progress on getting people vaccinated anything I Miss tower now maybe just to put some math on the turnaround numbers I mean last year.
We really crunch down on a number of turnarounds. This coming year, we'll have about $400 million of higher turnaround spending 300 of that in our core business about $100 million and our joint ventures, and as Jim said that the bulk of that is going to be in Q1, two and three so it just a factor that instead of a headwind Laurence.
And we'll move on to Vincent Andrews with Morgan Stanley.
Thank you and good morning, everyone.
Just looking at some of your businesses that haven't recovered as quickly.
Our high end personal care, it's a it's unfortunately easy to understand why that's been soft, but I'm. Just wondering maybe if you could talk about how youre anticipating that coming back in web and in particular, if customer inventory levels I'm, assuming they've been worked down pretty hard so.
Do you think that they're going to need to rebuild a before the second half assuming the vaccines are reaching.
Reaching critical mass by that and hopefully some return to normality is taking place or or more likely to see just sort of a smoother recovery. There. How do you how do you foresee that playing out and then just as a as a housekeeping.
A question.
Never mind I'll just leave it there.
Hi, Thanks Vincent.
I would say 2021, we're seeing strength in some of those specialty growth rates right. Now so I think building and construction is going to be up.
Probably up in the 3% to 4% range electronics, 6% or more.
Australia up nine industrial was off quite a bit last year.
Ability maybe up 11%.
Home and personal care will still be up.
Even though probably not as high as 2020, because you had some of that pre COVID-19 buying and that surge that we saw on <unk> in the third quarter second quarter third quarter.
And I do think personal care will come back I think it will come back probably up up 4%.
We are taking advantage of you know we had some scheduled turnaround time in first quarter last year, when the pandemic hit in China.
Actually completing that work right now in China. So that's got some siloxane capacity offline.
But because building and because of the high end personal care demand haven't been there that's been okay. So we'll get those things done in this quarter.
The thing we've been doing is debottlenecking a lot of our downstream capacity. So we've done a lot of projects downstream to get our what we call our specialties business ready.
And I think we're getting ahead of what will be some pent up demand once we hit an inflection point on these vaccinations certainly people are tired of being at home they want to travel they want to get back to.
Life is normal and that will open things up and we're gearing up that we should see some of that in the second half of the year.
And next we'll hear from Jonas <unk> with Bernstein.
Hey, good morning.
Yes.
Good morning, I was hoping you could.
I was hoping you could comment on what's happening with your JV, but more detail, particularly on the tie JV if I'm looking at your page 14 here.
On your EBITDA went down on a lot.
But your net income went up.
That's one.
Wondering how are we well what happened on how are we going to think about this going forward and then on answer Dara do you have.
Do you have any preliminary.
<unk> ideas of how we should we be thinking about the repayment schedule.
Al on his Thailand, and then I'll have Howard cover so Dara.
Thailand had some turnaround activity in the quarter. So that that was spending the hit them and then I talked a little bit about debt wintertime.
Situation essentially you you had a drive up and naphtha costs as you know all the alternatives went up.
And so that that put some squeeze on in the marketplace. So I don't think there's anything out of the fourth quarter results. So you should look at it and think that it's something you should project forward I think it's very situational and Howard maybe you want to talk about <unk> and the payment schedule. Yeah. Jonas look thanks for the question I mean, I couldn't be prouder of the.
The dial in the Saudi Aramco on the SEDAR a team. It's about 18 months worth of work that got us to this point, where we've got the agreement in principle with the entire lending syndicates commercial banks <unk> as well as to Cook investors. So we've got a five year Grace period, where no principle is due until June of 2026, we've matched the principal from.
<unk> 2026 out to 2038 with the projected earnings and cash loans and in terms of the next five years on a 100%. So dara basis Youre looking at about between 303 hundred $50 million of interest expense. So our share would be about 100 to 125 million a year, but I would say.
Based on <unk> current performance as well as all of the plans that they have in place.
