Dow Inc. (DOW) Earnings Call Transcript & Summary

Well, good afternoon, everyone. I'm P.J. Juvekar. Our next company now is Dow Chemical. And representing Dow is Howard Ungerleider, Dow's President and CFO. This is a public event, and please refer to forward-looking statements in the materials and the slides that Dow will present. And I want to introduce Howard Ungerleider. Howard is the CFO of Dow. Before that, he was the CFO of DowDuPont. During that period, he merged 3 companies into 1 and then -- 2 companies into 1 and then split them into 3 companies. As a CFO, that must be a nightmare. But what's amazing about Howard is during that entire period, he never lost his sense of humor. So Howard, the stage is yours. I know you want to make some public prepared remarks. And then after that, we'll launch into Q&A.

Yes. Absolutely, P.J. Look, thanks for having us. Thanks for that very kind introduction. Admitting that I have a sense of humor, that's great, I do appreciate that. And look, good afternoon, everyone. Thanks for joining us. I'll make a few prepared remarks and I look forward, P.J., to the Q&A. Look, as we shared on our third quarter earnings call, the Dow team really adapted to the shifting market conditions in the quarter, and I would say, once again, delivering sector-leading results. The performance really was enabled by early actions to prioritize cash, to reduce operating costs, to reduce working capital. And we really quickly matched our operating rates to rising demand in the quarter, really continuing the agile and safe operations we have maintained throughout the year despite the pandemic, the floods in Michigan as well as the hurricanes on the U.S. Gulf Coast. We've also remained focused on further strengthening our financial profile. We increased our liquidity while reducing net debt by $1.8 billion year-to-date and improving our liability profile at the same time with 0 substantive debt maturities now until the second half of 2024. The improvements we have achieved in our balance sheet through the third quarter, including through the pandemic, is really something that has been a differentiator within our industry and positions Dow very well for the continued economic recovery. We also continue to advance our unique-to-Dow cash tailwinds, set to deliver more than $1.5 billion for the year. We closed our $300 million rail infrastructure asset sale in the third quarter, 3 months earlier than originally planned. And today, we closed the sale of our select U.S. Gulf Coast marine and terminal infrastructure assets with more than $600 million in cash proceeds to Dow. Turning to the fourth quarter. So far, the quarter is unfolding as we expected. The rebound off the April and May lows continues at a moderate pace, driving sequentially higher business results, tempered most likely by typical fourth quarter seasonality. Demand for packaging applications remains resilient with year-to-date volumes continuing to exceed the same period a year ago. And while October polyethylene pricing did not increase versus our previously shared expectation earlier in the quarter, we do expect the positive demand fundamentals, tight supply and increasing blend to continue to provide support to pricing in November and December. From a durable goods and market perspective, demand continues to improve, led by a strengthening construction and automotive industry, which are really helping deliver the expected benefits to both our silicones and our polyurethanes franchise order books. External data showed China industrial production was the first to emerge from the pandemic and has continued to remain solid, and is also now indicating increased consumer demand growth year-over-year. And as expected, a resilient demand and tight market conditions are also providing support for MDI pricing as well. During our earnings call, we shared that Sadara is also benefiting from improved market dynamics and structural operational improvements. As a result, the joint venture's cash needs from Dow decreased from earlier estimates, and we now expect to contribute approximately $350 million for the year towards Sadara's debt repayment. Additionally, Dow, Saudi Aramco and Sadara remain on track to reach a debt reprofiling agreement by year-end, and we now have an agreement in principle with the agency creditors. Discussions with the commercial lenders and the sukuk investors are also progressing as expected. Overall, for the quarter, absent any significant impacts from the response to the current COVID surge, we expect to be in line with the earnings guidance we provided on our earnings call. Now despite the volatility and the challenges of 2020, we have also continued to advance our ESG priorities throughout the year as they're both key to our strategy and our ambition. Earlier this year, we shared with you our new breakthrough sustainability targets to reduce our carbon footprint and address plastic waste. We announced our goal to reduce our net annual carbon emissions by 15% by 2030 and achieve carbon neutrality by 2050. We're confident in our ability to achieve our carbon emission targets. You've already seen examples of our work underway to improve the energy efficiency and the carbon emissions of our own operations. For example, we're advancing low-carbon EDH technology with the potential to significantly reduce our energy usage and our greenhouse gas emissions by 40% to 50%. We're also approximately 2/3 of the way toward our goal to obtain 750 megawatts of energy from renewable resources by 2025. And to that end, earlier this year, we secured new contracts for another 340 megawatts of power. And as of July, our manufacturing facilities in Tarragona, Spain are now purchasing 100% renewable power. We also announced several actions to further our leadership role in driving a more circular economy by addressing plastic waste, incorporating sustainable content in our products and designing recyclable-ready solutions with brand owners. In fact, 80% of our packaging products today can now be recycled. And already today, many of our products enable a low-carbon economy, such as solutions for renewable solar electricity, energy-efficient buildings and electric vehicles. And we're very well placed to further benefit as the energy, construction and automotive industries accelerate their transitions to more sustainable solutions. For example, from a silicones perspective, electric vehicles utilize 3 to 4x more Dow material than a traditional combustion engine. These high-performing materials are commonly used in EV power, electronics, batteries, assembly as well as driver assist systems. More broadly, we expect to benefit from the development of lower emissions and more easily recyclable products as our customers continue to work toward their own sustainability goals. And our targets continue to build on our decades-long commitment to incorporating sustainability into how we innovate new products to address the needs of our customers and ensure our operations are both efficient and sustainable. And on that note, we're very proud to have recently been recognized by the Dow Jones Sustainability Index for the 21st year as one of the top companies in the global chemical industry in terms of sustainability performance and solutions. Looking ahead, as the recovery continues to broaden and we move back toward pre-pandemic levels, we expect to see higher margins as differentiated parts of our portfolio begin to return to a more normalized growth, and our multidimensional feedstock flexibility continues to ensure lower cost to serve in all regions. Our ongoing focus on digitalization enabled us to quickly pivot earlier this year to operate and to innovate in a new environment. Innovating at virtual design tables with our customers, engaging in online trade shows and webinars and continuing to innovate in this space will only further enhance our differentiation over time. We'll also maintain our focus on unlocking additional cash, further strengthening our financial position and our competitiveness through continued evaluation of our nonproduct producing asset base with a best-owner mindset, lower capital intensity investments, innovation and digitalization, supporting operational reliability and continued diligence on operating expenses, including the removal of structural costs through our current restructuring program. Together, these actions, P.J., will continue to drive Dow's performance and generate more value-creating opportunities for our shareholders as the economy rebounds. And P.J., with that, I'll hand it back to you, and let's get into the Q&A.

