Good day and welcome to Dow's 1st Quarter 2019 Earnings Call. Time during today's presentation. Also, today's call is being recorded. I would now like to turn the call over to Neil Charay by President of Investor Relations. Please go ahead sir.
Division within DowDuPont. We're making this call available via webcast, and we have prepared slides to supplement our comments during this conference call. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. Speaking on the call today are Jim Fitterling, Dow's Chief Executive Officer and Howard Ungerleiter, 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 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 Form 10 as well as our Form 10 K include detailed discussions of the principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today and all financials where applicable exclude significant items. We'll also refer to non GAAP measures.
A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in the DowDuPont earnings release and on the DowDuPont and Dow websites. And as a reminder, because Dow operated as a material sign division of DowDuPont through the end performance as disclosed earlier today in DowDuPont's earnings release. On Slide 2, you'll see our agenda for the call. We will start with an overview of the first quarter performance of the Material Science Division of DowDuPont. We will also discuss the results for each of our operating segments.
Then we'll move into a financial overview of the quarter, which will also include some comments on modeling guidance. And finally, we will close a discussion on our go forward views. There will be plenty of time for your questions. With that, I'll turn the call over to Jim.
Thank you, Neil, and thanks everyone for joining us. I want to start by acknowledging the incredible accomplishments achieved by the Dow team to get us through our successful separation from Dow DuPont on April 1st. I want to thank every member of team Dow for all they did over the past three and a half years to execute 1 of the largest and most complex spend with a streamlined and focused business portfolio that is well positioned to operate more productively, invest more prudently grow more profitably and deliver higher returns to shareholders. With that, let's turn to our performance in the quarter on Slide 3. The Material Science Division of DowDuPont reported top and bottom line results in line with the updated guidance we provided a few weeks ago.
During the quarter the resilience of the Dow portfolio was on display as we were able to moderate the impact of year over year margin compression in our siloxane, isocyanates and polyethylene products, which impacted our core business results and our equity earnings. We mitigated the same systems and packaging. This end market growth is an important highlight of the quarter as it reflects the ongoing strength we see from the consumer, and it speaks to our product and technology differentiation, customer relationships, and value chain participation. This is not a new phenomenon for us as we have been growing in these applications for some time and we continue to maintain our positive view of the fundamentals in these value chains. I will come back to this point later in the call.
2nd, we continued to drive our cost reduction action. We delivered more than $125,000,000 of incremental cost synergies in the quarter, taking our cumulative savings since merger close to nearly $1,000,000,000. And we also removed the first $40,000,000 of stranded costs in the quarter. We remain on track to deliver the incremental $600,000,000 of savings this year. And third, we continued to benefit from our new U.
S. Gulf Coast investments, which all ran at high rates in the quarter and contributed approximately £500,000,000 of additional polyethylene volume versus the same quarter last year. Finally, during the quarter we established the initial shareholder return targets for Dow. We confirmed an industry leading annual dividend payout $2,100,000,000 and announced a $3,000,000,000 open share repurchase program. Our commitment to shareholder returns something we first outlined at our Investor Day in November last year, and it is a top priority of the board and the Dow Management team.
Turning to our segment results. On Slide 4, Performance Materials And Coatings Operating EBITDA was 481,000,000 down 18% from the year ago period, primarily driven by lower prices for siloxanes and shipping restrictions from a performance monomers facility in Deer Park, Texas due to a tank farm flyer at a nearby third party facility. Consumer solution sales were flat with the year ago period as gains in volume and local price were offset by currency headwinds in EMEA and Asia Pacific. The business achieved broad based local price and volume gains for silicones products. Those gains were offset by price declines in siloxanes.
To put things in perspective, siloxanes prices in China in the first quarter were approximately 30% below the peak price of the third quarter of 2018. But as we look ahead, we are encouraged that siloxanes pricing stabilized as we completed the first quarter. Coatings and performance monomer sales were also down primarily due to the shedding of lower margin business, as well as weather related events, which shifted seasonal demand Industrial intermediates and infrastructure operating EBITDA was $448,000,000, down 31% from the year ago period, primarily due to margin compression in isocyanates and MEG, which impacted both our core business results and equity earnings. Polyurethanes and CAB delivered higher volume in all regions, but this was more than offset by lower isocyan pricing. 2 times global GDP.
Industrial Solutions reported lower sales on reduced local price and currency headwinds. However, the business grew volume in EMEA, U. S. And Canada in industrial, oil and gas applications, as well as on strong demand for de icing fluids, lubricants and fuels. On Slide 6, operating EBITDA for the Packaging And Specialty Plastics segment was $993,000,000, down 24% from the year ago period.
The key driver here was compression in integrated polyethylene margin. However, cost. The packaging and specialty plastics business grew volume on higher demand in Asia Pacific and EMEA, supported by our new capacity ad. From an end market perspective, our growth was led by industrial and consumer packaging, and flexible food and specialty packaging, 2 core sectors for our packaging franchise. And finally, The decline in hydrocarbons and energy sales was primarily due of our new derivative assets, and the second was our tilt towards max ethane cracking in the U.