They will be cash flow self sufficient.
For this year and going forward. So we do not expect to put any cash.
And as Dara, So that's a 350 million tailwind.
Year on year.
The next day move to Frank Mitsch with Birmingham Research.
Hey, good morning, and nice end to the year folks.
A very impressive operating rates Jimmy mentioned for polyethylene in the on the U S. Gulf Coast I was wondering if you could talk at a higher level of what the operating rates for Dow where by the way.
Roughly what they were for the for the various segments and what your expectations are as we head here into the into the first quarter and Justin and just overall you did mentioned some debottleneck there was some startups how do we think about the net capacity.
At Dow 'twenty 'twenty, one versus 2020.
Yeah. Thanks, Frank for the question.
On average for the whole company, we were above 80% operating range for the fourth quarter and we continue that strength into the first quarter.
We were at higher levels than that and our packaging <unk> specialty plastics business.
The crackers ran very strong as I mentioned on the Gulf Coast, but actually we saw good performance around the globe and it continues to tighten up and you notice that our <unk> prices are also starting to rise. So that's.
That's really making things move there.
We also saw a big step up in industrial solutions so low.
They're running strong and we've got new capacity coming to support their growth this year.
We had low.
<unk> performance in <unk> sales and that's the one that is the big upside, which I talked about was Vincent's question in the second half.
And then polyurethane on construction chemicals got back to the 80 plus percent operating rate.
In the fourth quarter and that continues into this year. So we still have upside to deliver.
We are going to continue to run the assets hard we have been spending on reliability to make sure that we can deliver more out of those assets.
Texas nine has been a stellar asset in terms of its production and.
And we've done a lot of work on Debottlenecking and reliability on some of the other spaces. So I think we're in good good room for the rest of this year.
And next we'll move to John Roberts with UBS.
Thanks, and nice quarter guys.
Well, we're reading a lot about how.
How much shipping activities are challenging and freight costs are up a lot how much is it contributing to the tight markets and higher pricing and is it.
Impacting more than just polyethylene.
Yeah, Frank we have seen some shipping rates on marine pack cargo, primarily due to the fact that our containers are or you've got a container dislocation in China has had some pretty high.
Export levels and and so you know some empty containers have been moving back to China, mostly that's been reported in the AG sector on not so much in the plastic sector.
I think our supply chains are pretty well stocked in terms of containers, but we keep a close eye on it so I don't I.
I don't anticipate anything that's long last thing I think I think we'll work through this and they just assign.
Some of the supply chain and balance with China came back fast.
From Covid and we're coming back now and so things things come from time to time get dislocated.
And we'll move on to Hassan Ahmed with Alembic Global.
Good morning, Jim.
Jim a question around 2021 outlook look I mean, as I sort of heard all your comments about.
The different brought up change you know I'm, taking a look at the exit pricing sort of levels for be it ethylene polyethylene MDI you know as we exited 2020 significantly higher than 2020 levels right.
On average levels and then it seems supply demand fundamentals ethylene polyethylene MDI wise share.
<unk> tightened up.
Through the course of 2021, you were alluding to how the turnaround schedule for spring and summer flow from most of these products is pretty heavy right and there seems to be a perception that in the back half day Yep.
The vaccine rollout happens.
People hit the streets more in the like oil prices go up higher so I mean as I sort of piece together all of these things it seems 'twenty 'twenty, one earnings could be significantly higher than 2020.
And I'm missing something here.
Is there a fly on the ointment.
Thank you for the question Hassan I think youre on the right path, we not only beat in the fourth quarter, but we guided higher on one hour to walk you through the first quarter guidance and I think that's instructive to the way you're looking at the year, Yeah Hassan I mean, we think about it.
A very similar way as you, but I mean look let's let's start one corner in time. So if you go from Q4, where we printed on the $1 seven eight from an EBITDA perspective, and you look at your comment about margins expanding you look at polyethylene margins isocyanate margins in EG margins I would bucket about $250 million.