Great. Howard, thank you for that. I should also mention that Colleen Kay from Dow's IR team is dialed in. And I should remind investors that if you have any questions as they come up, please e-mail them to me. There's a link on your website or on your landing page, and you can click on that. I've already gotten some couple of questions. So with that, Howard, let's get started. As you've seen lockdowns getting reinstated globally, in the U.S. as well as in Europe, have you seen a change in demand for polyethylene or any of your other products, industrial products?

P.J. -- the short answer, P.J., is no. I mean we've seen really -- when you think about polyethylene, specifically on your question, polyethylene demand has been resilient really through the pandemic. I think I mentioned in the prepared remarks, our demand is up versus year-to-date through the third quarter, and that has continued into the month of November. And we've really seen, both on the packaging side that resilience, but then clearly, since the second quarter, we've seen the demand for durable goods, so in P&SP, that's our functional polymers business, obviously, our polyurethanes franchise is heavily tilted toward durable goods, whether that's construction or automotive, and we've seen that demand snap back, frankly, faster than we had originally expected in the third quarter. And so far in the fourth quarter-to-date, we've continued to see that demand stay strong.

So it looks like the industrial recovery will power through this kind of a mini slowdown.

I think it's maybe too early to declare victory in that space. I mean, certainly, even in the fourth quarter, we're still not through the fourth quarter. I would still say it is reasonable to assume typical seasonality, which you typically see a fall-off in the last 30 to 45 days of the quarter. I will say candidly, P.J., we haven't seen that slowdown yet through the month of November. It's December 1, so there's another 30 days to go. But what I would say, even with the colder weather in the Northern Hemisphere, in North America and Europe, you're starting to see a little bit more of a lockdown. We're certainly experiencing that in Michigan with increased cases. I know you're doing the same in New Jersey and the New York metro area. I think we're all getting used to dealing with that. And certainly, travel is being impacted, and leisure spending is being impacted. But when you think about the industrial economy, it -- so far, the third quarter and so far in the fourth quarter to-date seems to be hanging in there in a pretty resilient way.