S. Gulf Coast. Which reduced co product sales in the quarter. I'll now turn it over to Howard to discuss our overall financial performance and our modeling guidance.
Thanks, Jim. Turning to Slide 7, sales declined 10 percent to $10,800,000,000, in line with our guidance. Volume grew 1% with demand growth in many of our core businesses, including polyurethanes, industrial solutions, consumer solutions and packaging and specialty plastics. These gains more than offset a decline in coatings and performance monomers a double digit decline in hydrocarbons and energy. And as Jim mentioned, the hydrocarbons decline was primarily due to lower sales of co products.
Excluding the hydrocarbons and energy business, the Material Science division grew volume year over year by approximately 3%. Local price was down 9%, largely driven by lower prices in isocyanates, Saloxanes and polyethylene. Currency decreased sales 2%, primarily driven by a stronger U. S. Dollar against the euro.
Operating EBITDA for the quarter was 1.9000000000 down 24% versus the year ago period and also in line with our guidance. The key driver of the decline was margin compression in polyethylene as well as ice cyonates and siloxanes, and these factors, along with lower MEG prices, also drove our equity earnings decline. But importantly we were able to offset a portion of this with cost synergies, contributions from new capacity appreciated portions of our portfolio. Now while Dow was not a standalone company in the first quarter, we were able to estimate our cash flow metrics on a new Dow basis. Free cash flow in the quarter was approximately $600,000,000 or $200,000,000 lower than the prior year period, primarily driven by reduced earnings partly offset by a capacity reservation payment from ME Global related to our Texas 9 Cracker expansion, which will support ME Global's new facility in Freeport, Texas.
We also made further progress toward our targeted capital structure just after the quarter ended. We received the $2,000,000,000 de leveraging payment from DowDuPont and as in our second quarter financial statements. Shareholder return targets. In early April, Dow's Board of Directors declared a 2nd quarter dividend of $0.70 per share and we established a $3,000,000,000 open share repurchase program, a portion of which was designated under Rule 10b51 which involved a pre arranged trading plan. Given our stock performance since spin, we have not yet repurchased any shares under the program.
The 10b5-1 is expected to expire in June and from that point, we plan to be opportunistic with our share repurchases and we'll be disciplined with how we allocate our excess cash, taking into consideration all our priorities, including the dividend and deleveraging to reach our targeted capital structure. As we've said before, our target is to return approximately 65 economic cycle. Within that, the dividend is our top priority for returning cash and share repurchases of the flywheel. We're currently targeting share repurchases of approximately $500,000,000 for the remainder
of the year. This is
our base case target and does not take into account any additional nonoperational cash inflows. Let's now take a closer look at the contributions from our joint ventures on Slide 8. During our Investor Day last year, we made a commitment to provide more transparency on our JV results. And today, we're providing those details This slide gives you more granularity on the performance of what we call our principal JVs, our 3 most meaningful joint ventures, which account for the vast majority Dowes equity earnings. Including all GVs, equity losses for the quarter were $10,000,000 compared to equity earnings of $208,000,000 in the year ago period.
The reduction was primarily driven by margin compression in MEG at the Kuwait joint ventures and isocyanates at the Sadara joint venture. And as typical in the first quarter, we also received annual dividends from many of our JVs, which totaled more than $750,000,000 of cash inflow in the quarter. Now before I turn to our modeling guidance, I would like to review some of the reporting changes that we're making now that we've completed our spin. This was another commitment and how they'll impact our historical results. There are 3 key changes that will impact our financial reporting and the way we discuss our results.
First, as of our next quarterly report, we will switch to EBIT as our primary profit metric to reinforce the message that capital is not free. Though we will still provide all the details for EBITDA as well for those of you who want to continue to track it. And as we shift to EBIT as our primary metric, we will also include the impact of foreign exchange in our definition of EBIT, which is how Dow historically defined our profit metric before the DowDuPont merger. 2nd, we will transition to full market based transfer pricing. This change will have an impact on the profit across our operating segments, but it will be net neutral to total EBIT at the enterprise level.
And third, we will also incorporate the impact of the new contracts and service agreements we will have with DuPont and Corteva. We plan to file a voluntary 8 K later this quarter by mid June, which will provide you with quarterly recast of our operating segment results incorporating these changes. Into your models. While there are quite a few changes that we're putting in place, the net impact to historical EBITDA and EBIT is relatively modest. Moving to modeling guidance on Slide 10.
