DOW Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 16 speakers on the call.

Operator

Morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I am Pankaj Gupta, Dow Investor Relations' Vice President and joining me are Jim Fitterling, Dow's Chair and Chief Executive Officer and Howard Underleiter, President and Chief Financial Officer. Please note our comments contain forward looking statements and are subject to the related cautionary statement contained in the earnings news release and slides.

Operator

Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides that are posted on our website. On Slide 2, you will see the agenda for our call.

Operator

Jim will review our Q3 results and operating segment performance. Howard will provide an update on our cost savings actions and financial position and share our outlook and modeling guidance. To close, Jim will outline how our long term growth and sustainability roadmap continues to enable value creation as we navigate challenging short term dynamics. Following that, we will take your questions. Now let me turn the call over to Jim.

Speaker 1

Thank you, Pankaj. Beginning on Slide 3, for the Q3, 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 $1,000,000,000 in cost savings in 20 of 23 and delivered a sequential improvement to operating cash flow of more than $300,000,000 Net sales were $10,700,000,000 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.

Speaker 1

Volume was up 1% sequentially led by gains in Industrial Intermediates and Infrastructure and Performance Materials and Coatings. Volume was up 3% sequentially excluding merchant sales in hydrocarbons and 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 EMEA. Operating EBIT for the quarter was $626,000,000 down from $1,200,000,000 in the year ago period and $885,000,000 in the prior quarter.

Speaker 1

Our consistent focus on cash flow generation and working capital management enabled team Dow to generate cash flow from operations of $1,700,000,000 resulting in 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 priorities, while also returning $617,000,000 to shareholders in the quarter through dividends and share repurchases. Year to date, we've returned nearly $2,000,000,000 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 4 decades, supported by strong investment grade credit ratings with no substantive long term debt maturities due until 2027.

Speaker 1

Now turning to our operating segment performance on Slide 4. In the Packaging and Specialty Plastics segment, operating EBIT was $476,000,000 compared to $785,000,000 in the year ago Local price declines were driven by lower polyethylene and olefin prices in all regions, primarily as a result of lower global energy costs. Volume declined as increased polyethylene demand across all regions was more than offset by lower volumes in merchant hydrocarbons and energy sales. Sequentially, operating EBIT decreased by $442,000,000 driven by lower integrated polyethylene margins, increased planned maintenance activity and lower licensing revenue. Moving to the Industrial Intermediates and Infrastructure segment, Operating EBIT was $21,000,000 compared to $167,000,000 in the year ago period.

Speaker 1

Results were driven by lower prices and Demand in both businesses as well as reduced supply availability due to an unplanned event in Industrial Solutions at our Louisiana operations. Sequentially, operating EBIT was up $56,000,000 driven by volume gains and lower costs, which were partly offset by the Louisiana event. And in the Performance Materials and Coatings segment, operating EBIT was $179,000,000 compared to $302,000,000 in the year ago period, driven by local price declines in both businesses. Volume was down as gains in commercial building Construction end markets were more than offset by lower demand for personal care and coatings applications in residential construction. Sequentially, operating EBIT increased $113,000,000 driven by higher operating rates and cost savings.

Speaker 1

Next, I'll turn it over to Howard to review our outlook and actions on Slide 5.

Speaker 2

Thank you, Jim. We expect the challenging macroeconomic dynamics to continue through the Q4, including sluggish industrial activity. Global Manufacturing PMI has declined for 13th consecutive month in September. It also includes weak demand in Europe and a slower than expected recovery in China. While inflation continues to moderate, it remains at elevated levels resulting in a continuation of a tighter monetary policy.

Speaker 2

In the U. S, we're seeing some mixed indicators as September manufacturing PMI improved to 49.8. Retail sales growth remains positive, while consumer confidence has declined for the last 2 months. In Europe, industrial and consumer demand remains weak despite sharply lower inflation. PMI has contracted for 15 consecutive months through September and consumer confidence remains low.

Speaker 2

With that said, automotive demand is showing signs of resilience. In China, while manufacturing PMI remained in Expansionary territory in September, China exports fell for the 5th straight month. Automotive sales and production are a bright spot rising in August both sequentially and over the prior year in September. Around the rest of the world, India's manufacturing PMI remains expansionary, while in Mexico, industrial production rose for more than 20 months in August. However, ASEAN Manufacturing PMI contracted for the first time in 2 years in September.

Speaker 2

Against this macroeconomic backdrop, we will continue to take a disciplined approach to managing our operations while leveraging our diverse global portfolio and our cost advantaged assets. Turning to Slide 6, our commitment to financial and operational discipline continues to be reflected in the proactive We are implementing to lower our costs and maximize cash flow. We achieved $700,000,000 in cost savings year to date and remain on track deliver our $1,000,000,000 commitment in 2023. In addition, we are further enhancing our financial flexibility as we execute on our capital allocation priorities across the economic cycle. For example, we're implementing continued actions to improve our working capital to maximize cash flow.