A higher EBITDA sequentially between all three of those change just because of your point about ending the year at higher margins and margins moving up.
Then I would say you got it you got to take two <unk>, there's about $50 million of higher turnaround spending sequentially.
Related to that John is your gallon plant in China, and the <unk> plant that Jim talked about in the prepared comments and then there was about $50 million on onetime items that we had in the fourth quarter that won't recur couple of land sales as well as an IPO that happened that we were able to monetize and are out of our venture capital.
So overall earnings are going to be up sequentially and your point is right. They should be up year on year I think the open question and Jim maybe give some comments on the back half of the year.
But on.
All things right now are pointing up.
The first half look solid and I believe that as we get more people vaccinated and around the world I think we're going to see more economies open up and things get back to more normal types of activities.
And next we'll hear from Kevin Mccarthy with vertical research partners.
Good morning.
Question for Howard on cash flow prospects for 2021.
I think you already spoke to the uplift related to <unk> as well as some maintenance activity considerations I was wondering if you could step through other non earnings related cash considerations, such as working capital. Some of the digital investments you talked about any cash required for restructuring or other.
Considerations that would.
Help you or be a headwind on the cash generation front versus the impressive conversion numbers you posted for this year.
Yeah, I mean look I would I'd point you ended on a full year 'twenty, one modeling guidance slide, but just a couple of the high points on Capex is going to be $3 50 higher.
Mandatory pension will be flat.
Yeah on the restructuring program will be about a $350 million cash outflow, but we won't have any outflow. We finished the Dow Dupont separation. So that owns basically offset each other on the digital side, we'll spend about $150 million.
Sundar will be $350 million tailwind.
Talked about the dividends from our from our JV companies will be down about $200 million, just because we get those dividends from.
On a year on arrears, so with earnings down in 2020, we'll see dividends down in 2021, but that should reverse in 2022, and then I would say you know look we had a number of non operating cash flows in 2020, and we're probably not going to be able to deliver the same number because that was a big number we delivered $5 million zone.
Our free cash flow out of this machine, which was our best performance since 2013 on.
On an apples to apples basis is your best you can construct it but we will have additional tailwind. So we are working on additional structural improvements on working capital on the fourth quarter. You saw some of that shine through we had working capital be a source.
Source of cash, even though sales was up which is hard to do so we will look to get another $2 50, or 300 million on structural improvement in working capital. We still have the top up payments from the second Nova litigation, that's still going through the courts. So we'll see if that's a 2021 event, but that should still be several hundred.
<unk>.
And then.
We're still working on best owner lens sales. So I don't have a number for you.
But if we're able to deliver on those projects that should also be several hundred million dollars probably in the back half of the year.
And we'll move on to John Mcnulty with BMO capital markets.
Yeah. Thanks for taking my question, so I guess to that like the cash flows are coming in certainly stronger than expected and at really high levels in the balance sheet has really been cleaned up.
<unk> been doing this best owner approach and have sold off some assets.
Looking at it from a from a slightly different angle are there assets out there where dow should be viewed as kind of the best owner and should we think about M&A as an opportunity for you as we look forward or is whereas the cash flow that you generate really just going to be going down to paying down debt and and whatever's left over taking taking down the share count how should we be thinking about that.
Yeah, Good morning, John.
Walk through capital allocation priorities real quickly.
First and foremost as safely and reliably operate the plants that cost us about $1 billion a year.
To support that dividend, that's about 2% to $2 1 billion a year.
We've got some further incremental deleveraging that we need to do in 2021.
It keeps us on trajectory with what we've committed to the ratings agencies.
We've got additional priorities to make sure that we're.
Ready for the I think the pent up demand that's coming as we reach these vaccination rates. So we've bumped up incremental gross capex and as Howard said, we will have some cash to buy back shares towards the end of the year to cover dilution. Although if you look at our share count we've been very steady since the spin.
And now on top of that to your point most of the divestitures and the cash generation have been taking on.