Right. I do want to talk a little bit about the polyethylene feedstock impact. And there's a school of thought, and we had Enterprise Products present at our conference this year. I think some people are thinking that with reduced rig count, oil production could drop next year. And if oil prices go up, then ethane could rise. I mean, again, that's a theory, but how do you think about it? What's your view on it?

Yes. I mean, look, I think we certainly saw earlier in 2020, the cost curve became a little bit less steep with lower oil and then higher natural gas prices. I think when you -- the oil-to-gas ratio has been hovering kind of in the mid-teens. When you look forward, as you've seen, the economic activity continue to improve, you've actually seen Brent move up. And so now you've got Brent in the kind of in the high 40s, and natural gas actually moving down some, and ethane -- the ethane advantage even widening. And so I don't want to make a prognostication for the next 2 or 3 years, but certainly, you would expect, as economic activity improves, that likely brings oil price along with it. Naphtha, as you know well and as our investors know well, naphtha typically trades with Brent, and polyolefin pricing typically trades with naphtha because naphtha is representative of about 2/3 of the world's cracker production. So I think the NGL advantage is here to stay. It's probably going to be a little bit lower than what it was in the last 2 or 3 years before the pandemic, but it's still going to be here. And then from a Dow perspective, I mentioned Colleen's favorite term in the prepared remarks, multidimensional feedstock flexibility. This is something you know, you've been covering us for a long time, P.J. This is something that we've invested in on purpose in every region around the world, whether it's the physical location of our assets in Alberta or Kuwait or Argentina or the U.S. Gulf Coast or it's in furnace feedstock flexibility where we have max ethane capability that is best-in-class in the U.S. Gulf Coast. We have the ability to crack up to 65% LPGs in Europe, which is a naphtha crack, not to mention our assets in the Middle East and in Argentina.

Right. I'm going to keep moving, and let's move on to polyurethanes, and I can always come back to polyethylene, but I do want to take questions from the audience. Well, the poly -- the urethane chain, the outlook seems quite strong, not just for you, but for the entire chain. If I look at MDI, polyols, propylene oxide, it's driven by demand in durables. Housing has been strong. Do you see that this robustness, particularly in MDI, continue next year?

Yes. I mean I think it does have some legs. Obviously, it will depend on the macroeconomic activity. I think when you look at the urethane assets, they tend to be the most complex multistep chemistry, starting with chlorine or propylene, depending on your feedstock, all the way through to PO, the polyols, to isocyanates and then ultimately to systems. And clearly, we shut down the industrial economy in the second quarter, right? First quarter in China and then second quarter in North America and Europe, and really shut down a lot of construction activities. We also shut down automotive, right? I mean, if you think about it, no cars were manufactured really in North America or Europe in the second quarter. And then since the second quarter, things started to really rebound and demand has been resilient. So that snapback in demand, plus trying to bring all those assets back with all the multi -- the complex steps in the chain that I talked about, it created some supply issues. And then, of course, you had the hurricanes in the U.S. Gulf Coast and some unplanned outages in Europe that also impacted that. So it is a combination. And that tightness, it does seem like it's got some legs here for at least the next several months. We'll see how the overall industrial economy goes. A lot of the -- there -- you look at the GDP estimates for next year, and they kind of range from 3.5% to as much as 7% on a global GDP perspective. But if you take the midpoint of kind of 4% to 5%, that should be enough demand growth to really continue to keep the assets reasonably tight.

And obviously, MDI is doing well. Geographically, where is it doing the best? And is that helping out Sadara as well with the utilization?

