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Dow Inc. (DOW) CEO Jim Fitterling on Q1 2021 Results – Earnings Call Transcript

Apr. 22, 2021 1:45 PM ETDow Inc. (DOW)

Dow Inc. (NYSE:DOW) Q1 2021 Earnings Conference Call April 22, 2021 8:00 AM ET

Company Participants

Pankaj Gupta – Investor Relations

Jim Fitterling – Chairman and Chief Executive Officer

Howard Ungerleider – President and Chief Financial Officer

Jim Fitterling

Thank you, Pankaj and thanks to everyone for joining us today. Before we begin, I would like to recognize and thank Colleen Kay, who announced her retirement from Dow after over 31 years of outstanding service and also to welcome back Pankaj Gupta, who many of you already know.

Starting on Slide 3, our results for the first quarter once again demonstrated the focus and agility of Team Dow which enabled us to quickly recover from the impact of winter storm Uri on the U.S. Gulf Coast. This event had a far-reaching impact across our industry and broader market. Our colleagues quickly and safely got our units back online some of which began coming up within a week of the storm. All impacted Dow units are back online and we have reached pre-storm operating rates by the end of March ahead of plan. Our team’s efforts, combined with improving demand and tight industry supply conditions, drove results higher than the updated guidance we shared last month at the JPMorgan Investor Conference. At the company level, Dow achieved double-digit growth on the top and bottom lines, both year-over-year and sequentially.

A few highlights in particular. Sales were up 22% year-over-year, with gains in all operating segments and in every region. We continued to benefit from strong price momentum with improvements in all segments, businesses and regions. Volume was in line with the year ago period as gains in construction, mobility, electronics and consumer durables end markets as well as higher energy demand were offset by supply constraints from the storm and we continue to improve our working capital efficiency with a net improvement of 3 days. Sales were also up sequentially with growth in all segments and regions. This top line growth and our continued focus on cost discipline led to bottom line growth and our highest EBIT quarter since spin. We achieved more than $700 million of EBIT growth from the year ago period and $500 million sequentially.

We delivered equity earnings improvements of more than $300 million led by Sadara. Earlier this month, Sadara with help from Dow and Saudi Aramco worked to bring its mixed feed cracker back online faster than anticipated and downstream production units are also back at expected rates. We also completed key structural changes to our U.S. defined benefit pension plans in the quarter, which reduced the company’s pension liability. Cash flow from operations was more than $750 million, excluding a $1 billion elective pension contribution. And Dow, Saudi Aramco and Sadara completed the joint venture’s debt re-profiling, which will provide approximately $350 million cash tailwind to Dow in 2021. Sadara is now expected to be cash flow self-sufficient. In summary, Team Dow remained agile in an extremely dynamic business environment to deliver strong top and bottom line growth, positioning Dow for greater value creation going forward.

Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $326 million, up $151 million year-over-year due to strong supply and demand fundamentals in polyurethanes and construction chemicals and higher equity earnings led by continued improvement from Sadara. Sequentially, operating EBIT improved $30 million despite significant impact from winter storm Uri. The polyurethanes and construction and chemicals business achieved a double-digit net sales increase compared to the year ago period, led by local price momentum in polyurethanes. Demand growth in consumer durables and appliances and industrial end markets was more than offset by volume limitations on the U.S. Gulf Coast and other third-party supply constraints related to the storm. These pricing and volume dynamics also drove sequential sales growth.

Howard Ungerleider

Thank you, Jim. Moving to Slide 5, as we turn to the second quarter, market demand remains robust in packaging, electronics, mobility, architectural coatings as well as consumer durable end markets. While sectors like home care have begun to normalize, we do expect additional upside on continuing economic recovery in the industrial sector. And as travel, workplace and social activities resume, they will also provide a boost in demand for higher margin personal care applications as well as across the service sectors of the global economy. These constructive market trends will continue to support top and bottom line growth across all Dow operating segments in the second quarter.

We are entering turnaround season in the Northern Hemisphere and we expect increased spending of approximately $125 million sequentially, particularly in the U.S. Gulf Coast, including a turnaround at one of our crackers in Louisiana. We also expect an additional $100 million from outages, including a third-party supply disruption on the U.S. Gulf Coast. Collectively, robust demand, tight supply, low inventories and increased raw material costs are providing support for prices across many of our value chains. We expect the constrained industry inventory levels to continue in the second quarter, preventing inventory builds until later this year as we focus on clearing the growing backlog of customer orders. All combined for the second quarter, we expect approximately $750 million to $800 million in higher earnings versus the prior quarter from a combination of earnings momentum in our key chains and lower sequential costs from winter storm Uri. This earnings growth will be partially offset by approximately $200 million to $250 million in higher costs from turnarounds and the third-party outage I mentioned. Altogether, we expect second quarter to be our strongest performance since spin.

