DOW Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 14 speakers on the call.

Operator

Greetings and welcome to the Dow First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn it over to Dow Investor Relations' Vice President, Pankaj Gupta.

Operator

Mr. Gupta, you may begin.

Speaker 1

Good morning. Thank you for joining Dow's Q1 earnings call. This call is available via webcast and we have prepared slides to supplement our comments today. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. I am Pankaj Gupta, Dow Investor Relations' Vice President And joining me today on the call are Jim Fitterling, Dow's Chairman and Chief Executive Officer and Howard Underleiter, President and Chief Financial Officer.

Speaker 1

Please read the forward looking statement disclaimer contained in the earnings news release and slides. During our call, we will make forward looking statements regarding our expectations or predictions About the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially 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 is contained in the Dow earnings release, In the slides that supplement our comments today as well as on the Dow website.

Speaker 1

On Slide 2, you will see the agenda for our call. Jim will begin by reviewing our Q1 results and operating segment performance. Howard will then share our outlook and modeling guidance. To close, Jim will outline how our decarbonize and grow and transform the way strategies enable continued value creation. Following that, we will take your questions.

Speaker 1

Now let me turn the call over to Jim.

Speaker 2

Thank you, Pankaj. Beginning on Slide 3, In the Q1, TeamDAO demonstrated its agility, delivering sequential earnings improvement in what continues to be a challenging environment. These results reflect our competitive advantages and operating discipline as we leveraged our structurally advantaged feedstock positions, We're actively aligned our operating rates with market demand and focused on higher value products where pockets of demand remain resilient, Such as pharmaceutical applications, energy, commercial building and construction and mobility end markets. Additionally, our actions to deliver $1,000,000,000 in cost savings in 2023 are progressing with $100,000,000 achieved in the Q1. These actions will ensure we continue to focus on cash flow generation through our low cost to serve operating model.

Speaker 2

Turning to the details of the quarter. Net sales were $11,900,000,000 down 22% year over year. Declines in all operating segments were driven by continued soft global macroeconomic activity. Sales were flat sequentially As gains in Performance Materials and Coatings and Packaging and Specialty Plastics offset declines in Industrial Intermediates and Infrastructure. Volume decreased 11% year over year, led by declines in Europe, the Middle East, Africa and India or EMEA.

Speaker 2

However, volumes increased 2% sequentially on gains in Performance Materials and Coatings and Packaging and Specialty Plastics. Local price declined 10% year over year and 4% quarter over quarter due to industry supply additions in some businesses Amidst soft global economic conditions, operating EBIT for the quarter was $708,000,000 down year over year due to lower local prices and volumes. Sequentially, operating EBIT improved by $107,000,000 with gains primarily driven by Performance Materials and Coatings. Cash flow from operations was $531,000,000 in the quarter. On a trailing 12 month basis, cash flow conversion was 85%.

Speaker 2

With ample financial flexibility and a strong balance sheet, we are continuing to execute on our strategy as we advance our disciplined and balanced Capital allocation priorities for long term value creation. We returned $621,000,000 to shareholders through dividends and share repurchases during the quarter, And our balance sheet continues to have no substantive long term debt maturities until 2027. Now turning to our Operating segment performance on Slide 4. In the Packaging and Specialty Plastics segment, operating EBIT was $642,000,000 compared to $1,200,000,000 in the year ago period, primarily due to lower integrated polyethylene margins. Continued margin resilience in functional polymers was more than offset by lower polyethylene and olefins margins.

Speaker 2

Volume declines were primarily driven by lower consumer demand in EMEA. Sadara also had lower export volumes due to planned maintenance activity. Sequentially, operating EBIT was down by $13,000,000 Improved input costs and higher operating rates in our most cost advantage assets We're more than offset by lower sales from non recurring licensing activity and lower equity earnings. Moving to the Industrial Intermediates and Infrastructure segment. Operating EBIT for the segment was $123,000,000 compared to $661,000,000 in the year ago period.

