Dow Inc. (DOW) Q2 2024 Earnings Call Transcript

Jul. 25, 2024 12:05 PM ETDow Inc. (DOW) Stock

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Q2: 2024-07-25 Earnings Summary

EPS of $0.68 misses by $0.04 | Revenue of $10.92B (-4.42% Y/Y) misses by $101.82M

Dow Inc. (NYSE:DOW) Q2 2024 Earnings Conference Call July 25, 2024 8:00 AM ET

Company Participants

Andrew Riker – Investor Relations, Vice President
Jim Fitterling – Chair and Chief Executive Officer
Jeff Tate – Chief Financial Officer

Jim Fitterling

Thank you, Andrew. Beginning on slide three, in the second quarter, team Dow delivered sequential top and bottom line growth, as well as the third consecutive quarter of year-over-year volume growth. We achieved this despite a slower-than-expected global macroeconomic recovery, particularly in areas like building and construction and consumer durables.

Net sales were $10.9 billion, down 4% versus the year ago period and up 1% sequentially, driven by gains in packaging and specialty plastics and performance materials and coatings. Volume increased 1% versus the year ago period with gains led by the United States and Canada. Excluding hydrocarbons and energy sales, which were down primarily due to lighter feed slate cracking in Europe, volume increased 4%.

Sequentially, volume increased 1% with gains in all regions except Asia Pacific, which was flat. Local price decreased 4% year-over-year. Sequentially, local price increased 1% led by gains in Europe, the Middle East, Africa, and India or EMEA. Operating EBIT was $819 million, up $145 million sequentially, reflecting gains in packaging and specialty plastics and performance materials and coatings.

Cash flow from operations was $832 million on higher earnings and an efficient release of working capital, resulting in an 85% cash flow conversion on a trailing 12-month basis. Our focus on cash flow generation enabled $691 million in returns to shareholders, including $491 million through dividends and $200 million in share repurchases.

In June, we published our 2023 Intersections Progress Report. This report showcases the positive impact that we are making on the environment and society and importantly, how those actions support long-term profitable growth.

Now turning to our operating segment performance on slide four. In the packaging and specialty plastic segment, operating EBIT was $703 million, down $215 million a year-over-year, this was driven by lower integrated margins, higher planned maintenance activity, and lower non-recurring licensing sales. Local peak declines were due to lower downstream polymer prices, primarily in Asia Pacific. Volume decreased year-over-year as higher demand for functional polymers and polyethylene was more than offset by lower merchant hydrocarbon sales, primarily due to lighter feed slate cracking in Europe. Sequentially, operating EBIT increased by $98 million, primarily due to higher integrated margins behind both price and volume gain.

Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $7 million, an improvement of $42 million versus the year-ago period. Results were driven by improved equity earnings, partly offset by lower integrated margins. Local price declined year-over-year, but volume was up, driven by gains in polyurethane and construction chemicals.

Sequentially operating EBIT decreased $80 million, driven by higher planned maintenance activity and higher equity losses, as well as lower volumes. And in the performance materials and coating segment, operating EBIT was $146 million, up $80 million, compared to the year-ago period, driven by broad-based business and geographic volume growth.

Local price declined year-over-year, but volume was up, driven by gains in both businesses and all geographic regions. Sequentially operating EBIT increased to $105 million, driven by volume and price gains in both businesses and lower planned maintenance activity.

Now I’ll turn it over to Jeff to review our outlook and share some examples of our playbook in action.

Jeff Tate

Thank you, Jim. And good morning to everyone joining our call today. Moving to slide five, in the near-term, we expect macro-dynamics to remain largely unchanged. While global manufacturing PMI has been positive since February 2024, the pace of the global economic recovery has decelerated slightly. This is primarily led by China, where economic growth in the second quarter was lower than the market expected. Overall, we continue to keep a close eye on the weight of inflation on U.S. consumer, global interest rates, and geopolitical tensions.

Looking across our four market verticals, packaging demand is seeing global growth, primarily in the U.S. and Canada as the industry experiences robust domestic and export demand for polyethylene. In Europe, soft demand across the value chain is reflected in manufacturing PMI levels, which despite stabilizing, remain in contractionary territory. And in Asia, packaging demand has remained steady, but the reason has been impacted by poor congestion and rising transportation costs.

Infrastructure demand, primarily residential construction, continues to be soft across most regions. In June, existing U.S. home sales, which tend to drive residential paint sales for both buyers and sellers, were below prior year levels. And building permits were down slightly year-to-date through June. Eurozone construction PMI remains in contractionary territory and declined to 41.8 last month, down from 42.9 in May. And in China, new home prices were down 4.5% year-over-year in June.

