Dow Inc. (DOW) Q3 2024 Earnings Call Transcript

Oct. 24, 2024 11:16 AM ETDow Inc. (DOW) Stock

Q3: 2024-10-24 Earnings Summary

EPS of $0.47 misses by $0.00 | Revenue of $10.88B (1.39% Y/Y) beats by $200.05M

Dow Inc. (NYSE:DOW) Q3 2024 Earnings Conference Call October 24, 2024 8:00 AM ET

Company Participants

Andrew Riker – IR, VP
Jim Fitterling – Chair and CEO
Jeff Tate – CFO

Conference Call Participants

Vincent Andrews – Morgan Stanley
Hassan Ahmed – Alembic Global
Richard Garchitorena – Wells Fargo Securities
Jeff Zekauskas – JPMorgan
Bhavesh Lodaya – BMO Capital Markets
David Begleiter – Deutsche Bank
Steve Byrne – Bank of America
Josh Spector – UBS
Chris Parkinson – Wolfe Research
Patrick Cunningham – Citi
Kevin McCarthy – Vertical Research Partners
Frank Mitsch – Fermium Research
John Roberts – Mizuho
Mike Leithead – Barclays
Duffy Fischer – Goldman Sachs
Matthew Blair – TPF
Aleksey Yefremov – KeyBanc
Laurence Alexander – Jefferies
Arun Viswanathan – RBC Capital Markets

Jim Fitterling

Thank you, Andrew. Beginning on Slide 3, our cost advantage footprint in the Americas continues to provide strong competitive edge capturing demand growth in attractive markets and regions. In the third quarter, Team Dow delivered our fourth consecutive quarter of year-over-year volume growth. We delivered this despite a soft macroeconomic environment, primarily in Europe and China, as well as an unplanned cracker outage in Texas, which has been successfully restarted and is running well.

Net sales in the Q3 were $10.9 billion, this is up 1% versus the year ago period led by higher demand and local prices in the United States and Canada. Volume increased 1% versus the year ago period and prior periods. Sequentially, we saw gains in Packaging and Specialty Plastics and Industrial Intermediates and Infrastructure.

Local price was flat year-over-year as gains in Packaging and Specialty Plastics were offset by decreases in Performance Materials and Coatings. Sequentially, local price was down 1% due to minor declines across all segments. Operating EBIT was $641 million, up $15 million year-over-year, reflecting higher integrated margins in Packaging and Specialty Plastics, which were partly offset by the impact of the unplanned cracker outage in Texas and higher planned maintenance activity. Cash flow from continuing operations was $800 million down year-over-year, primarily due to higher inventories to support both sales growth and labor related supply chain disruptions.

Shareholder remuneration for the quarter was $584 million including dividends and share repurchases. In addition, we progressed our long-term growth strategy including signing a long-term agreement with Linde for the supply of clean hydrogen for our Path2Zero project in Fort Saskatchewan. We also completed the acquisition of US based polyethylene recycler Circulus. This will add capacity of 50,000 metric tons of recycled materials annually to Dow’s portfolio.

Now turning to our operating segment performance on Slide 4. In the Packaging and Specialty Plastics segment, local price increased year-over-year led by higher polyethylene prices in all regions except Latin America, which was flat. Volume was flat year-over-year as higher demand for functional polymers in all regions was offset by lower polyethylene volumes. Operating EBIT was $618 million an increase of $142 million year-over-year. This was primarily driven by higher integrated margins, which were partly offset by the impact of the unplanned cracker outage I mentioned earlier.

Moving to the Industrial Intermediates and Infrastructure segment, local price was flat year-over-year. In addition, volume was down 2%. This was driven by lower volumes in Polyurethanes and Construction chemicals, which were primarily due to a force majeure in MDI following a third-party supplier outage.

Operating EBIT decreased $74 million versus the year ago period. Results were driven by higher planned maintenance activity and lower integrated margins, which were partly offset by improved equity earnings. And in the Performance Materials and Coatings segment, local price declined year-over-year, while volume was up 5% with gains in both businesses and across all geographic regions. Operating EBIT was $140 million down $39 million compared to the year ago period, driven by higher raw material costs, which were partly offset by higher volumes.

Moving to Slide 5. The strength of Dow’s differentiated portfolio is defined by our strategic and purpose built asset footprint which leverages low cost feedstock positions, primarily in the Americas. Our growth investments are concentrated in higher value businesses and regions, particularly where demand is resilient and we have a competitive cost advantage. Over the past few years, we’ve demonstrated our commitment to operating with the best owner mindset by taking proactive actions with select higher cost assets aligned with the evolving market dynamics.

Since 2023, we have undertaken more than 20 asset actions. These include targeted rationalization of our global polyols capacity, shutting down our propylene oxide unit in Freeport, Texas in 2025 to reduce lower value merchant PO exposure, strengthening our coatings footprint with select asset closures and announcing the sale of our laminating adhesives business for $150 million including two manufacturing sites in Italy, which we expect to finalize in the fourth quarter of this year.

Overall, these actions have been primarily focused on our industrial, intermediates and infrastructure segment and in the EMEA region. On Slide 6, current market dynamics are impacting Europe, including continued soft demand, coupled with a persistent lack of long-term regulatory policy. This ongoing absence of clear, consistent, and competitive regulatory policy in Europe has resulted in many challenges for our industry.