Speaker 2

Results were driven by lower pricing and demand as well as higher energy costs, particularly in EMEA. Sequentially, operating EBIT was down 41,000,000 Lower energy costs were more than offset by decreased demand and pricing for propylene oxide, its derivatives And in isocyanates and polyurethanes and construction chemicals. Industrial Solutions experienced lower volumes due to weather related impacts And a third party supply outage combined with lower demand in industrial end markets. And in the Performance Materials and Coatings segment, Operating EBIT for the segment was $35,000,000 compared to $595,000,000 in the year ago period. Local price declines for siloxane We're driven by competitive pricing pressure from supply additions in China.

Speaker 2

Volume was down as resilient demand for commercial building and construction, mobility And Industrial Coatings was more than offset by volume declines in siloxanes and Architectural Coatings. Sequentially, Operating EBIT increased $165,000,000 driven by improved supply availability, seasonally higher volumes And reduced value chain destocking. Next, I'll turn it over to Howard to review our outlooks and actions on Slide 5.

Speaker 3

Thank you, Jim, and good morning, everyone. In the Q2, we expect to continue navigating challenging macro conditions around the world. While the pace of inflation has slowed, elevated levels continue to pressure both input costs and demand, particularly in industrials, durable goods and housing. On the bright side, demand in agriculture and energy markets remains resilient as does consumer demand for personal care and household items. In the U.

Speaker 3

S, consumer spending continues to moderate, while retail sales were up 2.9% year over year in March. After contracting for 5 straight months, normalizing value chain inventories are driving improvements in manufacturing PMI, Which reached 50.4 in April. Residential building and construction markets remain under pressure with housing starts and building permits Down around 20% year over year in March. However, builder confidence increased for the 4th straight month in April on growing demand in the new home market due to limited resale In Europe, while energy prices have remained lower than previously anticipated, higher inflation levels continue to weigh on both consumer End business sentiment with manufacturing PMI continuing to contract since July of last year. In China, March industrial production rose 3.9% year over year and is recovering gradually with manufacturing PMI now at 50.

Speaker 3

March retail sales also rose 10.6% year over year at their fastest pace since July 2021. The recovery following the pandemic lockdowns has been slow. We continue to expect growth over the medium term. Against this backdrop, we continue to take disciplined actions to manage our costs and deliver our target of $1,000,000,000 in cost savings in 2023. We're implementing our global workforce reduction program of approximately 2,000 roles.

Speaker 3

Notifications have begun and 75% of the impacted roles will exit by the end of the second quarter. We're also continuing to review our global asset footprint on a business by business and region by region approach rationalizing select higher cost lower return assets in line with market fundamentals. Additionally, we're executing opportunities to reduce operating costs. This includes decreasing maintenance turnaround spending by $300,000,000 year over year And driving efficiencies through the value chain, including streamlining our logistics networks and reducing our spend to purchase raw materials and contract services. All in, we expect to deliver approximately 35% of our cost savings in the first half of the year and the remaining 65% in the second half of the year.

Speaker 3

Turning to our outlook for the Q2 on Slide 6. In the Packaging and Specialty Plastics segment, we see signs of improving domestic demand versus the As well as continued easing in marine pack cargo allowing for increased export volumes. We expect healthy oil to gas spreads to continue to favor our Cost Advantage positions as rates increase to meet seasonally higher demand levels. All in, we expect these factors to have a $75,000,000 tailwind versus the prior Set by a $25,000,000 headwind from a seasonal increase in planned maintenance activity. In the Industrial, Intermediates and Structure segment demand remains resilient in energy and pharmaceutical end markets.

Speaker 3

However, we expect continued demand pressure in consumer durables And Building and Construction, which is also driving a decline in cost pricing from its recent peak. We anticipate a $25,000,000 tailwind from improved volumes in Industrial solutions following 3rd party outages and the winter weather related impacts, as well as a $20,000,000 tailoring from cost savings actions. Additionally, Dow will begin to turn around at our Louisiana glycols facility, which is projected to be a $50,000,000 headwind for the segment. In the Performance Materials and Coatings segment, while demand for consumer electronics and industrial end markets is softening, We're seeing a seasonal increase in demand for coating applications as well as improvement in mobility. Our cost saving actions will deliver a $50,000,000 The completion of our Q1 turnaround at our Deer Park Acrylic Monomers Facility will be offset by impacts from the planned maintenance at our Carrollton And our Zhang Zhigang siloxane facilities.

