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Dow Earnings Call Transcript Urethane Highlights

October 24, 2022

Dow Inc. (DOW) Q3 2022 Earnings Call Transcript

Oct. 20, 2022 11:53 AM ETDow Inc. (DOW)

Q3: 2022-10-20 Earnings Summary

EPS of $1.11 misses by $0.04 | Revenue of $14.12B (-4.87% Y/Y) beats by $1.10B

Dow Inc. (NYSE:DOW) Q3 2022 Earnings Conference Call October 20, 2022 8:00 AM ET

Company Participants

Pankaj Gupta – Investor Relations, Vice President

Jim Fitterling – Chairman and Chief Executive Officer

Howard Ungerleider – President and Chief Financial Officer

Jim Fitterling

Thank you, Pankaj. Beginning on Slide 3, in the third quarter, team Dow continued to proactively navigate higher energy costs and geopolitical uncertainties that are impacting consumer demand, particularly in Europe. As macroeconomic conditions began to erode in the quarter, we responded quickly by implementing a set of actions to prioritize resources toward higher return products, align production rates to supply chain and logistics constraints as well as demand and reduce operational costs across the enterprise.

In addition, our advantage portfolio enabled us to capitalize on demand strength in higher value functional polymers in Packaging & Specialty Plastics, and performance silicones in Performance Materials & Coatings.

Third quarter net sales were $14.1 billion, with sales declines of 5% year-over-year and 10% quarter-over-quarter. Local price increased 3% year-over-year with gains in Performance Materials & Coatings and Industrial Intermediates & Infrastructure. Sequentially, price declined 6% and was down across all operating segments and regions.

Volume was down 4% versus a year ago period as declines in Europe, the Middle East, Africa and India or EMEA more than offset volume growth in the U.S. and Canada and Asia Pacific. Sequentially, volume was down 3% led by EMEA. Continued strength of the U.S. dollar also impacted net sales by 4% year-over-year and 1% sequentially.

Operating EBIT for the quarter was $1.2 billion. Our consistent focus on cash flow generation and working capital management in the quarter supported cash flow from operations of $1.9 billion or a conversion of 104% of EBITDA and free cash flow of $1.5 billion.

We returned $1.3 billion to shareholders in the quarter, including $800 million in share repurchases and $493 million in dividends. And our balance sheet continues to have no substantive long-term debt maturities due until 2027.

Turning to our operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, net sales were $7.3 billion, down 5% year-over-year as price gains and resilient demand in functional polymers were more than offset by lower polyethylene pricing. Sequentially, net sales were down 11%, also driven by lower polyethylene prices with reduced volumes as we decreased operating rates in response to continued global marine pack cargo logistics constraints and lower demand in EMEA.

Operating EBIT for the segment was $785 million, compared to $2 billion in the year ago period and $1.4 billion in the prior quarter. These results were impacted primarily by higher raw material and energy costs and lower local prices.

Moving to the Industrial Intermediates & Infrastructure segment, net sales were $4.1 billion, down 9% from the year ago period with price gains in both businesses. Volume was down as strong demand for pharmaceutical, agricultural, and energy applications in Industrial Solutions were more than offset by declines in polyurethanes and construction chemicals due to inflationary pressures in EMEA, decreased consumer durable demand and the slowing housing market. Sequentially, net sales were down 7% and stable volumes primarily in mobility end-markets were more than offset by lower local price and currency.

Operating EBIT for the segment was $167 million compared to $713 million in the year ago period and $426 million in the prior year. As lower EMEA demand and increased energy and raw material costs were partly offset by higher prices. Sequentially, operating EBIT margins declined by 560 basis points on lower price and higher energy costs.

And in the Performance Materials & Coatings segment, we reported net sales of $2.7 billion, up 5% year-over-year, with price gains in both businesses and all regions. Volume was down as resilient demand in mobility and home care end-markets were more than offset by declines in building and construction.

Sequentially, net sales were down 12%, driven primarily by lower demand and decreased local price for siloxanes due to supply additions in China as well as with planned maintenance turnaround activity.

Operating EBIT for the segment was $302 million compared to $284 million in the year ago period as margins expanded by 20 basis points due to price gains for both silicones and coatings applications. Sequentially, operating EBIT declined $259 million driven by lower prices for siloxanes and increased raw material and energy costs.

Howard Ungerleider

Throughout the third quarter, Dow implemented plans to reduce natural gas consumption at our sites in Europe by more than 15% due to high energy costs. In August, we also temporarily lowered our polyethylene nameplate capacity by 15% and have now implemented a cold furnace idling program at our crackers for fixed and energy cost savings. In parallel, we continue to prioritize higher margin functional polymers to capitalize on continued demand strength while working to ease logistics constraints along the U.S. Gulf Coast.

We’re also reducing operating rates and shifting production across polyurethane, siloxane and acrylic monomer assets in Europe to manage our costs and our inventory levels. And as we plan for next year, we have additional actions focused on production optimization, turnaround spending, and reductions in purchase services with the potential to deliver more than $1 billion in cost savings on a run rate basis.

