Dow Inc. (DOW) Q3 2023 Earnings Call Transcript

Oct. 24, 2023 11:37 AM ETDow Inc. (DOW)

Dow Inc. (NYSE:DOW) Q3 2023 Earnings Conference Call October 24, 2023 8:00 AM ET

Company Participants

Pankaj Gupta – IR, VP

Jim Fitterling – Chairman and CEO

Howard Ungerleider – President and CFO

Jim Fitterling

Thank you, Pankaj.

Beginning on Slide 3. For the third quarter, we continued to advance our long-term strategy while also taking action to reduce costs and maximize cash generation in the face of slow global macroeconomic activity and higher sequential feedstock costs. In particular, we continue to implement targeted actions to deliver $1 billion in cost savings in 2023 and delivered a sequential improvement to operating cash flow of more than $300 million.

Net sales were $10.7 billion, down 24% versus the year ago period reflecting declines in all operating segments due to slower global macroeconomic activity. Sales were down 6% sequentially as volume gains were more than offset by lower local prices. Volume decreased 6% year-over-year, mainly due to lower merchant Hydrocarbons and Energy sales. Volume was up 1% sequentially, led by gains in Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Volume was up 3% sequentially, excluding merchant sales and Hydrocarbons & Energy with gains across all operating segments.

Local price decreased 18% year-over-year with declines in all operating segments and regions, primarily due to lower feedstock and energy costs. Sequentially, price was down 7%, primarily in Europe, the Middle East, Africa and India or EMEAI.

Operating EBIT for the quarter was $626 million, down from $1.2 billion in the year ago period and $885 million in the prior quarter. Our consistent focus on cash flow generation and working capital management enabled team Dow to generate cash flow from operations of $1.7 billion, resulting in a cash flow conversion of 129% for the quarter and 103% on a trailing 12-month basis.

We continue to invest in our long-term strategic priority while also returning $617 million to shareholders in the quarter through dividends and share repurchases. Year-to-date, we’ve returned nearly $2 billion to shareholders. Our cash flow generation continues to enable Dow to fully cover its capital allocation priorities. And our balance sheet remains the best it has been in four decades, supported by strong investment-grade credit ratings with no substantive long-term debt maturities due until 2027.

And in the Performance Materials & Coatings segment, operating EBIT was $179 million compared to $302 million in the year ago period, driven by local price declines in both businesses. Volume was down as gains in commercial building and construction end markets were more than offset by lower demand for personal care and coatings applications and residential construction. Sequentially, operating EBIT increased $113 million, driven by higher operating rates and cost savings.

Starting with decarbonize and grow. In September, we achieved startup of a new MDI distillation and pre-polymer facility at our manufacturing site in Freeport, Texas. This new facility replaces Dow’s existing capacity in La Porte, Texas, and expand supply by an additional 30% at the site to support high-value demand growth in polyurethane systems while also reducing our greenhouse gas emissions by more than 45% compared to the La Porte asset.

Finally, before we move to Q&A, I would like to speak to the announcement this morning that Howard is elected to retire from the company following 33 years of dedicated service. I want to personally thank Howard for his significant contributions to Dow over the last three decades. He’s been an incredible business and strategic partner, created a financial and leadership team that guided our company through numerous challenges and accomplishments and most importantly, he’s been a tremendous colleague and friend.

In addition to recognizing and thanking Howard, we are pleased to share that the Board has elected Jeff Tate to the role of CFO effective November 1, 2023. As we thank Howard for his years of service and there will be time to honor and recognize him for that. We’re excited to welcome Jeff back to Dow. Many of you will remember, Jeff, who also previously led Dow’s Investor Relations team. He returns to us following a 4-year stint as the CFO of Leggett & Platt.

Prior to that, Jeff had 27 years with Dow in various finance roles, including VP of Finance for Packaging and Specialty Plastics and was our lead auditor. Jeff is joining us here today, and we’ll look forward to him joining our next earnings call in his formal role.

Jeff Zekauskas

Thanks very much. In your $1 billion cost-cutting program, how much of that comes out of SG&A and R&D? And in your slides, you say that your share count in the fourth quarter is 7.10 and in the third quarter, it was7 or 7.5. Are you rounding or is the share count going up?

Jim Fitterling

Yes, Jeff, good morning. On the cost, about half of the costs come out of our structural operating cost model, which would include obviously, making sure that we’re controlling SG&A, during this time period. It also includes things like contract labor and what we’ve been doing, there to reduced headcount.

On our operating cost side, it’s things like purchase raw material and logistics costs, utilities costs being down, our turnaround spend, which is down about $300 million. And while SG&A is down both in cost and as a percent of sales, we’re obviously still continuing to invest in research as we go forward. Howard, do you want to touch on the share count?

Kevin McCarthy

Yes, good morning. Jim, I’d appreciate your outlook for Dow’s construction-facing businesses heading into 2024. Some of the companies that we cover are pointing to meaningful benefits from infrastructure and reshoring-related investments, basically fiscal stimulus. On the other hand, we’ve got rising rates, and that typically has a chilling effect. So, how do you see those countervailing trends netting out for Dow and affecting the way you’re planning for the future?

Jim Fitterling

Yes. Good morning, Kevin. The things we watch on construction, obviously, on commercial construction just the completion rates on existing builds and the permit work that’s going on new builds. I would say this has been a relatively strong year on commercial because there have been a lot of projects that were in flight. We’re starting to see, obviously, some tick up in applications for pyramids on residential for the noncommercial side of things, which is good.

But I think as long as there’s a question out there on rates and will rates continue to rise, that’s going to put a lid on what we’ll see on residential construction. In terms of infrastructure, we are seeing some movement in that space. I would say the biggest rate-limiting step on infrastructure is permitting. So, the speed at which people can get permits, whether that’s for – it could be for pipelines.

It could be for transmission cabling, you name it, but there could be some limitations there, and we keep an eye on that. Overall, I feel good about the fact that we’re moving through the toughest phase of it right now. And if we could see some positive growth come back in the construction markets in China and the U.S., that will be a nice upside for us in ’24.

Steve Byrne

Yes. Thank you. The inventory chart you have on Slide 6 is intriguing. What I’m curious about is, for each of your businesses, do you have a view as to how much your customers have destocked your products relative to their end market demand. And thus, how much of this sequential decline that you’ve seen 12, 15 months is destocking versus just end market underlying demand weakness. You showed some sequential improvement, in each of your businesses in the third quarter. Is that just destocking coming to an end? Or do you think that this is really some firming demand by your customers?

Jim Fitterling

Good morning, Steve, it’s a good question. Obviously, we get industry data that we published on the chart that you see there. When it comes to downstream when we get into the consumer brands and the retailer space, we have to go on reported data that we clean out of their public reports. But just a few things to keep in mind. We know in the auto sector, for example, that with the OEMs.

It’s been pretty much hand to mouth, because there have been other rate-limiting steps like the ability, to get computer chips. We haven’t seen a big restocking with the OEMs. We’ve seen the OEMs continuing to run, because they want to be in a position to ramp up when the strikes get settled. So, I would say, I don’t feel like there’s a lot of restocking going on there.

I would say on the consumer brands and the pharma companies lately seen them, obviously, watching inventory levels. I don’t get any sense of any stocking or big destocking going on there. I think it’s running more to meet demand. And then, the other thing we take a look at is obviously what’s going on with the construction segments, as I just mentioned.

But it’s a little bit harder. It’s a little bit fuzzier when we get into the downstream. We don’t have as much published data to rely on. So, we look more at PMI. We look more at retail sales. We look more at, what they comment on in their public filings.

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