Speaker 3

All in with the puts and takes mentioned and listed on our modeling guidance slide, We expect a sequential earnings improvement of $150,000,000 to $200,000,000 versus the prior quarter. With that, I'll turn it back to Jim.

Speaker 2

Thank you, Howard. Moving to Slide 7. While we expect near term conditions to remain challenging through the year, We continue to see positive underlying demand trends driving above GDP growth across our attractive market verticals over the next few years. Packaging is vital to delivering a lower carbon footprint. Through our 3,000,000 metric tonne Transform the Waste commitment, We will capture demand growth for recycled polyethylene, which is accelerating as brand owners and customers increasingly seek more circular products.

Speaker 2

In infrastructure, more than $3,000,000,000,000 in investments will be needed to meet global infrastructure plans. Green buildings are driving demand for Dow products, including low carbon footprint silicone sealants for high rise buildings, Reflective roof coatings and lower carbon emissions cement additives. An expanding middle class will support growth in consumer spending, Where our products help deliver a lower carbon footprint and enable more sustainable materials through technologies such as biodegradable polymers For bio based surfactants for home care and thermal conductive silicone gels and adhesives for electronics and batteries. And in mobility, stable global vehicle production growth is expected with increasing demand for electric vehicles, which contains 3 to 4 times more silicone content than internal combustion engine vehicles. Lightweight vehicles are also aided by our Further, we continue to execute our targeted suite of higher return, Lower risk projects, which are expected to add $2,000,000,000 in underlying EBITDA by the middle of the decade.

Speaker 2

These investments put us in an advantage position to capture demand as economies recover and raise our underlying earnings profile. Turning to Slide 8. With growing consumer and brand owner demand for more sustainable and circular products, Leading in the transition to a more sustainable future remains critical to our strategy to drive growth and shareholder value creation. In collaboration with X Energy, in the Q2, we expect to select and announce a site in the U. S.

Speaker 2

Gulf Coast To develop a small modular nuclear energy facility by 2,030, nuclear technology will be key in generating safe And reliable power and steam at our sites, while enabling 0 CO2 emissions manufacturing. In Alberta, We recently awarded Fluor with a contract to provide front end engineering and design services for our path to 0 project. Today, we achieved another key milestone by selecting Linde as our industrial gas supplier to supply nitrogen and clean hydrogen for the site. Securing partner agreements and subsidies is our next step. All of these actions are critical to reaching a final investment decision this year.

Speaker 2

As a reminder, this investment for the world's 1st net 0 CO2 emissions ethylene and derivatives complex We'll decarbonize 20% of our global ethylene capacity. At the same time, it will grow our global polyethylene supply by 15% And triple our Alberta site polyethylene capacity. We're also taking a capital efficient approach To meet increasing demand for more circular solutions as we scale up production for both advanced and mechanical recycling With strategic partners like Valorigen, Miura Technology and WM among others. Valorigen's Kiloton mechanical recycling facility in France will start up during the second half of this year. This hybrid recycling plant Is expected to process up to 70 kilotons of plastic waste per year by 2025.

Speaker 2

And Mira remains on track to start up The first of its kind 20 kiloton per year advanced recycling plant in Teesside, the United Kingdom in the second half of this year. This is the first step in our strategic partnership with Miura to launch as much as 600 kilotons per year of advanced recycling capacity by 2,030. As the key offtaker of post consumer and advanced recycled feed from both of these partnerships, Dow will commercialize circular polymers in high demand From Global Brands. Altogether by 2,030, we are on track to deliver an additional $1,000,000,000 in underlying EBITDA improvement Through our Alberta project, commercialize 3,000,000 metric tons per year of circular and renewable solutions and reduce Scope 1 and 2 CO2 emissions by 5,000,000 metric tons compared to our 2020 levels. Turning to Slide 9, we remain focused on delivering on our commitments With transparency, accountability and a culture of benchmarking.