It's definitely -- look, Sadara matches in many ways the chains that Dow is large in with polyolefins and then polyurethane. You're seeing good strength in Asia and then followed by Europe and then followed by North America, that's how I would assess it today. Clearly, automotive strength and construction strength are definitely being supportive. I would say the one area which is more impacting silicones today is in kind of the personal care area. So if it's something that's touching -- face cream, for example, everybody wearing a mask is probably denting high-end cosmetics, high-end lipstick or high-end moisturizers or creams. And so we're seeing a little bit of weakness in the personal care area. I think the only other area is in de-icing. Obviously, the weather has not been that cold yet. Although with that said, we had about a pretty big winter storm in Southeast Michigan in the last 24 hours. So we've seen some snow for the first time. But a combination of not quite as cold a winter to begin with, plus the lack of travel, you're not seeing any strength in our de-icing business. Our de-icing business is going to be off quite a bit, but that's a relatively small part of our portfolio.

The third leg of the stool, if I can call it, is silicones and siloxanes. You've completed 16 debottlenecking projects in silicones. You have another 12 to complete. Can you talk about the returns on these projects? And 2/3 of your siloxanes are still merchant. And when do you think you'll get more of the siloxanes downstream? And what would happen to margins?

Yes. Look, I mean, as you point out, I mean, siloxanes are a key building block of our integrated silicone franchise. We're just now starting to see some pricing strength on what we call the G1 or the siloxanes part of the upstream business. We are continuing to see demand recovery. When you think about electronics, you think about construction, you think about consumer durable goods where silicones play, that side of the house demand is doing reasonably well. To your point, we continue to do these debottlenecking projects, and we -- today, we consume about 2/3 of our siloxane production internally. And clearly, the goal is to continue to invest downstream in our higher, what we would call our performance silicones area, to continue to consume all of that siloxane over time. That's going to take us several years. But the markets where we participate are all growing 1.5x global GDP. So several years of global growth in that range, even if we don't increase our share of wallet, we'll be able to absorb a lot of that siloxane from a building block perspective.

Yes. Thanks for pointing that out. I think I misspoke. It's 2/3 is internal and 1/3 of siloxane is merchant.

Right.

The cash conversion at Dow has been strong. Cash conversion over the last 12 months, and I know it's near and dear to your heart, has been strong. 3Q was 117%. Can you walk through some actions of working capital and what drove that cash conversion? And what happens as you come out of this pandemic and working capital needs go up and maybe you bring some of your CapEx back? Can you talk about the ramp-up in CapEx, post pandemic, and walk us through that cash situation.

Yes. Absolutely. I was smiling when you said that, P.J., because thank you for noticing. It is cash. The cash conversion is something that's near and dear to my heart. It really -- it didn't come about because of the pandemic or because of the economic situation. It really came about, as you know well, as we were thinking about who the new Dow is going to be as we approach the spin. That was one area where we had a gap between best-in-class conversion and where we were. We've been in the 70% range for the prior several years, prior to spin. And we set the goal to get to a best-in-class around 90%. And so far, we've been able to exceed that number, as you pointed out. We did that with many different levers. We had some unique tailwinds, things like the Nova judgment, things like the Olin ethylene payment, but we also did a lot of heavy lifting in working capital. So your point, we released more than $700 million year-to-date in working capital, and there's more to come. I would say we're looking at 2 to 3 days of efficiency over the next 2 to 3 years. We're also -- we've made good progress year-to-date on our best owner, nonproduct producing infrastructure-related assets. I talked about that in the prepared remarks. We did the rail deal. Today, we closed the marine infrastructure deal between the 2 of them. That's almost $1 billion of cash in the bank, and we sold those assets to great partners that are going to provide us long-term, cost competitive service, and we're able to unlock the value at very high multiples. So as I look forward into next year, we're going to continue that best owner lens from an infrastructure standpoint. There's probably going to be 2 or 3 days of structural working capital improvements that we'll target. Assuming the economy continues its progression coming out of the pandemic, and certainly CapEx will increase. If I had to call it today, we're going to spend $1.25 billion in CapEx this year in 2020. Next year is probably going to be in the $1.6 billion, plus or minus range, depending on how we finish the year. So I'm sure we'll talk about that on the earnings call. When I think about how we're allocating our capital, in terms of our capital allocation priorities, P.J., they're going to be boringly consistent. First, safely and reliably operate our plants; second, continue to support our best-in-class dividend; third, incremental deleveraging. Very proud of the team that we've been able to delever $1.8 billion of net debt through this year, I mean, in a pandemic year for us to be able to take almost $2 billion of net debt out through the third quarter. We'll likely take another tranche of leverage down again next year. And then likely look at share buybacks, at least to cover dilution starting next year. We haven't finally made that decision yet. We'll see how the cash flow ends the year and what the economic situation looks like as we head into next year. And then obviously, the CapEx increase, we're going to prioritize on lower risk, faster payback, higher return on invested capital projects. I mean that's what our investment thesis was coming out of spin. I think we've been doing everything that we've told the investment community we'll do in terms of improving our cash flow conversion, continuing to deleverage the balance sheet, continuing to reward shareholders with an industry-leading dividend and continuing to invest in lower risk, faster payback, higher ROC projects.