Speaker 2

As a result, our cash conversion cycle has improved by approximately 8 days from pre COVID levels and we have unlocked approximately $600,000,000 of cash from working Capital in the Q3. Since spin, we have taken actions to strengthen our balance sheet, ensuring ample liquidity, while reducing net debt and pension liabilities and we are continuing to take actions to further de risk our pension plans. Dow pension funded status has greatly improved, driven primarily by changes in the discount rate and the $1,000,000,000 voluntary contribution we made in 2021. Our decision to freeze the U. S.

Speaker 2

Deferred benefit plans at year end 2023 further reduced the pension liability. We expect to pursue additional derisking opportunities for our pension plans in the Q4, including annuitization and risk transfer of some pension liabilities. If these transactions are executed, we expect to record a one time non cash and non operating settlement charge in the range of $500,000,000 to $1,000,000,000 in the Q4 of 2023. All in, our targeted actions have given us the ability to continue investing in growth while delivering more than 80% of operating income back to our shareholders well above our 65% target. Turning to our outlook for the Q4 on Slide 7.

Speaker 2

In the Packaging and Specialty Plastics segment, industry data shows a continued decline in U. S. Gulf Coast inventory levels, driven by resilient domestic demand and export market strength. Higher polyethylene prices and elevated oil to gas spreads continue to favor our cost and are expected to generate $100,000,000 tailwind in the quarter. Additionally, we expect a $25,000,000 Tailwind as we complete planned maintenance activity at our cracker in St.

Speaker 2

Charles, Louisiana. We also expect a $50,000,000 headwind and de icing fluid to offset seasonal volume declines in building and construction end markets. Additionally, we expect a headwind of $25,000,000 due to elevated energy and feedstock costs, particularly in Europe impacting our polyurethanes and our construction chemicals businesses. In the Performance Materials and Coatings segment, we expect the current macroeconomic conditions to limit consumer discretionary spending in non service areas. We also expect margin pressure to continue in upstream soloxanes from competitive supply additions, which will result in a $25,000,000 headwind.

Speaker 2

Additionally, the seasonal decline in building and construction demand is expected to contribute an approximately $50,000,000 headwind in the quarter. All in, we expect 4th quarter earnings to be in line with the Q3. Next, I'll turn it back to Jim.

Speaker 1

Thank you, Howard. Moving to slide 8. We continue to make progress on both our Decarbonize and Grow and Transform the Waste strategies, which by 2,030 position us to deliver more than $3,000,000,000 in underlying earnings while reducing greenhouse gas emissions by 5,000,000 metric Tons and commercializing 3,000,000 metric tons of circular and renewable solutions annually. Starting with decarbonize and grow. In September, we achieved startup of a new MDI distillation and pre polymers facility at our manufacturing site in Freeport, Texas.

Speaker 1

This new facility replaces Dow's existing capacity in La Porte, Texas and expands supply by an additional 30% at the site to support high value demand growth in polyurethane system, while also reducing our greenhouse gas emissions by more than 45% compared to the La Porte asset. Our path to 0 project in Alberta remains on track. We expect the final investment decision by year end pending completion of our subsidies and incentives with the Canadian Federal Government. Additionally, we recently announced a solar power purchase agreement with MSU Green Energy in Bahia Blanca, Argentina, which will drive the site to source 75% of its electric power supply from Renewable Sources by 2025. In Ternusen, the Dutch government informed us that they need more time for adjustments to certain rules and regulations critical to enabling carbon capture and clean hydrogen.

Speaker 1

The public private partnership is a crucial element of our path to 0 effort at Ternusen. Dow investment and timing will depend on the level of collaboration, Subsidy is available and a clear regulatory framework. We will continue to engage with the Dutch government to advance these efforts. And we continue to advance our transform the waste strategy. In the Q3, we successfully leveraged our U.

Speaker 1

S. Gulf Coast assets for bio and Circular Feedstock Processing accomplishing a key milestone to utilize existing assets to quickly scale production of recycled and bio based products. This was a direct enabler to the commercial launch of our sustainable sirloin ionomers, which support high end applications like perfume and cosmetics packaging. In addition, Valorigen in France And VERA Technology in the U. K.