Speaker 2

Today, we published our annual benchmarking update as we have every year since spin, which can be found in the appendix of this presentation and is posted on our website. The results once again demonstrate our strong performance relative to peers. In particular, Dow delivered best in class free cash flow yield and net debt reduction since spin. We also achieved above peer median return on invested capital and returns to shareholders. Taking a closer look at the results on Slide 10, Our free cash flow yield on a 3 year average is nearly 2 times the peer average and 3 times the sector and market averages.

Speaker 2

Our differentiated portfolio, cost advantaged assets and operating discipline have resulted in 3 year EBITDA margins And return on invested capital well above the peer median. This includes our 15% return on invested capital, which is above our 13% target across the economic cycle. Our focus on cash flow generation has supported strong shareholder returns and our strengthened balance sheet has resulted in improved credit ratings and outlooks. Additionally, all operating segments achieved best in class or top quartile free cash conversion and cost performance. Notably, Packaging and Specialty Plastics further expanded its outperformance Over the Next Best peer on an EBITDA per pound of polyolefin basis by $0.05 per pound.

Speaker 2

It also delivered 5 year average EBITDA margins 500 basis points above the peer median. Looking forward, our growth investments throughout the decade will further enhance our competitive advantages And shareholder value creation. Closing on Slide 11, Dow continues to execute with consistency and discipline to deliver resilient performance in the near term and sustainable growth and cash flow generation over the long term. We're implementing targeted actions across the enterprise to reduce costs and maximize cash. Our strong balance sheet provides financial flexibility As we continue to deliver against our capital allocation priorities and our decarbonize and grow and transform the waste strategies, We'll raise our underlying earnings profile while reducing our carbon footprint and increasing recycled content.

Speaker 2

All combined, we are confident in our ability to continue delivering against our financial targets across the economic cycle. With that, I'll turn it back to Pankaj to open up the Q and A.

Speaker 1

Thank you, Jim. Now let's move on to your questions. I would like to remind you that our forward looking statements apply to both our

Operator

Our first question comes from the line of Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 4

Thank you and good morning everyone. Wondering if you could touch a little bit more on Performance Materials and Coatings. Obviously, this segment Showed very strong results on a sequential basis that were clearly better than what The Street was looking for. So if

Speaker 1

you can just give us

Speaker 4

a little bit more insight into why things turned out Better than planned and just sort of what you think trajectory is for the balance of the year?

Speaker 2

Yes. Good morning, Vince. Good question. Obviously, we had some headwinds obviously in the Q4 in silicones with some outages that did not recur in the Q1. So that was part of the impact.

Speaker 2

The other thing you would see in silicones was that pricing and demand held up relatively well. Some pressure downward on siloxanes pricing in China from new capacity additions there. But I think we're starting to see that The demand is picking up and that should help smooth things out. So you also saw higher net sales in coatings and monomers And also higher volumes. Some of its supply availability, as I mentioned, in Silicones and siloxanes.

Speaker 2

The other is getting ready for seasonally higher volumes going into the Q2. And then we think we'll see More of a traditional seasonal pickup in the coatings and monomer segment. Some pressure on architectural coatings, But industrial coatings are looking relatively strong. And I think we'll have to watch carefully what's going on with housing starts And housing sales and see how that impacts Architectural Coatings through the quarter.

Operator

Your next question comes from the line of Pashan Ahmed with Alembic Global. Please go ahead.

Speaker 5

Good morning, Jim and Howard. Question around Packaging and Specialty Plastics.

Speaker 6

Look, I was

Speaker 5

a bit surprised to see EBITDA being Sequentially flat, keeping in mind that, obviously, we've got $0.06 a pound worth of polyethylene price hikes And, ethane was down sequentially. So that's sort of part 1 of the question. And part 2 is that I'd also love to sort of Hear your views on what's happening with your operating rates within sort of ethylene and polyethylene, keeping in mind that you guys scaled back in Q4?