Right. I'm getting a lot of questions. So I'm going to ask my final 2 questions quickly, and we'll go into rapid fire mode. But my next question -- I guess, last 2 questions. One is on Sadara. So what's exactly taking so long for debt profiling? It's been kind of 1.5 years. And what kind of injection would you expect once the debt profiling is finished? So that's my first question. And second question is on pension plan. You have an underfunded pension plan with almost $8 billion of underfunding. Rates have been lower. So do you -- what do you expect for cash contribution in 2021?

Yes. So actually, on Sadara, P.J., we're exactly on time where we said we would be. We talked about the reprofiling. Earlier this year, we said it was going to take a year. Look, the reality is, it is a complex, multi-party negotiation. There's 3 tranches of debt. There's the ECAs, the export credit agencies, and there's the commercial lenders and then there's the sukuk investors. I'm pleased to report that we've got an agreement in principle with the ECAs. They have the overwhelming majority of the debt. So that's an agreement in principle. We're now well underway with the commercial lenders and the sukuk investor process. We are on track to get at least a deal in principle or an agreement in principle done before the end of the year. Sadara continues to actually improve their operational performance, and also benefit from some of the tailwinds we talked about earlier in polyethylene as well as our polyurethane franchise. So when we started the year, we talked about needing $500 million from Dow to fund Sadara's debt. That number came down from $500 million to $400 million. And then today, I announced that, that number is more likely going to be $350 million this year for Sadara's debt repayment. So assuming that we can get that deal finalized with the commercial lenders and the sukuk investors, then there'll be a $350 million cash tailwind. Because the goal with that reprofiling is to reprofile the debt and have Sadara be able to stand on its own and be cash flow self-sufficient. And I would tell you, we're on track and on pace. So I would expect anybody building a Dow model next year should have a $350 million cash tailwind relative to Sadara. And then finally, on your pension question. This year, our pension contribution from a cash standpoint is about $300 million. I would expect next year, it will be about the same. And then also 2022, based on where rates are today, probably about the same. If rates don't improve, then that number moves up by $300 million or $400 million in 2023, 2024 and 2025. But we've got several years before we get there. So let's cross that bridge when we come to it. But certainly, for this year, for next year and the year after, $300 million, plus or minus, is a reasonable number in terms of mandatory pension contributions.

Great. Well, I -- in the next 15 minutes, I'm going to take the investor questions. The first question is a CapEx question. '18 CapEx was $2.5 billion. How sustainable is $1.6 billion?

I mean it's certainly sustainable based on where the macro was in 2020. So if you tell me that the macro is going to stay at the kind of level that we saw in 2020, then we can most likely still stay at that $1.5 billion, $1.6 billion level. That's not our base case view, right? Our base case is for continuing economic expansion over time. And so I would imagine that over the next several years, we'll move our CapEx number back into the $2 billion to $2.5 billion range. We're not going to rush to that number, right? We're going to keep capital constrained. I think that's a fundamental responsibility, and that will ensure that we invest in the highest return, lowest risk projects. This year was a special year where we lowered it to $1.25 billion, like I mentioned earlier. I think next year, probably a $1.6 billion, plus or minus number is a reasonable target. And then if we continue to see macroeconomic growth from there, 2022 would likely be in the $2 billion plus or minus range as I sit here today, P.J. So let's build it 1 year at a time.