Given the current environment and the fact that we've just spun out as an independent company, we have provided modeling guidance today on a sequential basis versus the first quarter of 2019. For those of you who prefer to look at the year over year comparison, You'll find a similar slide with that view in the appendix of today's deck. On a sequential basis, we see overall demand remaining healthy in consumer and packaging end markets, which will continue to benefit businesses like our silicones, polyurethane systems and plastics businesses. We're also now seeing margins stabilize and in a few areas such as polyethylene, MDI and Saloxanes, we're seeing the early signs of price increases half of the year. We're also entering the typical seasonal high period for our turnaround activity, which will be a headwind sequentially.
We expect our turnaround spending in the 2nd quarter to be approximately $200,000,000 higher than the 1st quarter or about even with our spending in the second quarter of last year. These are planned turnarounds that are scheduled in advance. For crackers, we're on a roughly 8 year turnaround cycle and for derivative plants, it's approximately every 3 to 5 years. We will also be impacted by material. Our current assessment is that this limitation will continue through the second quarter and will result in approximately a $40,000,000 impact sequentially.
I'll now turn it back to Jim.
Thanks, Howard. Let's turn to Slide 11 and the outlook. Global Economy is still expanding albeit at a slower pace than 2018. We're seeing strength in the overall consumer confidence and spending, supported by a strong labor market and wage growth. Manufacturing activity also continues to expand in support of this demand, but the trends are not synchronized globally.
The US remains the bright spot, while the EU and China are expanding at a more modest rate. And while personal consumption remains healthy, spending on big ticket items such as automobiles and home purchases and builds remains tepid in some geographies. Additionally, ongoing trade negotiations remain front and center around much of the world. We think that a positive trade outcome could be a catalyst for increased economic activity. With that said, our plans as always are focused on what we can control.
Looking more specifically at our portfolio, we see early signs of stabilization and improvement in our key fundamental indicators. After several months of inventory destocking on normal demand seasonality. While we still see prices down year over year in areas like MDI and siloxanes, they have stabilized sequentially, and we see the opportunity to regain margin with price increases underway. We expect MDI fundamentals to be balanced through 2021, and in siloxanes, we expect overall operating rates to remain high in the near term as demand continues to outpace supply. The global ethylene market is relatively balanced on a regional basis today with some length in the U.
S. Gulf Coast. We expect polyethylene demand to outstrip the recent ethylene supply additions starting in the second half of twenty nineteen. Our view of the cycle has In feedstocks, the naphtha to ethane spread is widening again after the large contraction in the fourth quarter of 2018. In some areas like Europe, this may be a near term headwind to margins, but over the medium term, it should be constructive to our product spreads.
Also, the coming online, coupled with delayed ethylene capacity as well as the turnaround season in the second quarter. The result is a significant reduction in the market's forward view of ethane prices for the year. We still expect near term ethane prices to be somewhat volatile as the industry works through the timing and spikes, if any, to be short lived. We saw a real life example of this in the back half of twenty eighteen, and I think what surprised many people outside of our industry was how quickly these energy and feedstock markets changed, which is something that is often underestimated. And additionally, people underestimate how quickly Dow's assets can shift.
We have leading feedstock flexibility and commercial capabilities to adjust quickly to these markets, and we have full chain integration and a differentiated portfolio to further mitigate the impact of the swings. To that point, as I mentioned before, our focus on increasing the consumer driven bias of our portfolio is paying off for particularly in consumer care, packaging and infrastructure sectors. There are a few examples on Slide 12. In our silicones franchise, we have prioritized the growing use of our siloxane toward our performance silicones business where we can convert that siloxane into differentiated silicones that provide our customers with tremendous value and use, and our efforts are delivering. Every quarter since we brought this franchise into our portfolio, we have driven silicones growth that has outpaced global GDP.
And consequently, our teams are unlocking incremental capacity to continue to meet growing customer demand. So far this year, we've already completed 4 debottleneck projects, and we have more than a dozen still on deck with incremental expansions in every geography. Another example is in our polyurethanes business. The business has been able to partly dampen the impact of isocyanates margin compression, with continued above GDP growth in systems applications in furniture, bedding, white goods and other durable goods. As a result, our polyurethanes business has now achieved year over year demand growth for 23 consecutive quarters.
And finally, in packaging and specialty plastics, we've been growing volume for several quarters on our strength in industrial and consumer packaging, and flexible food and specialty packaging. These are parts of the value chain where we are the proven market leader and where our global asset base new capacity and expertise in local markets have enabled us to place new pounds efficiently in the market and deliver them to the highest value application. The common thread healthy, and that benefits the Dow portfolio. I'll close with a quick recap on our near term priorities on Slide 13. These are the same priorities that we've shared with you over the past several months, and I'm proud of the progress that we're making against each, but there is still work to do.
While we see the early signs of improvement in our value chains, it is still early days. That's why our focus remains being very disciplined with We've made substantial progress against our cost synergy capture and stranded cost removal targets, but we still have work to do. Our focus on a lean cost structure is still very much in place and we will deliver the $600,000,000 of incremental savings this year. And as you've seen over the past few months and today, we are committed to a best owner mindset and an enhanced level of disclosure. To wrap up, first, I could not be proud of our team for working through all the complexities of our successful separation from DowDuPont.