Consumer spending has shown resilience in most regions except Europe where consumer confidence remained negative in July. In the U.S., retail sales are up 2.3% year-to-date through June, but furniture and bedding sales remain low. In China, retail sales increased by 2% year-over-year in June, but marked the first month of deceleration since July 2023. And in mobility, China auto production was down 2.1% year-over-year in June amidst the potential for tariff increases and flow to materialized incentives.

In the U.S., auto sales were down year-over-year in June after increasing by more than 2% in May. Against this backdrop, we delivered the third consecutive quarter of year-over-year volume growth and will continue to leverage our differentiated portfolio to capitalize on areas of demand strength, while maintaining operating and financial discipline. And I’ll touch on these actions in more detail shortly.

Now turning to our outlook on slide six. We expect third quarter earnings to be slightly above second quarter performance, continuing our string of sequential improvement. We experience minimal disruption from Hurricane Berly in the U.S. Gulf Coast, and we expect the positive sequential signals in some markets will continue. In the packaging, especially plastic segment, we expect modest top line sequential growth. Domestic and export demand for polyethylene in North America will remain robust, and EMEA will experience typical lower demand seasonality from the summer holidays.

In addition, the completion of our cracker turnaround into being Texas in the second quarter will be offset by another planned turnaround at our St. Charles, Louisiana cracker in the third quarter. In the industrial, intermediates and infrastructure segment, market conditions remain mixed. Demand in energy and pharma end markets remains resilient, but consumer durable demand has not shown any significant signs of inflection.

We expect an approximately $25 million headwind due to the planned maintenance activity in the U.S. Gulf Coast. Importantly, at the end of June, we successfully started up our glycol 2 facility at Louisiana operations, which will ramp through the quarter and provide a sequential tailwind of $75 million.

In the performance materials and coating segment, we continue to see growth in downstream silicone applications across most end markets, but the siloxane prices are still under pressure. Lower seasonal demand for building and construction end markets are expected to be a headwind of approximately $50 million, while lower planned maintenance activity will contribute a $25 million tailwind.

Moving to slide seven. As we navigate the current market conditions, we are focused on executing our proven playbook to deliver increased value over the cycle. We benefit from our global asset footprint with leading positions in every region. This is particularly true in the cost-advantaged America, where approximately 65% of our global production capacity is located, and we expect to reach 70% by 2030.

With leading low-cost feedstock positions, trust our industry-leading feedstock flexibility, Dow is well positioned to capture growing global demand for our products. And supported by our solid financial position, we remain on track to deliver our countercyclical growth investments. Team Dow continues to operate with discipline as we maintain our low cost to serve mindset, focus on maximizing cash flow, and further strengthen our financial positions.

im Fitterling

Thank you, Jeff. Moving to slide eight, our expectations for 2024 reflect a slower pace of recovery in certain end markets. Dow is positioned to capture more than $3 billion in EBITDA upside as we return to mid-cycle earnings levels. We are encouraged by the positive top line signals across our portfolio. This is demonstrated by our year-over-year volume improvement in the last three quarters, as well as price stabilization across the entire enterprise over that same period.

In packaging especially plastics, we anticipate supply demand fundamentals to continue improving as the recent polyethylene capacity builds in North America have been fully absorbed by growing global demand. We’re also starting to see rationalization of higher cost assets, particularly in Europe. And going forward, we did not expect to see any new capacity in the cost-advantaged Americas until the 2026, 2027 timeframe.

In industrial intermediates & infrastructure, we’ve maintained a disciplined approach to our inventory management. The beginning of an interest rate cutting cycle will accelerate demand in our polyurethan’s business. In industrial solutions, the majority of our U.S. Gulf Coast capacity is aligned to higher value EO derivatives. With the successful restart of our Glycol-2 facility in Louisiana, we will see positive impact in consumer, mobility, pharma, and energy and markets. And in performance materials and coatings, industry siloxane capacity additions are expected to slow due to prolonged negative cash margins impacting non-integrated players.

And lastly, our coatings business is highly correlated to existing home sales with market demand forecasted to see pre-pandemic levels by next year. With these positive indicators combined with an economic recovery, Dow is positioned to capture significant annual earnings upside at mid-cycle levels.

Vincent Andrews

Thank you and good morning everyone. Jim, we’d love to get your sort of high level thoughts on two things that might have opposite reactions. One, it does seem like we’re finally going to get into a period where interest rates are going to come down, which I would expect to be broadly positive for your business, particularly your exposure to building and construction. But politically, we may be also re-entering a period geopolitically with tariffs and duties and things like that. So I’m wondering if you can compare and contrast, you know, sort of what the impact of both of those dynamics could be for Dow as we look into 2025?

Jim Fitterling

Good morning, Vince, I’m happy to do that. On interest rates, we had expected that by this time, we’d probably have seen two or three interest rate cuts in the year, we haven’t seen the first one yet. I do think the expectation is coming. If you look at the housing market, I think you’re seeing the weight right now of the high interest rates on housing [Technical Difficulty] new builds [Technical Difficulty] you know and employees that are kind of stacking up on [Technical Difficulty]. And part of it’s because people are unable to qualify for mortgages at these higher rates.