Great. Great. The next question is on your divestitures that you just completed, any other assets considered noncore that could be monetized? And any interest in selling JVs? You do have strategic value in your JVs.

Well, in terms of the JVs in the overall portfolio, look, we like the portfolio that we have today. I mean, if you think about it, if you think -- you go back to the Styron transaction, you go back to the Olin transaction, the Dow Corning transaction, the DowDuPont transaction, we've been doing a lot of portfolio shifts over the last 10, 12 years. So coming out of the spin, the new Dow, we like the portfolio we have. But we're -- we have this best-owner mindset view, and we have a benchmarking view. And when you think about the infrastructure, I'm not going to make any announcements today, but yes, we have a pipeline of infrastructure-related assets that we're continue -- going to continue to look. And if there are better owners out there that will be able to deliver a value-creating transaction to Dow and our shareholders, we're going to continue to do more of those, and I would expect that to happen again in 2021. In terms of our joint ventures, I would say we like the joint ventures that we have. They're good performers. And I think they're -- we're the right owners for those assets at that time. But if there's a better owner, we'll obviously look at that as well. But certainly, nothing on our mandatory to-do list, P.J.

Great. Next question is sort of twofold. Could you talk about the Chinese siloxanes market? Prices seem to be moving higher. Was that expected? And does that mean PMC's up sequentially?

The Chinese, which? I didn't hear the Chinese one.

Chinese siloxane market.

Yes. I mean, I mentioned, I think an answer to one of the earlier questions. So we hadn't yet seen through the third quarter a lot of movement in siloxanes price. Although we had seen movement in polyethylene pricing. We had seen movement in polyurethane and isocyanates pricing. We are now starting in the fourth quarter, really October and November, we've started to see siloxanes moving up. And I think that's a combination of continued economic strength in China and some -- also some supply issues. So you've got a combination of things, but we're starting to see that strength. And that should be positive as we end the year for silicones. And certainly, it foreshadows a good 2021 or an improving 2021 relative to a pretty tough 2020 for our silicones business.

Great. And the next question is on Sadara, interesting question. Does decline in Sadara in 2020 mean in 2021 there is no need to contribute cash?

So the answer is -- the short answer is yes, but let me expand on that just to make sure that folks understand it. Sadara's performance this year actually is going to be better in 2020 than 2019. So when you think about it, there's not that many players in the chemical industry that can say they're going to have a better earnings 2020 given COVID than they had at 2019, and Sadara is one of them. Through the third quarter, they were up $100 million. So they improved $100 million results third quarter year-to-date versus a year ago. The $350 million cash that's required this year from Dow is to go towards Sadara's debt service because of the project financing, right? So assuming, which I assume, that is my base case, that's something that we're working on, assuming we get that reprofiling done by the end of the year, there will not be any required cash going from Dow into Sadara for any reason, debt service or otherwise. So Sadara will be able to stand on its own as long as we get that reprofiling agreement finalized next year, which is the plan.

Right. In terms of the assets that were nonrevenue-producing that recently sold -- I think they are talking about marine and rail terminals -- what can you tell us about the contract that buyers accepted? And from their perspective, was that like a sale leaseback?

Definitely not a sale leaseback. If you think about all the portfolio work that we've done, we're in these assets, which really are today value parts. You've got Dow and many other public companies and some private companies that are on those sites. So the compelling thing for Dow was selling those assets, those infrastructure assets to people that are experts in marine, experts in terminals and experts in rail infrastructure. They're -- that is their business. They're going to be able to invest in those businesses and provide us with a long-term cost that's equal to what we were doing today. And over the next several years, we'll actually be able to lower our cost. That's what was in it for Dow. What was in it from our counterparties was really the ability to grow those assets and get a good return on that investment because they can grow with Dow, they can grow with all the other counterparties that are on those sites. And when you think about the U.S. Gulf Coast, when you think about marine, Freeport, Texas is their only other deepwater port anywhere close to the Houston Ship Channel and doesn't have nearly the complexities of the Houston Ship Channel, which today is landlocked. So that's a great opportunity to invest in a marine infrastructure to be able to bring in both chemical, and frankly, nonchemical-related capabilities into the U.S. Gulf Coast.