Speaker 1

Remain on track to start up their respective mechanical and advanced recycling facilities by year end. All in, we expect that our initiatives to develop a circular ecosystem will generate more than $500,000,000 of incremental run rate EBITDA by 2,030. Altogether, we remain confident in our long term growth with continued focus on a more sustainable future, while maintaining a disciplined and balanced approach to capital allocation. Next, an update on our Path to 0 project in Fort Saskatchewan, Alberta on slide 9. The project will enable Dow to capture sustainable growth opportunities while also delivering on our 2,030 greenhouse gas emissions reduction targets and advancing our long term goal of carbon neutrality by 2,050.

Speaker 1

Construction is planned to begin next year with Phase 1 startup expected in 2027 and Phase 2 expected in 2029. We expect to spend an average of $1,000,000,000 of CapEx annually on this key growth project with total enterprise CapEx ramping above depreciation and amortization levels in the 2025 to 2027 time period as we implement the first phase. We remain fully committed to keeping our CapEx within D and A across the economic cycle and expect to return to those levels as we complete the project. We are expecting bottom line returns on our Alberta Path to 0 project equal to or better than our Texas 9 investment. Turning to slide 10, we are partnering with brand owners and leaders across the value chain to strategically enable and scale waste management transformation through mechanical recycling, advanced recycling and bio based solutions.

Speaker 1

This allows us to lead the way to a more circular economy and become a major offtaker of circular feedstock, while also minimizing capital outlay for Dow. Robust industry demand for these solutions is expected to outpace supply through the end of this decade. We expect Dow's differentiated innovation portfolio to create opportunities that will result in more than $500,000,000 in incremental earnings by 2,030. Continuing on slide 11, our actions to commercialize 3,000,000 metric tons of circular and Renewable Solutions annually are driven by a robust pipeline of strategic partnerships. These collaborations enable us to deliver Innovative solutions to meet increasing brand owner demand.

Speaker 1

For example, our partnership with P&G China to enable recyclability of air capsule e commerce packaging delivers an effective and efficient way to protect products while avoiding excessive packaging. Dow's SPECFLEX CIR foam system uses recycled waste from the automotive industry to produce circular polyurethane based materials matching the performance of existing products as seen in the recent launch of the Mercedes Benz E Class. And our collaboration with LVMH Beauty is pioneering circular feedstocks for sustainable packaging in the cosmetics industry. This has enabled Dow's first sales of bio based and advanced recycling polymers in the 3rd quarter. Closing on Slide 12, since spin we have executed against our strategic priorities and consistently demonstrated financial and operational discipline.

Speaker 1

As a result of our proactive actions, our underlying earnings and cash flow generations are well above pre COVID levels and our balance sheet is the strongest it's ever been especially in this part of the cycle. Our global scale and leading positions across key value chain, paired with our cost advantaged assets and industry leading feedstock flexibility, positioned Dow well to respond quickly to evolving market trends and capture above GDP demand growth across our attractive market verticals. These distinct competitive advantages will continue to enable us to execute our capital allocation priorities, while also driving long term value growth for our shareholders. Finally, before we move to Q and 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 3 decades.

Speaker 1

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 has 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 and Platt.

Speaker 1

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. In the meantime, more to follow as we all work together through this transition. As I noted, this change will become effective November 1st and Howard will stay on to support the handover through early January when he will formally retire from Dow. Howard, I'll now turn the mic over to you for a few comments.

Speaker 2

Thank you, Jim. I really appreciate those comments and thoughts and I would like to share a few personal thoughts of my own. I've had the good fortune of being Dow's CFO for nearly a decade and President for the last five, and they have truly been the best roles of my career. Jim, it was an absolute honor to serve with you and the rest of the leadership team. We have accomplished a great deal together, And I am extremely proud of not only what we have delivered for all of our stakeholders, but also how we have done it.

Speaker 2

Dow is a great company. Our decarbonizing growth strategy is absolutely the right path forward and our balance sheet as you've said is in the best shape it's been in 4 decades and that's as a direct result of our disciplined and balanced capital allocation approach. The Dow culture and the incredibly smart, Hardworking people who embrace it each and every day all over the world are absolutely second to none. After more than 33 years at Dow, this is the right moment for me to move on to my next chapter. And I could not be more excited to hand the finance reins over to Jeff Tait.

Speaker 2

Jeff and I have known each other for more than 25 years. We have worked alongside each other and I consider him to be a great professional as well as a friend, and he is absolutely the right leader to help take Dow to the next level of performance together with Jim and the leadership team. And while I'm retiring from Dow, I am not heading to the beach or the golf course. I am excited about my next chapter and the opportunities that lie ahead. With that said, I bleed DAO Red, Pantone 185 for those of you checking the color wheel and I will always be a supporter, a fan and a friend of team DAO.

Speaker 2

With that, I'll turn it to Pankaj to open the Q and A.

Operator

Thank you, Howard. Now let's move on to your questions. I would like to remind you that our forward looking statements apply to both our prepared remarks and the following Q and A. Operator, please provide the Q and A instructions.

