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July 21, 2022
Dow, Inc. (DOW) CEO James Fitterling on Q2 2022 Results – Earnings Call Transcript
Jul. 21, 2022 11:14 AM ETDow Inc. (DOW)1 Comment1 Like
Dow, Inc. (NYSE:DOW) Q2 2022 Earnings Conference Call July 21, 2022 8:00 AM ET
Company Participants
Pankaj Gupta – VP, IR
James Fitterling – Chairman & CEO
Howard Ungerleider – President & CFO
James Fitterling
Thank you, Pankaj. Beginning with Slide 3. In the second quarter team Dow delivered top line growth both year-over-year and sequentially. These results reflect the strength of our diverse global portfolio, our focus on execution and our proactive pricing actions. As such, our team was able to navigate dynamic market conditions, the impacts of pandemic lockdowns in China, continued logistics constraints, and higher energy and raw material costs.
Sales increased 13% year-over-year with gains in all operating segments and regions. Sequentially, sales were up 3% with gains in all regions except Asia Pacific. Local price increased in all operating segments, businesses and regions, up 16% compared to the prior year period, and up 6% sequentially, with gains in all operating segments and regions.
Volume was consistent with the prior year as growth in packaging and specialty plastics was primarily offset by declines in industrial intermediates and infrastructure. Sequentially, volume declined 2% primarily due to lower demand in Europe and China in the quarter.
With a low cost position and industry-leading feedstock and derivative flexibility, we generated cash flow from operations of $1.9 billion and free cash flow of $1.4 billion. Our disciplined and balanced approach to capital allocation enabled us to further strengthen our balance sheet. We redeemed $750 million of outstanding notes in the quarter, lowering our annual interest expense by $27 million. As a result, we have no substantial long-term debt maturities due until 2027.
We also returned more than $1.3 billion to shareholders in the quarter, including $800 million in share repurchases and $505 million through our industry leading dividend. Furthering our commitment to transparency and accountability, this quarter we also published our annual integrated ESG report intersections. The report highlights our ESG leadership advancements and aligns our data and disclosures with key ESG frameworks.
Notably, this year’s report features convenient access to data, as well as enhanced disclosures and carbon emission reporting for Scope 1 and 2, intensity metrics and full TCFD implementation. Key highlights from the report include executing our plan to decarbonize and grow, accelerating sustainability investments to enable design for recyclability and more circular plastics, taking deliberate actions to drive inclusion, diversity and equity, and improving governance, transparency and accountability.
Dow’s report is one of the few in our industry to receive limited assurance against formal standards by its external audit firm. And with our latest report, we added our Scope 1 and 2 emissions reporting in accordance with greenhouse gas protocol reporting to the assurance review. We’re proud of our progress. And if you haven’t already accessed the report, we welcome you to do so through the link included in this presentation or on our website.
Howard Ungerleider
In the Industrial Intermediates & Infrastructure segment, while industrial activity and infrastructure spending in the U.S remain resilient, we expect inflation to continue impacting global consumer durables demand, including furniture and bedding and appliance end markets. Industry supply recovery of propylene oxide in China will likely drive higher global polyol and other PO derivative supply and combined with higher energy costs in Europe will likely result in an approximately $125 million headwind.
Jeffrey Zekauskas
Thanks very much. Since the end of the first quarter, oil prices have been relatively stable at about $105 a barrel, but naphtha prices have moved down globally. What do you make of that? And do you think that’s changing? In your MDI business, are spreads getting worse? And then for Howard, in your Slide 10, you estimate your underfunded pension at $3 billion as of the second quarter. Was that $6 billion in — as of the end of 2021? And you have gas field investments. Are those ever going to be big? Or it’s all small numbers? Thank you.
James Fitterling
Thanks, Jeff. I will tackle the first two and let Howard handle the last two. On oil price, we are still bullish oil, and we expect that these oil-to-gas spreads are going to stay in that $70 to $80 a barrel of oil equivalent in the back half. The reason I say that is there’s less than 2 million barrels per day of available capacity and oil derivative demand has been very strong. And so we don’t see that abating, and we don’t see that the supply is picking up fast enough to close that gap. A little bit of effort and you’ve seen a little bit of movement in China towards coal. You’ve seen it in the energy industry. You’ve also seen it in coal to chemicals, that’s probably taken a little bit off of the naphtha demand. China, Northeast Asia would be some of the largest naphtha demand that’s out there. So my guess is that’s why you’ve seen the oil naphtha correlation change a bit.
