Dow Investors Call Urethane Highlights
January 28, 2022
Dow Inc. (DOW) CEO Jim Fitterling on Q4 2021 Results – Earnings Call Transcript
Dow Inc. (NYSE:DOW) Q4 2021 Results Conference Call January 27, 2022 8:00 AM ET
Pankaj Gupta – VP, IR
Jim Fitterling – Chairman and CEO
Howard Ungerleider – President and CFO
Thank you, Pankaj.
Beginning with slide 3, in the fourth quarter, Dow once again delivered top and bottom line growth year-over-year with sales growth and margin expansion in every operating segment. Our results reflect the strength and resilience of our advantaged portfolio and the incredible efforts of the Dow team as we continue to ensure well-being and safety of our team and our communities.
We delivered year-over-year sales growth of 34%, with gains in every operating segment, business and region. While volume declined 4% year-over-year due to supply constraints from several factors, including our own maintenance, lingering effects of weather-related outages and global logistics challenges, we continue to see robust underlying demand across our end markets, particularly for higher-margin downstream and sustainability-led applications. Prices were up 39% year-over-year, reflecting gains in all operating segments, businesses and regions.
Our discipline and agility enabled us to navigate the supply constraints and logistics challenges I just mentioned, dual control actions in China and rising energy costs. We delivered operating EBIT growth of $1.2 billion year-over-year, with margin expansion in every operating segment. Equity earnings were also up year-over-year with margin expansion at our joint ventures in Saudi Arabia, Thailand and Kuwait. These results translated into significant cash generation for the quarter, with cash flow from operations of $2.6 billion, up $901 million year-over-year and cash flow conversion of 88%. And we returned $912 million to shareholders in the quarter, including $512 million through our industry-leading dividend and $400 million in share repurchases.
Our performance in the fourth quarter capped a record year for Dow, which you will see highlighted on slide 4. In 2021, Team Dow capitalized on the economic recovery, achieving record sales and earnings performance despite pandemic-driven uncertainty and industry-wide weather-related challenges. Our focus on cash flow and disciplined capital allocation enabled us to continue to deliver on our financial priorities.
We achieved $7.1 billion of cash flow from operations, bringing our total cash flow from operations since spin to $18 billion. We enhanced our balance sheet by reducing gross debt by another $2.4 billion in the year, bringing down gross debt by more than $5 billion since spin. We have also no substantive debt maturities until 2026. We proactively funded our U.S. pension plan, and successfully executed Sadara’s debt reprofiling, lowering Dow’s guarantees by more than $2 billion. Dow has returned a total of $7.3 billion to shareholders since spin through our dividend and share repurchases, including $3.1 billion in 2021. And we kept CapEx well within DNA as we continued to invest in our higher return and faster payback growth investments. In 2021, we achieved a return on invested capital of greater than 22% on strong earnings growth.
As we turn the corner on the pandemic, we do so with a strong balance sheet and a deliberate and disciplined strategy to decarbonize and grow. We achieved this record financial performance in 2021 while advancing our ESG leadership. Importantly, we announced our disciplined strategy to decarbonize our assets, while improving underlying EBITDA by more than $3 billion as we capitalize on our participation in attractive, high-growth end markets and sustainability-driven solutions.
Our ESG efforts continue to be recognized externally as we were recently recognized by JUST Capital for the third year. Dow earns a top spot in the chemicals sector overall as well as the number one position in the workers and stakeholders in governance categories in the industry. I’m extremely proud of Team Down’s dedication to deliver for our customers and drive value for all of our stakeholders. We will build on these achievements in 2022 as we advance our ambition.
Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $595 million, up $299 million year-over-year, primarily due to continued price strength. Sequentially, operating EBIT was down $118 million and operating EBIT margins declined 280 basis points, primarily driven by higher energy costs in Europe and our planned maintenance turnaround activity.
The Polyurethanes & Construction Chemicals business increased net sales compared to the year ago period on broad-based price gains in all regions. Volume declines were primarily due to a planned transition away from a low-margin coproducer contract and our planned maintenance turnaround activity.
Thank you, Jim, and good morning, everyone.
Turning to slide 6. Our diversified portfolio continues to enable us to capitalize on attractive end market trends with higher-margin downstream products. Our four primary market verticals are each growing at rates of 1.3 to 1.5 times GDP and benefiting from sustainability macro trends. We are meeting this demand with higher-margin solutions such as functional polymers, alkoxylates, surfactants, polyurethane systems, sustainable coatings and performance silicones.
In the packaging vertical, demand for lower carbon emissions recyclable and circular materials are driving demand for Dow’s industry-leading plastics portfolio and in-house application design capabilities.
Dow’s broad suite of products and hybrid innovations targeting infrastructure will continue to benefit from government investments and incentives, with particular demand resiliency in the Americas, Europe as well as in the Middle East, Africa and India. We see global demand across the diverse consumer market vertical remaining at elevated levels, particularly for applications like electronics, 5G, appliances, pharma and home care, where several of Dow’s growth investments are targeted. And in mobility, Dow’s portfolio of specialty silicones, polyurethanes and elastomers is uniquely positioned to benefit from growing electric and autonomous vehicle trends. Importantly, these attractive market verticals are supported by favorable balances across our key value chains with continued strength across consumer and industrial end markets, which we’ll see on slide 7.
In Industrial Intermediates & Infrastructure, our alkoxylates and PU systems expansion projects are closely linked with brand owner demand for higher value, differentiated downstream applications across home and consumer care, agricultural and infrastructure end markets. For example, our surfactants offer an improved environmental profile for leading brand owner laundry and home care products. And our polyurethane system PASCAL technology enables up to 10% greater energy efficiency and appliances without raising manufacturing costs.
Congratulations on a strong year there. I guess, we’ve talked a lot about the polyethylene market. So, maybe I could also just get you to guys to elaborate on your outlook for polyurethanes, as well as silicones. Could you just comment on those two markets as well? Thanks.
Yes. Arun, thank you. Polyurethane market strength in furniture and bedding, appliances, construction, everything related to housing is very good. In that segment, II&I segment also Industrial Solutions, market strength, pharma, home cleaning, food, we have some feed additives in there, crop defense, intermediates for crop defense and electronics are all very strong. And what you see is that the supply-demand is very constructive to the middle of this decade, whether you’re looking at MDI, polyethylene — propylene glycol or ethylene oxide and ethylene oxide derivatives. So, all very strong through mid-decade.
We think that even though automotive is a little bit constrained right now because of semiconductor chip shortages, we expect that’s going to ease throughout the year and especially in the second half is going to be better. Light vehicle production estimates for this year, about 85 million units around the world. That will be up from last year, so that’s positive. Electric vehicle trends are good for us. There’s more content on an EV for us than there is on internal combustion engine vehicle, but both of them continue to look good. So, I think that’s good. A little bit slower, our operating rates on propylene oxide because the new capacity has come on. But net-net, so the systems business, which is a strong driver of the profitability is going to be good.
Just to give you an example on building and construction, we’re looking at kind of 4% market growth rate similar to last year, electronics, 6%. And so, I think we’ve got a good trend in front of us.