So I think when we start to see mortgage rates get something with a five-hand on them, we’re going to see a couple of things happen. We’re going to see people, who have financed mortgages at these higher rates of 7%-plus will get some advantage to do a refinance. We’re going to see people who’ve been sitting on the sidelines with properties they want to sell, move into start to sell them, because people can get qualified for the mortgages. And you’ve got to start to see building credits increase.

In polyurethanes and construction chemicals, when that starts to happen, you get a domino effect that happens. You get both existing ones there and you build starting to build them. That drives volume, and then, of course, anytime you have that, you’ve got appliances, [Technical Difficulty], all the other things that go on with it. And so that tends to wrap it up pretty quickly. We haven’t seen that yet. Obviously teams were managing it closely, but we haven’t seen that tick up.

On the geopolitics side, yes, I think on — you do on both sides, on the political spectrum, you’re expecting a more percussive tone that we’re hearing coming out from both sides. I would say that the big driver behind that is in many cases where a lot of capacity has been built in China, there’s enough data to suggest that they’re being subsidized and those products are being flooded into other markets. And it’s hard to see anti-dumping cases being brought against China around the world in different areas. And so I think you are going to see activities that are going to try to halt some of that from happening in concert with trying to bring the manufacturing back.

Today, most of the manufacturing is going to go into Mexico, if you think about it, from our perspective. We haven’t had time to see the impact from semiconductors and other things being invested. That will take a few years to get to market. But I think we’re going to see increased rates on a whole host of things. Most of them are in the 25% to 50% range. And most of that is what people believe is the amount of subsidies going on to those markets. So we’re prepared for whatever case we get, depending on the outcome of the election. And as always, we just have to get on there and make sure that either side understands the supply chains, how product flows, and what’s important to keep industry moving, not just here, but in Europe and around the world.

Laurence Alexander

Good morning. I just wanted to follow-up on your discussion around potential tariff structures and how they might evolve, how do you think the response function in the industry with your customers has shifted that is if there is movement towards new tariffs, how significant a restock cycle do you see that triggering in advance?

Jim Fitterling

I don’t think anything has started yet, Laurence, on people doing stocking in advance of tariffs. And I think primarily because there’s all the uncertainty around the election and what policies are going to actually stick. I think on the same — by the same token, I think there’s a little bit of view that China doesn’t know what it’s going to do yet from an incentive standpoint for its own economy until it gets a better feel for what’s going to happen with the U.S. presidential election. We’re doing scenario planning here to look at the impact.

As I mentioned, there are antidumping activities going on in different parts of the world because of challenges that we see from things being — volumes being dropped into markets. And so there’s a lot of work going on behind the scenes. I think that will — we’ll get a clearer picture for that by the end of the year. But right now, I would say I haven’t seen any uptick in volumes or stocking because of that.

Mike Leithead

Great, thanks. Good morning. Jim, just a bigger picture question. DOW is obviously investing a lot for medium-term growth. You’ve laid out a lot of 2025 and 2030 expansion targets. But at the same time, the overall demand backdrop since about mid-’22 has probably been materially worse than you or anybody has thought at that time. So as that timing gap between near-term weakness, medium-term growth sort of closes, I mean, 2025 is only five months away now. Does that give you any pause at all in some of your investments? Do you need to rethink or pivot any of these expansions and sort of lower for longer economic scenario?

Jim Fitterling

It’s a good question, Mike. But I would also ask you to think about it and even a longer-term time frame, it takes years to plan and make these investments. And we have to look at what’s happened in plastics take for an example. Since 2019, we’ve seen a 20% increase in volumes in plastics, you can’t obviously respond to the market when you see the increase and start to get this capacity in place. You’ve got to get in place to take advantage of the mid-cycle and the up cycle ahead of time.

So typically, when we’re at this point in the cycle, it’s a common question that everybody asks, but we’ve got to look through at the long-term trends and the long-term trends for plastics say the growth is going to continue to be there. We’ve tried to move into the areas where there is differentiation and there’s higher growth rates. Whether that’s silicones, whether that’s plastics, whether that’s industrial solutions on the higher value of specialty EO derivatives where we’re investing. That’s where the dollars are going. So those three markets are consuming most of your capacity expansion.

What we’ve been doing in polyurethanes is more rationalizing the footprint around the higher-value markets, more downstream less commodity-like PO more MDI containing components. And on coatings, obviously, being able to move with the market as the housing market improves. So I feel good about the long-term direction. We’re not back at mid-cycle yet. As we get back to mid-cycle, there’s a $3 billion step-up in earnings at mid-cycle margins. And then once path to zero comes on in the ’27, ’29 time frame, and you get to peak, there’s another $3 billion step-up to peak.

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