Great. Then the next question was on pension liability, which you answered. Good to hear that Sadara debt profiling -- reprofiling is progressing. It sounds like you'll hit the goal to get it done by the end of the year. If that's the case, is there a scenario that some recourse to Dow will still remain even after reprofiling?

Look, the short answer to that question, P.J., is yes. I really don't want to go into a lot of details on that until -- out of respect for the negotiation that's ongoing. But what I would say is you should think about our recourse as being meaningfully lower once the reprofiling gets completed. That's the mindset. And I would say that's representative of the agreement in principle that we have with the export credit agencies already today. And we're working to finalize that with the commercial lenders and the sukuk investors, which is the work that we have left to do to get that buttoned up hopefully before the end of the year.

I'm just asking my follow-up on that. Why wouldn't you get the recourse down to pure joint venture? So like no recourse back...

I'm sorry. Can you repeat that question again. Why wouldn't we...

So why won't you negotiate that so that there is no recourse back to Dow?

Well, I mean, it's a matter of a negotiation, P.J., right? So I mean, we had, as you know, a pretty significant recourse. That was a requirement of the project financing. And so that's something that was important to the lenders, but also something that's important to Dow is to -- and to Saudi Aramco to reduce our exposure over the next several years. So like anything in life, P.J., with the negotiation, and it's still not 100% complete, like I talked about, but that's where we landed with the ECA, which is the biggest portion of the debt.

Yes. The next question, I think you kind of answered it. How should we think about capital allocation priorities for 2021 and beyond? I think you kind of answered that.

Yes. I did answer it, but I mean just to repeat. Safely and reliably operating our assets, #1 priority; #2 priority, the dividend, which is an industry leading dividend; #3, a combination of a little bit of additional deleveraging and a high-return, low-risk CapEx organic projects that are brownfield. Those are the top priorities from a capital allocation standpoint.

Great. Now the next question is, given the low interest rates. Would the company issue debt to address the balance sheet pension liability? So like would you issue debt to pay off pension liability?

Yes. Look, with regard to the pension liabilities and just liability, in general, we're always going to look and think about the economics in the long term, right? Overall, from a financial debt standpoint, I'd like to continue to deleverage. Obviously, the pension liability is a long-term liability, and we'll look to continue to optimize that liability over time. It doesn't take a significant amount of discount rate movement to really significantly improve that. We have put voluntary contributions into the pension in the past. I would look to do that as well. And if it's an option to raise debt to potentially do that if the economics were right, that would be something we absolutely would look at, P.J. No specific plans today. Like I said, we've got $300 million in cash going into the pension in 2020 and an expectation of another $300 million from a mandatory standpoint next year. And then we'll take a look at the economics, and we'll make the most value-creating decision we can.

Great. Almost down to last question. Dow's R&D expenses are much higher than LYB and other commodity chemical companies. Why the difference? And is there a plan to reduce R&D expenses? What is the impact of reduced R&D expenses on future growth? And in which areas?

Yes. Look, I would just say this, if you go and look, and we posted on our website, dow.com. If you look at our benchmarking results, whether it's the third quarter, whether it's been every quarter since spin, our portfolio continues to be a leading portfolio, and we're benchmarking in the P&SP area, best-in-class. And why do we spend what we spend in R&D? It's because we get about 1,000 basis points more margin on patent advantage sales than nonpatent advantaged sales. We've got a functional polymers area, which continues to be differentiated versus the competition. When you think about our comonomer, you think about our catalyst, you think about our unique process, that combined with some research and development, really allows us to continue to maintain that differentiation in the eyes of our customers. And we get paid for that value. And so that's why we're spending about $800 million a year on R&D. We get a good return on that investment. I can assure you every quarter, we benchmark that and we measure that. And if you just look at our return to polyolefins on a cent per pound basis, actually through 2020, we've actually expanded our lead from a differentiation perspective. So I'll put our portfolio and our team up against any player in the industry.

Great. That's the end of all the questions that came in. And we're almost out of time.

All right, P.J.

So Howard, thank you again for your time. Really appreciate all your comments and all the answers. So thanks, and have a good holiday season.

All right. Thanks, P.J. Thanks to you, and thanks to everybody out there who is investing in Dow. Appreciate the ownership.

Good. Thank you.