We do see near-term opportunities to improve adjusted operating EBITDA growth by continuing to implement our faster payback, higher ROIC expansions. This includes our ethylene cracker expansion in Canada, our FCDh retrofit, our polyglycols expansion and our downstream silicones expansions as well. And projects like the South China Specialties Hub will enable us to capture higher value polyurethane systems and alkoxylates demand in the fast growing Asia-Pacific market.

Steve Byrne

Yes, thank you. Jim, you made a few remarks earlier about outages, you have got turnarounds, you have got new supply coming, a lot of moving parts in industry operating rates. And I just wanted to ask you to put that into perspective on your – on the Slide 9 that has your multiyear outlook on industry operating rates for polyethylene, MDI and siloxane. How would you compare those forecasts to current industry operating rates?

Jim Fitterling

Yes. Good morning, Steve. It’s a good question because I think most of the third-party views out there are kind of taking the worst case scenario. And so that would be the bottom end of what we think the ranges of operating rates are. We are going to be in the 90s in both ethylene and polyethylene for the quarter, unless there is some unplanned event. And as we sit here today, there is probably about 15% of that capacity off-line, which is well in excess of what we normally have. We normally have probably 6% to 8% off-line. Same is true for polyurethanes and isocyanates. You see the downstream demand pull is very strong. And siloxanes pricing improvements is all driven by downstream demand improvements. So, my sense is that we are going to be in strong operating rate territory for the entire year. I don’t think we will be building inventory until maybe possibly the end of fourth quarter, which – and that all depends on whether we have a slow fourth quarter or not. But there is upside in automotive, there is upside in travel, there is upside in construction and home, there is backlog in appliances and long lead times. Everything is pointing in the direction of high operating rates.

John Roberts

Thanks. Good morning guys. Could you talk a little bit about the Sadara restructuring? I think Dow’s exports from Sadara was a key part of Dow’s Asia growth strategy. So do you need something else now to backfill as you lose a little access here to some of the Sadara output?

Jim Fitterling

Yes, I’m going to ask Howard to talk about that because he and the team did a lot of heavy lifting to get that done. But on the growth side, that’s where we will be looking at some incremental investments, including on the ground in China for specialty hub to be able to convert differentiated PU and alkoxylates for high-growth in Asia Pacific. And we’re also looking at incremental expansions that we could make in the U.S. to be able to supply more material over there. Howard?

Howard Ungerleider

Yes. John, good morning. The Sadara re-profiling is done. As you know, it was – it took us about 2 years to get it all done, but we got it done within the timeframe that we committed to. The maturity date is now extended out to 2038. There was no upfront or prepayment of any of the outstanding debt. There is a grace period until June of 2026 on any principle, and the guarantees were significantly reduced. When you look at Sadara’s operating performance, it really was a standout. I mean, all of our joint ventures did well in line with our core earnings growth that we reported. But when you look at the threee joint ventures, Sadara actually had the best earnings growth, both year-on-year, as well as sequentially. And if they keep up this pace, they likely will be paying off some additional principal still this year, which was not expected when we did the re-profiling. So really strong performance from Sadara.

Duffy Fischer

Yes. Good morning. Two kind of housekeeping questions. First is the Sadara marketing agreement winds down to the new terms, how visible will that be in your P&L and cash flow? And then on the pension voluntary, how did you think about the return on that $1 billion? And should we expect more voluntary cash to go into the pension over the next several years?

Jim Fitterling

My expectation on the PMLA changes, Duffy, will be that you’ll see that gradual over time. I think it will take a number of years. For our marketing to reflect our equity stake and obviously, for the Aramco side to do the same. So it won’t happen overnight. I think it will happen over time. And I think you’ll see it more on the revenue side than you will on the earnings side. Any other thoughts about that, Howard?

Howard Ungerleider

Yes. If anything, Duffy, I would say you should see our unit margins improve, because right now, we’re marketing 90% plus of the Sadara volume, but we obviously only own 35% of the equity. So that really – and we get a very – we only get a very, very small marketing fee on those volumes. So as that shifts more to our equity ownership in the JV, our unit margin should actually increase just because of that dilution. And remind me what your pension – what was the specific pension question, we might not – going back.

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