Team down embraced this challenge and took a head on. 2nd, the resilience of our portfolio showed through in the quarter, notably in our consumer driven businesses where we can take advantage of our innovation and differentiation. And third, We believe that the fundamentals in our key value chains are beginning to stabilize and as we look to the second quarter, we see early signs of inflection points that could materialize in the middle of the year. Going forward, our capital allocation and disciplined focus on higher return on invested capital incremental investments while keeping CapEx at or below D And A levels is the right approach in this environment. And the Dow team remains focused on the actions within our control, capturing cost synergy savings and removing stranded costs, growing our differentiated positions, running our assets efficiently and continuing to be disciplined resource and capital allocators to drive value growth within each of our businesses, and across the company.
Now, I'll turn it to Neil to open the Q and
I would like to remind you that our forward looking statements apply to both our prepared remarks and the following Q and
Thank
And our first question today will come from David Begleiter with Deutsche Bank.
Thank you. Good morning. Jim, looks like in PE, you did get the $0.03 increase in April. Given that increase, what's the potential for maybe an increase in May as well? And how should think about earnings in this segment sequentially even with the headwinds from the turnarounds and going in this quarter?
Good morning, David. Yes, this week, IHS published up 3 for the month of April in the U. S. And We had expected that really in March. And that's why we had guided again in the middle of the quarter.
Because that looked like it was sliding out. There are increases out there, all other increases out there for the second quarter. And we feel like we're building momentum into that. The core earnings are going to improve sequentially. That's what we've got in the forecast.
And then we just called out the turnaround expenses because sequentially they're higher. Our turnaround expenses are about the same as they were second quarter last year. But they're higher than first quarter. And that's just because of timing. As you know, some of these turnarounds crack are on 8 year cycles and some of these derivative plants are on 3 to 5 year cycles.
This is the time of year to take them. And I think in this market environment, we decided to do them in second quarter and not try to push anything out.
And next we'll move on to P. J. Juvekar with Citi.
Yeah. Hi, good morning. Jim, in our long term big picture question. When you look at Aramco's crude to chemicals strategy, you look at Exxon and Phillips wanting to build more crackers, It seems like there is more interest from oil companies and tracker assets. What do you think?
Will they buy? Will they build assets, you know, how do you strategically think about what oil companies are trying to do and where does doubt fit in?
Thanks, P. J. Difficult for me to telegraph someone else's strategy. I would say I think what's happening, there have been many reports out there about the value creation in petrochemicals. It's been one of the sectors decade 14, 15 years.
It's created some high value. So I think people are interested in that. There are different dry forces for everybody. Our driving force for our strategy is to grow with those consumer driven differentiated markets. And so we'll be focused on developing products like Performance Silicones, better packaging products, polyurethane systems, our industrial solutions that go downstream working on coatings, both our architectural and industrial coatings portfolios, our adhesives portfolios to continue to grow that business.
And then, of course, we'll look at the back integration. Is that a better make versus buy a decision? Where is the best place for us to be? Is it U. S.
Gulf Coast where you've got this tremendous NGL Advantage and ethane advantage. And where we can tie into the flexibility that we have and benefit from that. And that's a different driving force, obviously, than someone who's looking at maybe a future market that's peak oil and looking at what are they going to do with different barrels of oil. There are different chemistries out there. There's a lot of things going on.
There's different strategies, partnerships around the world. So you might take the oil and do partnerships you might make acquisitions. But in most cases, today, the industry shifted to Cracking lighter. And so if you're going to make acquisitions to think that you're going to convert oil to petrochemicals in most cases, you would be making acquisitions that are today probably NGL tracking. So I think there are a lot of things that have to play out.
I feel good about our investments and our position We took advantage of the 1st wave of Shale. We were up first. We got our projects done on time. We got them done under budget. And they're going to be the most efficient capital projects in that cycle.
And next we'll move on to Vincent Andrews with Morgan Stanley.
Thanks, and good morning, everyone. I've gotten a lot of questions this morning about 2Q and sort of what's in the slides. And maybe you could just help us with a little bit more detail on the 3 segments, more explicitly on sort of forget about all the turnarounds and so forth, but just on underlying basis, slight modest, no, how much improvement should we see for the 3 segments sequentially?
So if I go to the slide that was in the deck, slide number 29 in the deck, you've got the sales drivers and the EBIT drivers for the second quarter. And, really, the only thing that we called out is the specific headwinds from the turnaround costs. The core earnings I expect to be up, so Performance Materials And Coatings I think we're going to see sales moving up. Siloxane's pricings have stabilized and started to move up. So that's going to help silicone's pricing has held up well.
And the issue there is just getting more capacity online to support that. So we had 4 debottlenecks in the quarter. That came online. And we've got 12 new incremental projects for downstream silicones coming online through the year. In industrial intermediates, The big drag on industrial intermediates was really equity earnings and it was ethylene glycol, from the Kuwait joint ventures.