Speaker 3

Thank Your first question comes from the line of Hassan Ahmed of Alembic Global. Your line is open.

Speaker 4

Good morning, Howard and Jim. Howard, sorry to see you leave, but obviously wishing you the best wishes for your future sort of endeavors. In terms of my question, you guys obviously talked about $100,000,000 worth of a tailwind, EBIT tailwind on the P and SP side of things. And you cited expanding oil to natural gas ratios. I just want to sort of delve a little deeper into that.

Speaker 4

What sort of pricing regime for polyethylene are you baking into that? What sort of pricing regime for ethane are you baking into that?

Speaker 1

Good morning, Hudson. Yes, as we mentioned, We guided for the Q4 in line with the Q3. It will obviously be a different mix. I expect packaging and specialty plastics to be up. They had obviously the weight of the St.

Speaker 1

Charles turnaround on them in the Q3 and they also had the fact We were out of the merchant ethylene market. When you look at the core underlying volumes, polyethylene volumes were up in all regions year over year And they were up sequentially 3% in Asia, Latin America and EMEA. So those are good signs. Things that you should take into account is we obviously don't Had the St. Charles turnaround in the Q4.

Speaker 1

We do have a little bit of a headwind from the Thailand turnaround. We're expecting we saw prices up in September. I'm expecting Q4 integrated margins to be up about $0.02 in PNSP and that's mostly on the back of pricing. The outlook right now is for ethane to be flat. It could be slightly better than that, but I think for right now we've got it in as flat.

Speaker 1

We've got inventories Down for 3 consecutive quarters in the United States and plastics and U. S. Gulf Coast exports were up 7% versus the previous quarter and the previous quarter was up about 3.5% versus the quarter before. So I think all in all, I would expect volumes to be good. We'll be back in the merchant ethylene market for some extent.

Speaker 1

Pronap spread in Europe is positive at about $120 a tonne and our assets are the lowest cost in Europe. And I think when you factor all that in, the guide for the Q4 is heavily on the back of P and SP delivery.

Speaker 3

Thank you. Your next question comes from the line of David Begleiter of Deutsche Bank. Your line is open.

Speaker 5

Thank you. Again, Howard, it's been an absolute pleasure and best of luck.

Speaker 6

Jim and Howard, 2nd half EBITDA

Speaker 5

is running around $5,000,000,000 annualized, maybe a little bit

Speaker 6

more than that. How do you grow if the macro stays the Same as

Speaker 5

it is today. How does EBITDA increase materially next year?

Speaker 1

Good morning, David. Good question. Obviously, We're about 12 months to 15 months into this economic slowdown. And typically, When we see a slowdown like we saw starting mid last year, about 12 to 18 months, we start to see things turn in a positive direction. Inflation is the thing that Weighing on people's minds right now.

Speaker 1

We're continuing to invest in organic growth, while at the same time manage our costs. We've got investments in all three segments, both incremental investments as well as new plant investments. They will start up through this year. This year, we expect those add an underlying $400,000,000 to $500,000,000 of EBITDA Mid cycle run rate to the bottom line. On top of that, we're continuing to see strength in areas like Telecommunications and Data Centers, Automotive even in the face of the strikes is holding up relatively well And our view is that it should bounce back once the agreements are made between the UAW and the auto workers.

Speaker 1

Our cost positions are good. And so I think that we're positioned that once The weight of inflation starts to moderate, the things start to turn back in a positive direction. And our view is that we could be in a better shape for 2024. Additionally, we've taken $1,000,000,000 of cost out since spin. So if you think about where we're operating today, we're able to meet all of our capital allocation requirements, The free cash flow before financing breakeven, you saw a $300,000,000 improvement this quarter in operating cash flows And we were still able to opportunistically buy back some shares in the Q3.

Speaker 1

So, we've done our best to really manage to be able to get through the bottom of the cycle and it's the right time for us to continue to make our organic investments to get the benefit in the next up cycle.

Speaker 2

And David, this is Howard Lokey. Thanks for your comments. Hassan, same to you as well. The only other thing I would add David to your question is don't forget about cash, right. So I mean, Jim laid out our EBITDA or EBITDA improvements, but we have equally been doing Cash flow improvements really every year since spin if you think about it.

Speaker 2

So the last 5 or 6 years, every year we've been able to increase Cash flow, we'll see if we can do that this year. But a couple of things, we are able to cover all of our Capital allocation priority is inclusive of continuing to buy stock back even at these low EBITDA levels. And every year, we've had between $1,000,000,000 and $3,000,000,000 of what we like to call unique to Dow cash levers, and I would expect that to continue into next year. When you think about the $500,000,000 plus judgment that we will likely get finally from Nova on the last tranche, Continued structural working capital improvements, additional cash that we can pursue out of our joint ventures and other projects that we currently have in the pipeline. So you should expect at least another $1,000,000,000 of Unique to Dow cash flow levers coming out of next year on top of the organic investments that Jim talked about.