MDI fundamentals, to your point, are still strong. Our operating rate outlook for MDI through 2025 and 2026 is continuing to increase year-over-year, every year. So I don’t think we are going to see any issues with MDI spreads. If byproducts come off a little bit, a lot of byproduct goes into production of MDI. If oil byproducts come off a little bit from the refineries, then that could be actually positive. Howard?
Arun Viswanathan
Great. Thanks for taking my questions. Good morning. I guess I have just two quick follow ups on polyethylene and polyurethane. So in polyethylene, do you expect ethane to kind of stay in the $0.40 to $0.60 per gallon range and that kind of provides some support to pricing? Or do you expect pricing to kind of maybe decline $0.03 to $0.06 per pound over the next couple of quarters? And then similarly on PU, now that we are running slower, or running a little bit at BASF Geismar and some of the other facilities that were down, do you expect MDI prices to kind of moderate over the next couple of quarters, especially given what you said on durables demand slowing? Thanks.
James Fitterling
Yes, I do expect that ethane will bounce around. There’s plenty of ethane in rejection, so it’s not a supply driven issue. I think events have caused the prices to move around. Frac spreads right now are about $1.25. And they’ve ranged in from $1 to $1.50, so that’s kind of that $0.40 to $0.60 range at today’s natural gas prices. So I think that’s a reasonable expectation. As gas production improves, we might see it come off.
You’ve got to remember, you had the ONEOK plant fire in July, which put some upward pressure on prices. You’ve got a couple of startups of crackers in the second half here, which are going to put a pull on demand. But I think it’s a reasonable range and we will watch natural gas and what happens with natural gas because that could pull the prices down a little bit.
July 21, 2022
Dow reports second quarter 2022 results
FINANCIAL HIGHLIGHTS
• GAAP earnings per share (EPS) was $2.26; Operating EPS1 was $2.31, compared to $2.72 in the year-ago
period and $2.34 in the prior quarter. Operating EPS excludes significant items in the quarter, totaling $0.05 per
share, primarily related to digitalization program costs.
• Net sales were $15.7 billion, up 13% versus the year-ago period with gains in all operating segments and
regions. Sequentially, sales were up 3% with gains in all regions except Asia Pacific, which was impacted by
pandemic-related lockdowns in China.
• Local price increased 16% versus the year-ago period, reflecting gains in all operating segments, businesses,
and regions. Currency decreased net sales by 3% year-over-year due to broad-based strength of the U.S.
dollar. Sequentially, local price increased 6% with gains in all operating segments and regions.
• Volume was consistent with the year-ago period, as gains in Packaging & Specialty Plastics were primarily
offset by declines in Industrial Intermediates & Infrastructure. Sequentially, volume declined 2%, driven by
declines primarily in Europe and China.
• Equity earnings were $195 million, down $83 million from the year-ago period, primarily due to impacts from
pandemic-related lockdowns in China. Equity earnings were up $21 million from the prior quarter, driven by
gains at Sadara.
• GAAP Net Income was $1.7 billion. Operating EBIT1 was $2.4 billion, down $453 million versus the year-ago
period. Gains in the Performance Materials & Coatings segment were more than offset by higher raw material
and energy costs across the company as well as lower equity earnings. Sequentially, operating EBIT decreased
2%, as gains in Packaging & Specialty Plastics were more than offset by declines in Industrial Intermediates &
Infrastructure.
• Cash provided by operating activities – continuing operations was $1.9 billion, down $165 million year-overyear
and up $244 million compared to the prior quarter. Free cash flow1 was $1.4 billion.
• The Company’s proactive actions to redeem outstanding notes totaling $750 million have delivered an annual
interest expense reduction of $27 million and no substantive long-term debt maturities are due until 2027.
• Returns to shareholders totaled $1.3 billion in the quarter, comprised of $800 million in share repurchases and
$505 million in dividends.
CEO QUOTE
Jim Fitterling, chairman and chief executive officer, commented on the quarter:
“Team Dow once again delivered net sales growth both year-over-year and sequentially with price increases across
all operating segments and regions. Our competitive advantages and relentless focus on disciplined execution
enabled us to navigate the impacts of pandemic-related lockdowns in China, continued logistics constraints, and
higher energy and raw material costs. As a result, we increased our cash flow and our share buybacks sequentially.
“We continued to progress our strategy to grow our underlying earnings over the economic cycle by investing in
higher-return, faster-payback projects while capitalizing on long-term growth opportunities. As part of these efforts,
today we announced a series of circularity projects that will enable us to achieve approximately two thirds of our
2030 ‘Stop the Waste’ target as we capture growth for the sustainable and circular solutions our customers are
increasingly demanding.”