The core business is growing there. Now we've announced somehow coxulates capacity. That won't come on in second quarter. That's a longer term bet but they're going to be up 3% to 5% in sales. And Packaging, especially plastics, is going to be up 3% to 5% sales and it's going to benefit from obviously the pricing that we're seeing coming through in April, good to start the quarter with that and build that momentum.
And then also the better cost positions we've seen on ethane. 2 fracs came up in the quarter. And so they've come up ahead of the ethylene capacity. And that's really what's put that ethane futures curve down. So I believe you're going to see the core earnings move up sequentially, Vincent, and we just called out the turnarounds to make sure everybody understood what the magnitude of that cost would be in 2nd quarter.
Jeff Zekauskas with JP Morgan. We'll have our next question.
I have a 2 part question. Looking at Slide 12, it looks like perhaps your polyethylene sales volumes were up about 6% in the first quarter year on year, which I think is about the level of your capacity expansion. And so is the meaning of that, that the global polyethylene industry our global polyethylene demand really didn't grow in the first quarter, but you were able to grow 5% or 6%. And then the second part is I think Howard said that no shares were bought back in the 10b5 program. So does that mean that the trip price at which you would buy back shares wasn't hit as Dow traded as an independent company?
Good morning, Jeff. I'll take the first part and then I'll hand it over to Howard on the 10b5. Polyethylene sales were up the demand there was good. And obviously, we had the additional £500,000,000 from the Gulf Coast assets and those ran hard. So we moved that through the quarter.
And also, we saw inventory levels through the quarter kind of come back to the normal level. So we're able to get some material moved out. Some things had backed up at the end of fourth quarter 2018, as you know, in the U. S. Gulf and And so we saw some of that stabilize through the quarter.
And I think that's another big factor in why you see the pricing moving up. You've got inventories coming back to kind of the normal level in the Gulf Coast. On the 10b5, Howard can speak to that.
Yes, good morning, Jeff. So you're right. So we put so the short answer to your question is correct. It did not trigger, but we put just to give you a little bit more context, we put the 10b5-1 in place before the quiet period expired in the first quarter. So before mid March, that is going to be in place until early to mid June.
Basically we need to get the 8 K with all the accounting changes that I articulated in the deck. So I gave you the estimates in the slide deck. Once we're in the process of doing all the final accounting. We're going to get that done as soon as we practically can. As soon as that 8 K gets published, then we can be in the market because with an open program as opposed to the 10b5.
The 10b5 was set up based on the feedback that down stock could trade with substantial churn and volatility immediately post spin. So we put the algorithm in place to take advantage of the opportunistic intrinsic value and the Dow stock traded very well. And so as a result so far, that hasn't kicked in. But like I said, the 10b5-one is there until we get the 8 K out. Once we get the 8 K out, we'll be in the open market.
And what I put in the prepared remarks this morning is that our base case is approximately $500,000,000 of stock buyback for the year.
Our next question will hear from Christopher Parkinson with Credit Suisse.
Thank you. Can you just comment further on your expectations for MDI, maybe TDI, understanding it's only at Sedara just following 2 of your primary competitors' comments over the last couple of days, just there's been some inconsistent end market commentary. So if you could hit on your own regional demand outlooks, and expectations for new supply cadence, it would be greatly appreciated. Thank you.
Good morning, Chris. Thanks for the question. I expect MDI is So our systems business, where you had end markets like furniture, bedding, some level of white goods, durable goods, that business, some cold storage, cold chain business has been relatively good. Where we see obviously some things have been a little bit slower our housing starts and housing sales. So that's kind of slowed.
And so you've got also automotive. And automotive is a lot of content for polyurethanes. So some of the big ticket items are also big demand pull items in that chain. So I'd say the consumer strength is really showing up in the numbers, two times GDP for the systems growth. And that's without the big ticket items pulling.
So as we get through the year, I think you're going to start to see automotive pickup. I would say in Europe, right now, automotive is weak and there's probably the biggest inventory of finished autos out on the lots and at the dealers that has to be worked through. So I'd say Europe sentiment right now is it's going to take a little bit longer to work that through. The U. S.
Is relatively okay. I'd say North America is relatively okay. And, China is relatively okay. So I think as the year progresses, we're going to see those bigger ticket items pull through a little bit more. On TDI, as we said before, I think TDI is going to be long for most of the years.
So we're not putting into our outlook any big increases in TDI prices or margins, mostly the improvement will be in MDI.
And next we'll move to John McNulty with BMO Capital Markets.
On Sadara, can you speak to some of the opportunities there to improve some of the profitability? I know there was, I guess, some hope about potentially rejiggering the debt, expanding feed stocks lates, etcetera. So can you help us to understand what levers you can pull there to improve the profitability there?