Speaker 3

Thank you. Your next question comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.

Speaker 1

Thank you. And let me

Speaker 7

also echo the prior remarks and congratulations to you Howard, very exciting for you. If I could ask, just looking at Slide 9 on the CapEx, I just want to make sure I understand, I mean, obviously, we know where 23 is, it looked like 24 I was going to go to that D and A line. And then at 25% to 27%, it looks like there's quite a sort of a zone there. Could you speak to a little bit of maybe a range You could give us to make sure we have that right in our models and sort of what would define it at the lower end or the upper end of the range because I see you do have Alberta At about $1,000,000,000 a year, but is it maybe going to be a bit chunkier in some of those years or just how should we be thinking about the cadence and the range of CapEx during that period of time?

Speaker 1

Hey, good morning, Vince. Yes, as we get into the Alberta project, it will be 25 to 27 that is the peak construction of Project Phase 1 starts up in 20 27. You would expect that we would get to somewhere in the 3% to 3.5% range for CapEx during that 25% to 27% timeframe. That's very similar to where we were during the Gulf Stream project, we peaked at kind of that same level. Obviously, we're in a little bit different spot than we were at Gulfstream.

Speaker 1

We're just doing Alberta Path to 0, but we're also funding growth in Industrial Solutions, which is high value growth and downstream incremental growth in our Consumer Solutions business. So I think it will be very manageable. And as we get closer to those dates, we'll try to titrate more specifically so that you have some year over year

Speaker 3

question comes from the line of Jeff Zekauskas of JPMorgan. Your line is open.

Speaker 8

Thanks very much. In your $1,000,000,000 cost cutting program, how much of that comes out of SG and A and R and D? And in your slides, you say that your share count in the Q4 is 710 and In the Q3, it was 707.5%. Are you rounding or is the share count going up?

Speaker 1

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 and A During this time period, it also includes things like contract labor and what we've been doing there to Reduce 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 $300,000,000 and while SG and 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?

Speaker 2

Yes, Jeff, I was smiling. So yes, it is just Surely rounding, the share count actually went down about 2,000,000 shares quarter on quarter. Year on year, it went down 11,000,000 shares. And I would say Two things, we are going to continue as long as we have the free cash flow before financing to continue to buy at dilution and we will also continue to be opportunistic when we have cash available and or we believe it's a great investment. And so we're continuing to buy shares on a regular basis and you should expect that to continue in the 4th quarter.

Speaker 3

Thank you. Your next question comes from the line of Frank Mitsch, Fermium.

Speaker 9

Thank you, Howard. Hey, congrats. Thanks for all the help and friendship over the years and certainly looking forward to your next chapter. This Q3 was the Q3 in a row of sequentially higher volumes. I was wondering what your Expectations are as we finish the year and into 2024, is this a trend that we can continue to see?

Speaker 1

Yes. Good morning, Frank. I think on volumes in PNSP, I would still be positive around what we see on polyethylene In all the regions, I also mentioned telecommunications and the fact that we've seen a lot of demand in infrastructure, data centers, And so the wire and cable business is one which is very positive. I would say, Industrial Solutions will be limited a bit in 4th Quarter because of the outage in Plaquemines, but the demand other than that the demand is there once that plant is back up and running. In PM and C, for consumer solutions for coatings, You're going to see 4th quarter slowdown, which we typically see with architectural coatings.

Speaker 1

But other than that, The silicones downstream demand has been holding up pretty well. This is the Q1 that we've seen Core underlying volumes in all three segments better year over year. I mean, if you take away merchant ethylene sales in the Q3 because we were And we had the cracker down in St. Charles. The underlying downstream demand for all three segments was better in the Q3 than it was last year.

Speaker 1

That's the first time we can say that in several years. So I'm optimistic with that. We can see the automotive strike resolved. I think we'll see a tick up in that demand as well. China continues to be good.

Speaker 1

We saw good quarter over quarter demand in China in P and SP, Slightly up in polyurethanes quarter over quarter, up in consumer solutions and flat to just slightly down in the other 2.

Speaker 3

Thank you. Your next question comes from the line of Mike Sison of Wells Fargo. Your line is open.

Speaker 10

Hi, this is Richard on for Mike. I'm just wondering to follow-up on that, if you could give us some color on where your operating rates are Across your segments, where do you see them? For the industry, specifically for polyethylene? And how should we think about The potential improvement in EBITDA if we do get a stronger demand environment next year and you can ramp those operating rates up to optimal levels. Thank you.