Speaker 2

Good morning, Hassan. Good questions. P and SV did see Pricing improved through the quarter in the Q1. But obviously in the Q4, we saw things slide down through the quarter. And so A simple way to think about it is we ended the quarter really still below where we started the Q4 of last year.

Speaker 2

So we did see pricing improvements. In fact, we saw $0.03 through in March and we've got a $0.05 nomination into April. But I would say that averaging effect took away some of the impact from the oil to gas spreads, which are improving. The other thing is the oil and gas spreads really improved in the month of March primarily. We didn't see so much impact In the month of February, but the month of March, we saw that.

Speaker 2

So we I would expect that to carry into the Q2. Operating rates for the quarter were up ten Percentage points, with the biggest pressure still continuing to be in Europe because of the higher cost position there and also the lower demand In Europe, and I would say that's the biggest. If you look at our volumes, and not just in packaging and specialty plastics, but our overall volumes in Europe, Year over year, they're down the most in Europe and our operating rates are the lowest in Europe as you would expect, whereas our operating rates in the U. S. Gulf Coast, Canada and Argentina with the exception of turnaround time are continuing to be in the 90% -plus range.

Speaker 3

Hassane, 2 other points on that comparison. So don't forget that in the Q4, we had the innovation catalyst Actually, licensing sale, those are lumpy. That was about $70,000,000 in the 4th quarter that didn't recur. So that was a headwind sequentially. Then also the bulk of Q1, we had the cracker in Sadara out for a planned maintenance turnaround.

Speaker 3

So that's now back up and running and That should be a tailwind improvement in the Q2.

Operator

Your next question will come from the line of David Begleiter with Deutsche Bank. Please go ahead.

Speaker 7

Thank you. Good morning. Jim, the sequential increase in Q2 is a little less than normal. Where are you seeing the greatest pressures from a volume perspective in Q2 versus maybe perhaps normal seasonality?

Speaker 2

Yes. I would say the biggest pressure still continues to be in I, I and I and more specifically in Polyurethanes and Construction Chemicals, I'd say the one thing that may not be quite as obvious in the second quarter guidance is There's a $70,000,000 headwind in there from chlor alkali and vinyl, and we've seen some pressure, obviously, there on lower demand. And as you know, that complex operates on both caustic soda and also chlorine demand. And with housing down, PVC demand being down and the pressure that puts on operating rates brings things down. But on the other side, Obviously, we're seeing industrial uses putting some downward pressure on both demand and price and caustic soda.

Speaker 2

So I'd say they're managing it well. They're making the adjustments that they need to make. And But that's probably the biggest difference in looking forward to Q2. I would say from a turnaround's perspective, we're in pretty good shape. Howard, do you Have a comparison like on turnarounds Q2 versus Q1?

Speaker 3

Yes. I mean turnaround sequentially are going to

Speaker 5

be about a

Speaker 3

$75,000,000 headwind, $25,000,000 of that in PMSP and the balance in Industrial Intermediates.

Operator

Your next question comes from the line of Steve Byrne with Bank of America. Please go ahead.

Speaker 8

Yes. Thank you. I just wanted to confirm that the margin benefit from propane to propylene That's not realized in the PM and C segment. Is that right? And perhaps A question about the headcount reduction, the 2,000 target for the year.

Speaker 8

What is that off of the total number? And Is your benchmarking analysis, did it highlight that as an area to focus on like EBITDA per employee or something like that. Thanks.

Speaker 2

Yes. First, Steve, I'm going to Take a shot. I don't want to make sure I get this right. So Howard, I'll ask you to comment, but we transfer propylene and ethylene at market. Having said that, we roll some of the benefit of the propane to propylene spread forward into I, I and I, for example, for polyurethanes and into coatings and monomers.