Sure. Good morning, John. We're making obviously some sequential improvement in the 1st quarter from the 4th quarter in Sedar. It's about $20,000,000 better than it was in the 4th quarter. We're doing everything we can, obviously, to keep that moving.
The pricing moves are obviously going to help Cetera. That will fall right to the bottom line. Sudar has been working actively on its own cost programs internally. And so they've been becoming more efficient in getting those costs down. And then obviously, we have been working with Aramco, diligently on things that we can do to help that out, including looking at the debt restructuring.
So now that we've done the lender's reliability test and we've actually kicked off a team between Sadara and the 2 parents actively looking at how we can restructure that debt. And we'll have more to say about that a little bit later in the year that team is off and running. And I think making some good progress there.
And I would add John, this is Howard. Every product manager who has accountability for an asset there is working on the sell up side of that. So that's optimizing the product mix cutting the 4th quartile and adding to adding to 1st or second quartile margins, they look at the profitability on a margin velocity per and that's how they're held accountable.
And we'll move on to Jonas Oxgaard with Bernstein.
Hey, guys. If I can continue the line of question with Sadara, it looks like MDI and TDI to get to that was a $27,000,000 EBITDA for the quarter MDI and TDI must have run at negative margins. Is there any consideration of shutting down those assets?
Good morning Jonas. I don't believe that's a fair assumption. I'll have to ask Neil and the team to get back and walk through those numbers. But we would not have run them at negative margins. The teams are very disciplined about taking a look at that.
So there may be some mix assumptions or other things that are in there. We've got a lot of activity going on within Sedara to try to get that mix shifted. We've got supply chain costs that we're working on. So we're optimizing around the supply chain to make things a little bit more efficient The plant has been running well. So the asset has been good.
We don't have any issue there. We've looked at, obviously, all the things we can do on the feed stock side to improve it. As you know, Sadara's feedstock position, that's really the naphtha crack is what goes downstream for all that integration into isocyanates. And so we've been looking at what we can do there to get some better cost position in there. But I think relative to where they are today, we're going to start to see things stepwise improve just on the basis of the market demand.
And if we got a trade agreement through with China, I think that would be helpful. At least it would be helpful in the near term on the market psyche. But it would be helpful in the second half of the year.
And next we'll move to Hassan Hamid with Olympic Global.
Good morning, Jim. I wanted to sort of continue on the JV side. The Kuwait JVs equate in particular continue to be quite weak earnings wise. I would imagine obviously ethylene glycol was the culprit Is there any sort of, you know, bottoming out of glycol insight? You know, the polyester market continues to be quite weak as well.
So how should we think about, the equate earnings over the next couple of quarters?
Good morning Hassan. Thanks for the question. Yeah, the drag really on the Kuwait JVs was ethylene glycol pricing. And if you look at the year over year pricing, it's quite a bit down. Now what we've seen through the quarter is obvious the inventory levels have started to improve in China.
The demand pool, as you mentioned, hasn't yet kicked in. This is one of the areas in the China trade agreement. If you know, textiles had some tariffs coming back into the United States. That really put the brakes on some of the exports out of China and that kind of backed up some of that capacity. So as we get this trade agreement through and we see what happens, if that gives a little bit more confidence to the textiles industry in China, to be able to move some material in here, then that would be immediately visible in the marketplace.
And that might give us some momentum on ethylene glycol pricing. The PET side of the equation has continued to be strong. So we really need the polyester side to pick up to see that pricing move. And I would also say that typically when we pull out of 1 of these compression periods, PE and ethylene glycol is what you start to see turn. We've seen PE turn here in the month of April.
So I think we could probably see also some cost push on the ethylene side in China that might start to move things up a little bit.
And our next question, we'll hear from Frank Mitsch with Fermium Research.
Terrific. Thank you. Jim, you were discussing your consistent view on the cycle as being short and shallow. And I would imagine that given your outlook, you're expecting that 2020 would probably show some EBITDA growth in the polyethylene business. What is your outlook call in terms of the back half of the year?
Is there a, are you guys forecasting that you might be seeing year over year improvement in the back half of the year on polyethylene or is that really more of a 2020 sort of event?
Morning, Frank. We're running right now at about 4.5% growth rate. It's what our outlook for the year is. And obviously, we started relatively slow January February. So I think that's going to pick up pace.
2nd quarter is shaping up well. I think third quarter is usually very strong and we'll see how we finish the year. And obviously, I think we'll finish it a little bit better. The other thing that's happening is when you look at the supply that's coming on, obviously, we think that demand is going to outstrip the amount of incremental supply in coming on. And so you're going to see that in the back half of the year.
A lot of capacity came on in the last 2 quarters of last year. A lot of polyethylene capacity came on in the last 2 quarters of last year and was finding its way into the market in Q4, especially in December when China went dark on us for the last 2 weeks. That backed up inventories people were scrambling to move that around to the markets. You saw some of that actually hit Europe in a big way and that really compressed some margins there. I don't think we've got that same kind of magnitude in the back half of this
And we'll hear from Steve Byrne with Bank of America Merrill Lynch.