Speaker 1

Yes, just taking a look at it. I'll take a look at it both by segments, but I think you also have to take a look at it Via Regions. In P and SP, you're going to see operating rates substantially north of 80 And obviously, when you think about Canada, the U. S. Gulf Coast, Argentina, our Middle East assets, All cost advantage positions even Ternusen and Tarragona were PRONAPP spreads of greater than $100 $120 a ton.

Speaker 1

That advantages them versus their competition within Europe. So I think you'll see all those operating rates continue to be Strong and we're not building inventory. We're obviously able to meet that and move into the export market. Where you see things a little bit softer, obviously, construction related segments. So in polyurethanes, which has a pretty heavy European footprint, We see lower operating rates there.

Speaker 1

We see that as well even on the Gulf Coast. In Industrial Solutions, operating rates have been good. Our own issue in Plaquemines is the thing that has that capacity out. And then in consumer solutions, on silicones, we tend to see good operating rates in Quarter above 80%. And if you take a look at PM and C, those are slightly down because of the typical Year end slowdown in demand in coatings.

Speaker 1

So all in all, I feel good that we're positioned To be able to ramp up to meet demand as it comes up, our cost advantage regions are continuing to run strong as you would expect And we're watching closely for the demand signals that will pull us into 2024.

Speaker 3

Thank you. Your next question comes from the line of Kevin McCarthy of Vertical Research Partners. Your line is open.

Speaker 11

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 is it affecting the way you're planning for the future?

Speaker 1

Yes. Good morning, Kevin. The things we watch Structure, 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 non commercial 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.

Speaker 1

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.

Speaker 1

S, that will be a nice upside for us in 2024.

Speaker 3

Thank you. Your next question comes from the line of Steve Byrne of Bank of America. Your line is open.

Speaker 1

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 months, 15 months is destocking versus just end markets underlying demand weakness. You showed some sequential improvement in each of your businesses in this Q3. Is that just destocking coming to an end?

Speaker 1

Or do you think that this is Really some firming demand by your customers. Hey, 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 down Trem, when we get into the consumer brands and the retailer space, we have to go on reported data that we glean out of their public reports.

Speaker 1

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.

Speaker 1

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.

Speaker 1

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.

Speaker 3

Thank you. Your next question comes from the line of John McNulty of BMO Capital Markets. Your line is open.

Speaker 6

Yes. Thanks for taking my question. And Howard, again, congratulations. You've been a huge help over the years. So the question would just be on the II and I segment.

Speaker 6

It Came in, it looks like solidly better than kind of what you were expecting when you gave the outlook on the 2Q call. So curious What the factors were that drove it? And I guess if we back out the operations problem, you're kind of at a 2.50 Run rate in terms of EBITDA, is that a reasonable way to think about how you start out looking at 2024?

Speaker 1

Yes. Good morning, John. On IINI, we obviously saw strong demand in the energy side, which is industrial solutions And the mobility side, which is more the polyurethane side. Durable goods are still lower than they were in the year ago period. We also had a little bit better because Sadara had had some Lower operating rates from some maintenance time and it's coming back out of that.

Speaker 1

So I think that will continue to be a positive upside. There's price pressure obviously on polyurethanes. We're going to see some positive impact from the new isocyanates capacity down in Freeport, which will be there. The business also did a lot of work on their costs. So their EBITDA was up because they're also managing their costs.

Speaker 1

I don't think in Q4 you'll see any higher impact on Ackerman unplanned event, we saw about $100,000,000 in the Q3. You'll see that kind of flat to the Q4. And then the target is to try to get that asset up and running in the Q2 next year.

Speaker 3

Thank you. Your next question comes from the line of Josh Spector of UBS. Your line is open.

Speaker 12

Yes. Hi. Thanks for taking my questions. And I want to echo my congrats to Howard and Stephanie for joining. Thank you both for you.

Speaker 12

So just wanted to ask on the Saloxanes side within PMC, made some comments on kind of some increased Pressure there. I mean you've been under pressure in that business all year from added supply. Has anything changed in the last few months or is that just a reiteration of what you've seen? And As you think about next year, how much do things have to improve for that business to get back to a normal healthy level?

Speaker 1

Yes. Good morning, Josh. Obviously, in siloxanes, there was significant new capacity in 20222023, And we expect that to moderate in 2024 and beyond. That's put pressure on siloxane's prices, Primarily in Europe or in Asia, which are at the lowest levels that they've been at in quite some time. They're starting to move up a bit in the Q4, some demand related, some obviously related to higher silicones pricing, Upstream, silica metals pricing, which is kind of moving things up.