Polyurethanes & Construction Chemicals business net sales decreased compared to the year-ago period, as local
price gains were more than offset by local currency and lower volume due to planned maintenance turnaround
activity, third-party outages, and inflationary impacts on demand for consumer durables. Sequentially, net sales
declined as lower volumes from planned maintenance turnaround activity and third-party outages were partly offset
by higher local price.
OUTLOOK
“Looking ahead, the long-term fundamentals driving growth across our end markets remain attractive,” said
Fitterling. “While near-term market conditions are dynamic, we will continue to leverage our diverse, global portfolio
and flexible operating model to capitalize on attractive growth opportunities. The actions we’ve taken to enhance
the resiliency of our business position us well to deliver value across a variety of economic environments. Our
disciplined and balanced approach to capital allocation has delivered higher mid-cycle earnings, an improved credit
profile, and cash generation above pre-pandemic levels. Team Dow remains well-positioned to continue advancing
our “decarbonize and grow” strategy while delivering attractive shareholder remuneration.”
July 21, 2022
Dow reports second quarter 2022 results
FINANCIAL HIGHLIGHTS
• GAAP earnings per share (EPS) was $2.26; Operating EPS1 was $2.31, compared to $2.72 in the year-ago
period and $2.34 in the prior quarter. Operating EPS excludes significant items in the quarter, totaling $0.05 per
share, primarily related to digitalization program costs.
• Net sales were $15.7 billion, up 13% versus the year-ago period with gains in all operating segments and
regions. Sequentially, sales were up 3% with gains in all regions except Asia Pacific, which was impacted by
pandemic-related lockdowns in China.
• Local price increased 16% versus the year-ago period, reflecting gains in all operating segments, businesses,
and regions. Currency decreased net sales by 3% year-over-year due to broad-based strength of the U.S.
dollar. Sequentially, local price increased 6% with gains in all operating segments and regions.
• Volume was consistent with the year-ago period, as gains in Packaging & Specialty Plastics were primarily
offset by declines in Industrial Intermediates & Infrastructure. Sequentially, volume declined 2%, driven by
declines primarily in Europe and China.
• Equity earnings were $195 million, down $83 million from the year-ago period, primarily due to impacts from
pandemic-related lockdowns in China. Equity earnings were up $21 million from the prior quarter, driven by
gains at Sadara.
• GAAP Net Income was $1.7 billion. Operating EBIT1 was $2.4 billion, down $453 million versus the year-ago
period. Gains in the Performance Materials & Coatings segment were more than offset by higher raw material
and energy costs across the company as well as lower equity earnings. Sequentially, operating EBIT decreased
2%, as gains in Packaging & Specialty Plastics were more than offset by declines in Industrial Intermediates &
Infrastructure.
• Cash provided by operating activities – continuing operations was $1.9 billion, down $165 million year-overyear
and up $244 million compared to the prior quarter. Free cash flow1 was $1.4 billion.
• The Company’s proactive actions to redeem outstanding notes totaling $750 million have delivered an annual
interest expense reduction of $27 million and no substantive long-term debt maturities are due until 2027.
• Returns to shareholders totaled $1.3 billion in the quarter, comprised of $800 million in share repurchases and
$505 million in dividends.
CEO QUOTE
Jim Fitterling, chairman and chief executive officer, commented on the quarter:
“Team Dow once again delivered net sales growth both year-over-year and sequentially with price increases across
all operating segments and regions. Our competitive advantages and relentless focus on disciplined execution
enabled us to navigate the impacts of pandemic-related lockdowns in China, continued logistics constraints, and
higher energy and raw material costs. As a result, we increased our cash flow and our share buybacks sequentially.
“We continued to progress our strategy to grow our underlying earnings over the economic cycle by investing in
higher-return, faster-payback projects while capitalizing on long-term growth opportunities. As part of these efforts,
today we announced a series of circularity projects that will enable us to achieve approximately two thirds of our
2030 ‘Stop the Waste’ target as we capture growth for the sustainable and circular solutions our customers are
increasingly demanding.”
Polyurethanes & Construction Chemicals business net sales decreased compared to the year-ago period, as local
price gains were more than offset by local currency and lower volume due to planned maintenance turnaround
activity, third-party outages, and inflationary impacts on demand for consumer durables. Sequentially, net sales
declined as lower volumes from planned maintenance turnaround activity and third-party outages were partly offset
by higher local price.
