Urethane Highlights from Dow’s Investors Call
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
Pankaj Gupta – VP, IR
James Fitterling – Chairman & CEO
Howard Ungerleider – President & CFO
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.
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.
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.
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?
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.
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.