Speaker 1

But I think what you're going to start to see is that you're going to have less Capacity coming on in the downstream market continues to grow at good rates and we'll start to absorb some of that and we'll start to see operating rates improve 24,

Speaker 3

25. Thank you. Your next question comes from the line of Patrick Cunningham of Citigroup. Your line is open.

Speaker 8

Hi, good morning. On the long term decarbonization strategy, given the weaker macro Earl, and what seems to be some deceleration in appetite to tackle the green transition? How do you think about the risk to public private partnerships, Subsidies, incentives in North America and abroad.

Speaker 1

Good question. Obviously, our view on the Alberta project is we're working in an environment that's supportive of decarbonization. There's a price on carbon in Canada. There's existing carbon capture infrastructure and there's obviously some investment credits for The hydrogen portion of the project and so those are all positive. As we mentioned though, we have to keep in mind that this is also going to be a very low cost asset from an ethane supply capability standpoint.

Speaker 1

So that's why we say our expectation is the returns will be at or above our Texas 9 cracker, which is the best project that we've ever had in our history. Having said that, we always have to keep our eyes wide open to what's going on, on the incentive space. We're not going to build just on the back of incentives. We've got to make sure that we make investments that are long term, low cost operating investments where we have advantaged feedstocks and we have access to market. That's the same thing is true when we get into circularity projects And when we talk about our advance in mechanical recycling projects, we've got to make sure that the partnerships that we have are looking long term at where they're going to access The waste, will they be the low cost position and will they have the right access to market.

Speaker 1

So we're looking at them project by project. We're absolutely convinced that our timing is right on the Alberta project. We get this one final issue nailed down with the Canadian Federal government, we should have FID before the end of the year.

Speaker 3

Thank you. Your next question comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is open.

Speaker 13

Great. Thanks for taking my question. I'll add my congrats To you, Howard, definitely a pleasure working with you over the years. Appreciate your insights. Yes, I guess I just had a question on China.

Speaker 13

Maybe you could just update us And what you're seeing there, obviously very important for most of your markets. You noted that volumes were up across the 3 businesses Year on year if you remove the merchant ethylene sales, but I guess what are you seeing in China? Maybe if you could characterize kind of polyethylene demand, Maybe some impacts from on the consumer side as well as construction, that would be great. Thanks. And your outlook?

Speaker 1

Yes. Good question. I mean, obviously, GDP growth this year is expected to be about 5%. That's been on the back of consumer demand and that's really been the government's position as consumer driven recovery from the slowdown. Our expectation is because of what's going on in the housing construction markets, there will be some pressure on the government for some Stimulus activity to get things moving there.

Speaker 1

Manufacturing PMI in September was up. It's our 2nd consecutive month up, which is good. Automotive sales were up about 9.5% year over year in September. EV sales are up about 38% year to date. Retail sales were up 5.5% in September And we saw rises in the sale of clothes and textiles as well as some refined oil products.

Speaker 1

I would say one of the things that we've always looked at in terms of coming out of a slowdown is the price of MEG. One of the things that drives Price of MEG is the operating rate on the polyester plants, which are above 70% right now. We haven't seen that in quite some time. I think it's a little bit early To call that as the turn, but it's something to keep an eye on. And the volume Moves quarter over quarter are good.

Speaker 1

Packaging has held up really well and it typically does in an economic slowdown because of the Nature of food packaging, medical packaging, day to day consumer, non durable items.

Speaker 3

Thank you. Your next question comes from the line of Duffy Fischer of Goldman Sachs. Your line is open.

Speaker 14

Yes. Good morning, guys. In both PMC and iCUBED, if you could walk through pricing you called out is down sequentially in each of the SBUs, but in each of the SBUs, yet EBITDA was up in both segments sequentially. So could you walk through and just tell us like Where was the spread getting better because raw materials were falling more than price was down? And how much of that was kind of the Structural costs that you guys are trying to take out that we would put in is kind of permanent.

Speaker 1

Yes. So, If you look at I, I and I, the Louisiana outage was obviously a headwind. And then you had some turnaround tailwinds and cost savings about $40,000,000 Variable costs On the benzene, the propylene side really compressed there and then equity earnings from Sadara were a little bit better. So those were the moving parts. In PM and C, you had tailwinds of about $60,000,000 from the turnaround in cost savings.

Speaker 1

So that's to the positive. You had some seasonality in lower siloxanes prices to the negative and we had also improved Supply availability of siloxanes and some opportunistic monomer sales in the coating side of the business acrylates were strong in the quarter. So that was those were the things that net net made the swing in those two segments.

Speaker 3

Thank you. Your next question comes from the line of Aleksey Yefremov of

Speaker 15

Thanks. Good morning and Howard, congratulations. Just wanted to follow-up on PMC. I would say pretty healthy number. Is this a good level that we can use for Thinking about next year, it sounded just in the previous answer, there was some opportunistic sales.