OUTLOOK
“Looking ahead, the long-term fundamentals driving growth across our end markets remain attractive,” said
Fitterling. “While near-term market conditions are dynamic, we will continue to leverage our diverse, global portfolio
and flexible operating model to capitalize on attractive growth opportunities. The actions we’ve taken to enhance
the resiliency of our business position us well to deliver value across a variety of economic environments. Our
disciplined and balanced approach to capital allocation has delivered higher mid-cycle earnings, an improved credit
profile, and cash generation above pre-pandemic levels. Team Dow remains well-positioned to continue advancing
our “decarbonize and grow” strategy while delivering attractive shareholder remuneration.”
July 19, 2022
BASF confirms final phase of MDI expansion at Geismar Verbund site
- Annual production capacity to be increased to 600,000 metric tons by the middle of the decade
- Total investment of $780 million for the final expansion phase
FLORHAM PARK, NJ and GEISMAR, LA, July 19, 2022 – BASF is moving forward with the final phase of the expansion project for the methylene diphenyl diisocyanate (MDI) plant at its Verbund site in Geismar, Louisiana. With this third step of its multiphase capacity expansion, BASF will increase production capacity to 600,000 metric tons per year by the middle of the decade and support the ongoing growth of its North American MDI customers. The company kicked off the expansion project in 2018 with a staggered approach consisting of three investment phases. The investment in the final expansion phase from 2022 to 2025 amounts to $780 million.
“This investment underlines our commitment to North America and strengthens BASF’s supply reliability and the competitiveness of our customers’ value chains in the region,” said Michael Heinz, Chairman and Chief Executive Officer, BASF Corporation. “As one of BASF’s Verbund sites, the Geismar location is ideally suited for the expansion of our MDI production thanks to its existing infrastructure, reliable raw material supply, skilled workforce and strong community support.”
Leveraging state-of-the-art technology, the expansion will showcase the highest safety standards combined with advanced digitalization in its operations. BASF is now entering the final phase of the expansion, targeted for completion by the end of 2025.
“BASF is committed to growing and partnering with our North American MDI customers, be it in the construction and appliance, transportation, automotive, footwear or furniture sectors,” said Ramkumar Dhruva, President of BASF’s Monomers division. “With this integrated facility, we will continue to support our North American MDI customers by growing our capacity to meet their needs.”
The first phase of the expansion project involving the construction of a new MDI synthesis unit was put in operation in October of 2020. The second phase, which started operations in 2021, expanded several existing upstream units. With the third and final expansion phase, which includes several new upstream units and a splitter, the new overall MDI output of the Geismar complex will increase to 600,000 metric tons.
July 19, 2022
BASF confirms final phase of MDI expansion at Geismar Verbund site
- Annual production capacity to be increased to 600,000 metric tons by the middle of the decade
- Total investment of $780 million for the final expansion phase
FLORHAM PARK, NJ and GEISMAR, LA, July 19, 2022 – BASF is moving forward with the final phase of the expansion project for the methylene diphenyl diisocyanate (MDI) plant at its Verbund site in Geismar, Louisiana. With this third step of its multiphase capacity expansion, BASF will increase production capacity to 600,000 metric tons per year by the middle of the decade and support the ongoing growth of its North American MDI customers. The company kicked off the expansion project in 2018 with a staggered approach consisting of three investment phases. The investment in the final expansion phase from 2022 to 2025 amounts to $780 million.
“This investment underlines our commitment to North America and strengthens BASF’s supply reliability and the competitiveness of our customers’ value chains in the region,” said Michael Heinz, Chairman and Chief Executive Officer, BASF Corporation. “As one of BASF’s Verbund sites, the Geismar location is ideally suited for the expansion of our MDI production thanks to its existing infrastructure, reliable raw material supply, skilled workforce and strong community support.”
Leveraging state-of-the-art technology, the expansion will showcase the highest safety standards combined with advanced digitalization in its operations. BASF is now entering the final phase of the expansion, targeted for completion by the end of 2025.
“BASF is committed to growing and partnering with our North American MDI customers, be it in the construction and appliance, transportation, automotive, footwear or furniture sectors,” said Ramkumar Dhruva, President of BASF’s Monomers division. “With this integrated facility, we will continue to support our North American MDI customers by growing our capacity to meet their needs.”
The first phase of the expansion project involving the construction of a new MDI synthesis unit was put in operation in October of 2020. The second phase, which started operations in 2021, expanded several existing upstream units. With the third and final expansion phase, which includes several new upstream units and a splitter, the new overall MDI output of the Geismar complex will increase to 600,000 metric tons.
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