Jim, you mentioned higher naphtha pricing and just wanted to hear your view on on cash margins for the the top end of the polyethylene cost curve. Particularly the the Asian naps of producers, in your in your outlook for naphtha pricing in that and whether the the margins in that area could affect those producers' behavior, whether it's on pricing or operating rates?
Yes. So I think a couple of things. I think that the naphtha ethane And the propane naphtha spreads are both starting to open up, which will be beneficial. We've seen some move up a little bit of a move up in Asia on ethylene due to that. I think we could continue to see some more of that.
I won't try to predict what oil prices are going to do. But we kind of gone into this year thinking they would be in the 65 to 75 dollar a barrel range. I don't see any reason to think any differently. I do think we've tested lows on natural gas. So we've been at $2.50 a natural gas.
And with all the oil that we've been producing and the associated NGLs, that's helped bring those forward curves down. So anything that we see in terms of these naphtha ethane and PRONAP spreads is going to be helpful to us as we move through the year.
And next we'll move to John Roberts with UBS.
Thanks. I wanted to go back to the JVs. You did a good job several years ago cleaning up the JVs. And, what's the role of the Kuwait and Thai JVs in the portfolio. Obviously, there's some strategic projects products in there like polyethylene to dev, but there's also some products that don't seem to fit longer term with your strategy.
Well, the Kuwait, let me start with the Kuwait JVs and obviously that was a very strategic one from a standpoint of ethylene gly call, it was a way to put together at the time when we did it. Obviously, the world's largest ethylene glycol. Business together with the Kuwait. So Emmy Global, is continuing to grow in that format and that structure. And that's been positive for us.
And they've been also able to participate and continue that growth down in the U. S. Gulf Coast. So I think that's good. They clearly, we're already marketing ethylene glycol and carbide set that JV up obviously on its own to market the polyethylene.
So we don't do anything together there other than be an equity investor in polyethylene. Thailand was always an Asia growth play and continues to be that. And where we have a strategic interest together, we'll look at that. And where we've got lines of business there that may be strategic to one of us and not the other. We'll look at options there.
But both of those JVs are sustainable. They generate really positive cash flow and dividends. They've got good balance sheets. They're healthy. My first priority is getting Sadara to be sustainable.
Good balance sheet generating the kinds of returns that we promised. So I'm not expecting big moves there. We did talk about Obviously, maybe doing some consolidation among the entities in Kuwait. We'll still look at that. And if we can pull that off, that may be beneficial to us in 2019.
And we'll move on to Lawrence Alexander with Jefferies.
Good morning. Just 2 quick ones. Just to clarify the comment about Performance Materials, the core earnings being up sequentially. Is that including the sequential headwinds you call out or only before the sequential headwinds? Can you characterize inventory levels not in the polyethylene chain, but in the derivative businesses?
Just what you're seeing and whether there's any inventory destocking that might be needed later this year?
Howard, do you want to take the sequential earnings question.
Yes, Lawrence, if you look at the slide, I would say it's before. So it's the core earnings will be up, but it'll be offset by some of those sequential headwinds that we talked about on the call.
And we've seen I think I'd commented earlier on PE and what we've seen is inventories in the isocyanates, especially in the MDI side start to come down. And And the demand pull on silicones on siloxanes is obviously helping that. So we think the silicones demand growth is going to continue to tighten up that siloxanes spare capacity that's out there. And that'll happen through the rest of the year.
And next we'll move to Robert Koort with Goldman Sachs.
Thanks for taking my question. I was wondering, Jim, you guys obviously have one of the bigger exposures in Asia Pacific. Can you give us some sense on what's going on in China? Both from the maybe the echoes of some of the plant problems over there and environmental enforcement. And then maybe what you see on the appetite for future ethylene expansion, it seems maybe one of the consultants is a little more pessimistic on operating rates with some China expansions over the next 3 or 4 years.
So hoping you could address both of those. Thanks.
Yes. Thanks, Bob. Thanks for the question. I would say we had a good quarter in China. In total, our sales volumes were up double digit year over year.
So we continue to grow there and it's across the board. It's in all the businesses, polyurethanes, packaging, consumer solutions, obviously. We don't have as much coatings exposure in China. We don't have too many facilities for coatings over there. And we don't have as much industrial solutions exposure.
Most of that is exports out of Gulf Coast and out of Sedara. But I still feel good about the demand growth, and it continues to look good. I think the operating rates are probably been held down because of the cost curve and because of where some things are on the cost curve. There's just a big advantage in the U. S.
Gulf Coast. On the NGLs. And that's probably what's held them down. I think most of the environmental things are related to the incidents that have happened. And so you've had a couple of explosions and fires that typically always cause another relook at the industry and who's a credible operator and can operate safely and also who can operate at scale and return.