Speaker 15

So that's sort of where my question Coming from, is this a real sustainable number to think about going forward earnings in the segment?

Speaker 1

Yes, I think as siloxanes improve, you can see some positive uptick in consumer solutions in silicones. The downstream demand has continued to be strong, so that hasn't been the primary issue. And we're seeing Still continued good positive signs in the downstream demand sector, things like EVs and battery production. We'll have to watch the commercial construction markets. I think residential We'll start to improve somewhat, but household and personal care, consumer products, health and beauty, I would say, are going to continue to be positive in that space.

Speaker 1

Coatings has been slow due to construction. I think there is some signs starting that applications for permits are starting to pick up on construction. That's kind of a U. S. Centric View.

Speaker 1

And in China, we'll have to watch if there's any stimulus to get the construction markets going there. Automotive, I would say, is a bright spot globally. Even Europe, in spite of a slow GDP, has seen Pretty strong automotive builds through the year. And I would say once we get the strikes resolved here with the UAW and the big automakers. I think you'll see a step up in demand because they'll start to be Competing again for that market share.

Speaker 3

Thank you. Your next Question comes from the line of Laurence Alexander of Jefferies. Your line is open.

Speaker 1

So good morning. I just want to revisit the inventory level. If you think about lessons learned From this cycle, where do you see inventory days and working capital days shaking out at the next mid cycle? And separately, Howard, just thank you for your help getting ramped up on Dow. Yes.

Speaker 1

Maybe Howard, do you want to Touch inventories, you got the working capital team and they've been pretty focused on this all throughout.

Speaker 2

Yes, sure Jim. And Lawrence, thanks and appreciate everything you've done to cover Dow over time and hopefully we'll continue. Yes, we've been look, I've been very proud of the whole organization and how we've really if you think about one of the big changes that we've made, I think as a leadership team, as an organization in the last 5 or 6 years is really a big step change on cash and managing cash just as well as we were managing margins And EBITDA and operating rate in AU. We have structurally taken out about 8 days. When you think about it on a cash conversion cycle since spin, 8 days has been structural and the other improvements have been more around the cycle.

Speaker 2

So obviously that will continue as we head into a as we've headed into this down cycle period, Probably we've taken out about $1,000,000,000 of cash just on the releasing revenue from Working Capital. As we head into a normalized macro and eventually a cyclical peak out into the future, you could Expect a $1,000,000,000 use of cash. But overall, 8 days out cycle to cycle, I think is a good target So far and I would expect that under Jeff's leadership together with Jim and the leadership team, I would expect at least another day, Maybe another 2 days in the next year or 2, we'll come out structurally. So I think a nice target is 10 days cycle to cycle from Structural standpoint, we've been really we've implemented OMP or in the process of implementing OMP in almost all of our businesses now And really thinking about it end to end from the customer back and the team is still working on it, but that's that gives you a good range.

Speaker 1

Jeff is going to make me cut you off before you set any more targets for him.

Speaker 2

Just one more day, maybe 2. That's it.

Speaker 3

Thank you. Your last question comes from the line of Mike Leithead of Barclays. Your line is open.

Speaker 10

Great. Thanks. Appreciate you squeezing

Speaker 8

me in here. Just briefly on packaging, I think sequentially EBIT was down about $440,000,000 on $480,000,000 lower sales, almost 100% drop through.

Speaker 2

Can you

Speaker 8

help us better understand the moving pieces in the quarter there?

Speaker 1

Sure. The lower sales were primarily due to being out of the merchant ethylene market. And so that obviously had an impact. We had the cost of the turnaround in the Q3 for the St. Charles cracker and that was a drag.

Speaker 1

That drag becomes a positive as we go into the Q4. We had some stronger Equity earnings, which were up from the previous quarter, but then pricing and the impact of really a surge in feedstock And energy costs that happened in the Q3 were the big delta. Prices ran up on us in the Q3. And then the pricing came in September, which kind of lagged the increase in the feedstock and the energy cost. And so you saw that margin squeeze.

Speaker 1

I think we're back to even with that and we'll get a little bit ahead of that. Like I said, I expect about $0.02 integrated margin improvement as we go into

Speaker 12

the Q4. Thank you.

Speaker 3

There are no further questions at this time. I'll now turn the call over to Mr. Gupta for closing remarks.

Operator

Yes. Thanks, JL. Thank you, everyone, for joining our call today, and we Appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within approximately 48 hours. This concludes our call.

Operator

Thank you very much.

Speaker 3

You may now disconnect.

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Earnings Conference Call
DOW Q3 2023
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