These challenges have been acknowledged in statements by EU government leaders, top economists, and our peers. And while a demand recovery in other parts of the world was expected to provide swift upside across the markets we serve, this alone is unlikely to be enough in Europe. Given these dynamics, we’ve begun a strategic review of select European assets, primarily those in our polyurethane business. This review includes all value-creating options for these assets and currently consists of approximately 20% of our sales in the EMEA region.

We expect to complete this review by mid-2025. We continue to engage with governments both directly as well as through our leadership in trade associations to improve the industry’s overall competitiveness in the region. Decisions regarding the strategic review, similar to our prior actions, will focus on strengthening Dow’s global portfolio. This enables us to invest in the most attractive opportunities and create long-term value growth for our shareholders.

Hassan Ahmed

Good morning Jim. Just a question around some of the sort of review work that you guys are doing in Europe. You guys specifically talked about polyurethanes. I’m just trying to sort of get a better sense of all the moving parts with regards to how you see the polyurethane cycle sort of panning out. Obviously, we’ve seen or about to see some assets change hands within the global polyurethane market. The destocking was particularly severe in polyurethanes, but the supply side seems a bit tepid. So as sort of you sift through all of these moving parts, how do you see the polyurethane market sort of coming out on the other side?

Jim Fitterling

Good morning Hassan. Actually, we’re still poised for a very good recovery in construction and durables markets, which really drive a lot of what’s going on in polyurethanes. I’d add automotive on top of that because I think automotive has been under some pressure in Europe. So I agree with you, there is no signs that there’s any stocking and destocking has run its course. But I think we are waiting for that obvious turn in the economy that gets people moving into those segments.

And those assets in Europe is really a portfolio shift move. It really has nothing to do with the business. Polyurethanes is a good business, a pretty diverse downstream markets. We’ve got good positions there. And as I mentioned, we’re thinking about 20 asset actions so far across the globe, mostly in II&I, which is really to tighten up the footprint and get our capacity focused on our lowest cost assets there. So I think it is strengthened, both polyurethane business and also the coatings business as well.

Thank you, good morning. Jim, on the European assets under review, are they EBITDA positive? And if so, how much? And if you do close both of your MDI plants in Europe, would you still look to supply Europe MDI from your plants in Saudi and Texas? Thank you.

Jim Fitterling

Yes, good morning David. I don’t have a specific number to give you on the European assets right now, but they are EBITDA positive. They are good cost positions in the European market. Again, we are looking at all value-creating opportunities. I don’t believe – I don’t want to preclude anything, but I don’t believe shutting down MDIS, that is going to be a value-creating opportunity, but we’re going to look at everything.

John Roberts

Thank you. Jim, you’ve got chlorine integration in Europe. So how separable are the decisions you’re looking at in Europe for polyurethanes versus the [cab] (ph) assets?

Jim Fitterling

They’re not, John. Obviously, we’re not going to do anything without close contact with our own chlorine assets but also with our partners in Europe. And so we’ll keep a close eye on that. Chlorine PO integration is critical for us, and so we will make sure we’re eyes wide open to that.

Aleksey Yefremov

Thanks good morning everyone. Jim, I was quite surprised to see about $100 million in EBITDA for II&I into this quarter. The segment started the year pretty strongly with $234 million, and then EBITDA continued to soften. Could you give us, just to reflect on this year, what product specifically or regions maybe did not perform as well? And what do you expect next year here?

Jim Fitterling

Yes. So obviously, we had Glycol-2 up and running, so that was to a positive. We had price pressure on PO Polyols and we had lower volumes in MDI. I mentioned in the opening that we had a third-party outage in North America, which supplied industrial gas to our MDI process there, the plants back up but still running at lower rates. And then look, the other thing that happened when Texas-8 was out, Texas-8 produces propylene for us as well. And so when we had Texas-8 out, we had to go into the market to get some of that propylene so that was a higher cost.

So I think it was on to one-time, the MDI issue is a one-time, which will correct itself. The PO polyols that was a big driving force around the decision to tighten up the footprint in Freeport. So as we go forward, we don’t have as much length in PO, which brings the North American market more in the balance. So I think, as we move forward, it is polyurethanes in North America, that was the bigger slowdown and drag in the quarter.

Arun Viswanathan

Hi, guys great. Thanks for taking my question. So I guess I just wanted to ask about — there’s been a lot of portfolio reviews, especially of European assets at this point. So just wondering if you’ve gone through some kind of analysis here, assuming any of those shutdowns happen or potentially portfolio reviews result in shutdowns. How much maybe capacity could be coming out of the industry and P&SP in — as you look into ’25.

And maybe if you can give us your thoughts as well on PMC kind of global supply demand as well, just because we’ve been mired in weakness on the coating side for a while, from a demand standpoint, but maybe there is some green shoots with rates coming down. So do you see any improvement in operating rates on the PMC side as well. So just maybe you could get your comments on both P&SP and PMC utilization as you look into ’25? Thanks.

Jim Fitterling

Yes good morning Arun. Look, I think, again, our portfolio work in Europe is around polyurethanes. And as I mentioned before, it really isn’t driven primarily by shutdowns, we’ll look at that. But I think we’ve done a lot to bring smaller assets down and bring that capacity into our low-cost locations. It’s really looking at what is there a better owner for the portfolio? Does that allow us to continue to focus on our Invest for Growth businesses, which went from Investor Day, you’ll remember we’re P&SP our silicones business and also our Industrial Solutions business.

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