I think the biggest challenge has been the pricing compression that we saw in the fourth quarter. And so we'd see those margins recover you may start to see people take a look in China again at whether they can have a good investment there and long term make some money there. But it's the feedstock challenge. That's the toughest part of that. It's hard to find a good competitive feedstock there.
And I think that's why you see most of the oil majors looking. And it's mostly refinery integration discussion that you see happening. You see some ethane discussion, but That requires a lot of CapEx to build ships to take ethane out of the U. S. Gulf Coast.
There's really not anywhere else in the world that you can get ethane export. And if you start to drive that price up too high, then you're going to be looking back at NAFTA as an alternative.
And next we'll move to Aleksey Yofrema with Nomura Instinet.
Good morning. Thank you. I just wanted to return to Sadara quickly. If we look at last year's Q1 result of $96,000,000 of EBITDA, that's arguably close to peak environment, if you were to return to the same sort of cash margins in your key value chains, for Sadara, would that number be higher today because there's more capacity or more efficient operations, or that's sort of the upper end of what you could achieve?
Yes, I'm going to look to Howard here for a minute, but I don't think that Q1 or Q2 last year was peak environment. I think peak probably actually happened before that. So Sadara wasn't fully operational and running when we were at the peak of the cycle. Howard, you have some comments on what you think that could be?
Yes. Alexis, I would just say, it would be far above that number if you had the same conditions because remember to Jim's point, it was a startup year. You had we were going through the punch list to get ready for the LRT for the for the entire year taking assets up, taking assets down. And there was no sell up. It was all sell out kind of mindset at the time.
So as you move forward, everything else being equal, Sadara will improve. Just based on the sell up side of the equation would be what I would say.
And next we'll move on to Duffy Fischer with Barclays.
Yeah, good morning. First, just want to say thanks. I think the way you laid financials and disclosures around the JVs is very helpful and enlightening. So I appreciate that. Second, just on the question, Jim, U.
S. Ethylene versus ethylene derivatives, ethylene's obviously gotten long. As you look out the remainder of the build out of the first wave here in the U. S, when do you think the derivative capacity, gets to the point where you've got enough takeaway capacity the ethylene and then more of the margin moves back to ethylene and away from the derivatives.
Duffy, thanks for the comment on the disclosure. Look, we're trying to be more transparent and to, respond to everybody's interests and get it out there. So I think you'll find we've got nothing to hide here. And you know the priorities for us are to continue to work on returns out of those so that people can see the value out of those JVs. On the ethylene side, you're right.
Because there hasn't been as much derivative capacity, that ethylene's been backed up. And what you see in the first quarter is people adjusting ethylene plant operating rates really to the derivative downstream operating rates and derivatives are continuing to run hard in the U. S. Gulf Coast. So that's why we announced things like Coxylate the old capacity expansions down in the Gulf Coast to convert more of that material.
That's a high return to ethylene. I think by 2020, you're going to see that derivative demand is going to start to pull that excess ethylene that's out there. You also got a little bit of restrictions right now. There are not too many places that you can ship ethylene out. And one of them just had a large fire.
And so that's caused a little bit of more constraints. And so you've seen a lot of that margin in the short term disappear out of the ethylene part of the chain. But PE is holding up good. So I think if you think where we are in the cycle here and why we still say short and shallow, is because PE margins are relatively strong and we're seeing pricing coming back in April and polyethylene. So I think that's a good trend.
And we'll move on to Kevin McCarthy with Vertical Research Partners.
Good morning. The 2 part financial question. First, I was wondering what your cash costs were in the quarter for restructuring. And then, I think you had a plan previously to inject about $500,000,000 into SEDARRA. I was wondering if there was anything in the quarter related to that.
And then the second, piece was, I was wondering if you have a preliminary net debt figure, to provide and whether that would be representative going forward?
Yes, Kevin, good morning. I'll try to remember all three questions, but Jim or Neil, keep me honest here. So, the restructuring on that same basis, so Dow Tower last year spent $1,400,000,000 on an staples. We spent about $500,000,000 in the first quarter. We are that is the peak quarter obviously because that was the spin quarter.
That number should trend down over the course of the year and we're in line with that commitment to take 2 to 400,000,000 off of that $1,400,000,000. So kind of a $1,100,000,000 midpoint is a good number for the year. The official when the when we ended the quarter, we were at a $20,000,000,000 gross debt. We had $3,000,000,000 of cash. So net debt 17 on April 1st, we got that payment of $2,000,000,000 from the DowDuPont Tower and we did de lever.
So our net debt on April 2nd, you won't see that in until the Q2 earnings materials. The net debt was $15,000,000,000. Was there, did I, was there a third question?
And that will conclude today's question and answer session. At this time, I would like to turn the call back over to Neil Charray for any additional or closing remarks.
Thank you, operator, and thank you, everyone, for joining our call. We appreciate your interest in Dow. Your reference, a copy of our transcript will be posted on Dow's website later today. This concludes our call. Thank you.