Assets that are non revenue generating where their infrastructure companies out there today that value those and can use those as a growth platform.
And liberating those from our balance sheet will continue to do that.
On the other side, we will look at bolt on M&A, we've talked about that being you know.
Not in the billions, but smaller and that's where we can bring in a technology or a GAAP in our platform and take advantage of our global footprint to really rapidly grow that as well as get that into our machine in and get some economies of scale out of it. So those are some of the things we're looking at in their areas.
That are driven by the market trends that we're seeing on building construction mobility space.
<unk> you know these are some of the areas, where we want to continue to try to build in.
In the areas of adhesives, sealants coatings types of applications.
And our next question, we'll hear from Chris Parkinson with credit Suisse.
Great. Thank you on the <unk> fronts, obviously throughout 2020, there is a lot of volatility in feedstocks throughout the cost curves when we looked at when we look ahead enough on normalized EBITDA.
How is your team overall thinking about the slope on the cost curve as we head into 'twenty, two and 'twenty three and what are the key considerations other monitoring thank you.
Right I think we get back primarily to feedstock and what's going to happen with feedstock volatility on of course, we saw such huge volatility in oil last year.
Most of our feedstock is natural gas liquids and gas production has been very resilient and I think gas production is going to continue to be strong next year.
We didn't see much of a decrease last year, maybe 10% and we're already getting back to the levels that we had prior to the Covid pandemic the.
The other thing that people arent forecasting and in some of the natural gas outlooks is the fact that there are so many drilled and uncompleted wells out there and companies are moving up the learning curve on being able to get those wells completed and so I think that's going to bring back a lot of supply on the back half of the year.
Even with that ethylene tightness I talked about even with propane going up because of the winter time, and even with naphtha going up because you didn't have as much refining capacity. The reality was ethane was still in supply even at 75% a million Btu frac spread and I think it's going to continue to stay that way.
Natural gas production is going to bring back more ethane to get split out here. So I feel good about our position we have the capability to capture that better than anybody in the industry and I think we're on tour.
A year ahead, where our view natural gas is kind of range bound and three $3 a million Btu is probably the high end.
And next we'll hear from Arun Viswanathan with RBC capital markets.
Great. Thanks, Ted Thanks for taking my question. Good morning, Congratulations on the on the on the <unk>.
<unk> in the year I guess my question is back to the cash flow. So it looks like youre guiding to about $250 million overall reductions on some of those bucket items, Howard and but EBITDA is likely to be up year on year in 'twenty. One just given the absence of that weak Q2. So.
You have seen it up the balance sheet.
When we started this journey I think you guys had laid out a plan to return about 65 per cent of your free cash flow to.
To shareholders. So maybe you can just comment on what you think.
About free cash flow for 'twenty, one and why not allocate a little bit more to the capital return side the buyback side.
Free cash flow above that $5 billion and again.
Is there a preference maybe debt to increase towards buybacks. Thanks.
Yeah Arun good morning, what I would say is look our target which has been our target since before spin is really a long term reading a rating agency adjusted net debt to EBITDA target of between two and a half and three and so with the.
Where our book, we're above that today by about 150 basis points.
Really mainly because of the lower EBITDA as well as the lower interest rates, which really drove another.
Another $1 billion increase on the on the pension side of the house. So we still have some work to do and that's why we're going to do about $1 billion roughly of deleveraging.
Our target for 2021 on top of all the other things I said, but we understand your point and we agree with it and certainly as earnings continue to improve we will take another hard look at share buyback at a minimum.
To cover dilution and then we'll see how the back half of the year goes we'll also see how some of those best owner projects that we're working on goes and if we have excess cash.
Will be it will use that excess cash aligned with Jim's capital allocation priorities that Heath that you walked through earlier.
And that will conclude today's question and answer session. At this time I would like to turn the call back over to Colleen Kay for any additional or 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.
And that will conclude today's call. We thank you for your participation.
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