In the Industrial Intermediates & Infrastructure segment, demand for energy applications, particularly in the U.S. and a seasonal increase in deicing fluid demand are expected to positively impact the quarter. Inflationary pressures however continue to impact consumer durables and building a construction demand particularly in Europe.

We also expect continued pressure on propylene oxide and MEG margins due to increased supply from producers in Asia. After completing major plan maintenance activity in the prior quarter on a net basis, we expect similar dynamics with a typical seasonality on a sequential basis.

Jeff Zekauskas

Thanks very much. Two questions. Can you talk about MDI prices and volumes sequentially and your general expectations? And secondly, in Performance Materials, there seems to be a fair amount of pressure in siloxane prices. Are we entering some kind of cyclical downturn in that business? And so what we should expect is a relatively level of earnings from the fourth quarter going forward.

Jim Fitterling

Yes. Good morning, Jeff. Thank you for the question. On MDI in Industrial Intermediates & Infrastructure, the supply demand balances through the middle part of the decade look good on MDI, where we’ve seen market weaknesses in consumer durables, mobility is held up pretty well. Electric vehicles are really probably the shining star on growth in that space. But it’s housing and construction where we’ve seen the biggest weakness. And then of course, appliances closely related to that. I would also say, what you see in the numbers and what you see in the guide, remember that we have quite a bit of footprint in Europe, and so with the energy situation there that just really compresses the margins there. I think it’s less pricing and less that issue than it is the input cost issue.

So that’s why we brought rates down to low levels in Europe. China also seeing housing and construction slow. And so I think we’ll see what happens after we come out of this party Congress and whether we see a change in COVID restrictions that might signal that 2023 would be better. In siloxanes capacity has come on in China and that’s really what’s brought the prices down. And we’re really back to the kind of the long-term mid-cycle average prices for siloxanes in the marketplace, and yes, we expect that will continue into 2023. And so I think it’s more, the timing of the supply coming on that’s put that pressure on.

Unidentified Analyst

Hi, this is Richard on for Mike. Just wanted some color on the $1 billion in cost savings for 2023. Is any part of this embedded in the $3 billion to $3.9 billion that you’re targeting to increase sort of the – your earnings range through the cycle? And also is that – does that also include the temporary 15% reductions in polyethylene and maybe additional reductions in capacity, potentially in maybe II&I.

Jim Fitterling

Yes, that’s a good question, Richard. So, our target is to come up with more than a $billion in cost saves. I would break it down into a few different buckets for you. One is, what we can do with optimizing our mix, so flexing the assets across geographies and product and application mix tax when improve margins. The second would be what you talked about in terms of plant idlings were shutdowns. Right now we don’t have anything lined up for shutdowns, but we obviously reduce rates for higher cost plants, and we’ll continue to do that, especially in Europe while energy costs remain as high as they are.

And then we’re working on always things to drive operational excellence. And the other big moving part next year is, we’re going to reduce turnaround spending. We’re starting to see commodities come down and input costs come down and some relief on freight and logistics costs. So, we’ve got a big effort on purchased materials and freight and logistics to get costs down and also on purchased services including contract labor. And then we’ve been implementing digital and acceleration of finishing those projects delivers bottom line margins and productivity to us.

So those are really the five big buckets that we’re working on. The target here, if you looked at the earnings corridor that we published back in Investor Day, our 2023 lower end of that corridor is about $7.2 billion. So our efforts here are really driven to protect that earnings corridor that we put out there. A lot of the path to zero project growth in that earnings corridor the Alberta project, which is a $1billion of underlying EBITDA growth, starts in 2027. That project will come on in two phases between 2027 and 2030, but the other $2 billion comes on through the years as we bring on these smaller, higher return, lower risk projects.

Josh Spector

Yes. Hi, good morning. So I was curious if there is a way to think about the costs you guys are absorbing in Europe from higher energy. So we think about 3Q and 4Q expectations versus the level of 2Q. Is there any way to quantify how much you feel like you’ve had to absorb and not be able to kind of shift away from flexing your production or through pricing or other means? So if pricing or energy prices were to move down would demand environment remains similar? How would you think that would play out? Thanks.

Jim Fitterling

Simple answer two-thirds of the total EBITDA decline in third quarter whether it was versus previous quarter or last year was in EMEAI, and that’s the impact of high inflation, elevated energy costs on our raw materials and then what that high inflation has done to consumer demand in EMEAI. Volume was down 12% in the quarter in EMEAI.

Jaideep Pandya

EO and MEG?

Jim Fitterling

EO and MEG. MEG is the weak spot in EO. If you look at our industrial solutions strategy, it is to keep investing in high value EO applications. And so all the alkoxylate investments that you see, investments in our oil and gas franchise for means those are continuing to do very, very well. And we’re going to continue investing there to try to increase the amount of business that goes to those higher value applications for purified EO and away from MEG.

MEG prices were actually at a low spot in the third quarter and had improved a little bit since because of falling inventories. I think a big part is going to be dependent on higher China activity after they stopped the zero COVID lockdowns.


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