Speaker 2

So they see it's there for their integration benefit. And so they see that in their numbers, it rolls Forward. So it should show up in that side of the equation. On the 2,000 headcount reduction that is off our published Dow Direct headcount list. So, you would expect 75% of those exits to happen by the end of Q2, as Howard said, Probably close to 90% by the end of the year.

Speaker 2

The only reason for the time lag is as some of the site announcements get made on-site closures. Well, I have to obviously work through the timing with works councils and others on that and the timing of the closures. The driving force for that is obviously just looking at our overall cost position and trying to keep our costs Lean and in line with demand. If you can take a look at demand really hit in the 4th quarter, really hit the lowest we've seen since The beginning of the COVID pandemic, which was back in March of 2020. And so we really need to tighten up to that level And then see how we can go as we expand out of that.

Speaker 2

Other thoughts, Howard, comments? No, that's correct. Agreed.

Operator

Your next question will come from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Speaker 9

Thanks very much. ExxonMobil announced a very large project in Baytown To produce ammonia and hydrogen in order to decarbonize their Gulf Coast facilities. Is that something that Dow might do? That is, do you want to get involved in the ammonia markets or the hydrogen markets in the United States? And then secondly for Howard, what's the working capital benefit look like for this year?

Speaker 9

Is that, I don't know, dollars 400,000,000 Is it a higher number or lower number? Your cash flows Probably will work their way up this year.

Speaker 2

Good morning, Jeff. I'll take the Exxon question On the ammonia question, I'll have Howard tackle the working capital. I think one of the things that's happening is obviously Ammonia as a fuel is becoming an interesting market. And so in addition to decarbonizing, there's also A shift in what's expected to be a shift in fuel mix. We've seen that with some announcements in ammonia fuel for Overseas shipping and so I think there's a play into that market.

Speaker 2

As we look at our own assets, we're going to look at hydrogen and carbon capture as ways To decarbonize and obviously we've got the plan to decarbonize one of our assets with advanced small modular nuclear reactors. It will be site specific as we go through it. I think hydrogen clearly is going to play a role Because of the ability to take off gases through auto thermal reforming and convert those into hydrogen, That would probably be the most efficient for us, but there will be a wide variety of uses, but I don't see us entering the ammonia markets.

Speaker 3

Yes, Jeff, on the working capital, really proud of the work that the Dow team did sequentially. We kept our Conversion or efficiency on a day's basis flat sequentially from Q4 to Q1. You think about as we enter turnaround season, as we enter Hopefully a period of heavier demand. That's very good. Actually, we put our inventory units down About 2% sequentially.

Speaker 3

To your question about the full year, I would say we're working on between 2 3 days Sure, efficiency improvement in working capital. On a dollars basis, that's anywhere between $300,000,000 $500,000,000 for the year In terms of improvement in cash.

Operator

Your next question will come from the line of Mike Sison with Wells Fargo.

Speaker 10

Hey, guys. Nice start to the year. Just curious, I think you mentioned your North American Operating rates would improve 2Q to 90%. I think the EBIT driver is up $75,000,000 So just curious why the Improvement in PSP wouldn't be stronger in 2Q. Are you thinking polyethylene margins are coming down or just maybe any other No factors that the improvement would have been better.

Speaker 2

Good morning, Michael. I would say 2 things. We've got nominations out for April in terms of pricing. I think there's also capacity coming on. So We're being realistic about where we think things are moving in the marketplace.

Speaker 2

Exports are up, which is good. We hit the highest level Marine pack cargo exports since March of 2021. And so that is a really good sign. And the schedule reliability on marine pack cargo exports has been the best since October of 2020. So we're seeing really positive trends there.

Speaker 2

The only inventory increase we saw in the region was really at the export hubs, which was sitting there waiting for exports. So I think Overall industry inventories are under control. So those are all net positives. Oil and gas spreads promptly Are a little bit less than where we ended the quarter. And I would expect as we get into 2nd quarter and Demand for that natural gas picks up a little bit.

Speaker 2

We should see some of that natural gas pricing move up a little bit. But still it's going to be good oil to gas spreads here in the U. S. So I think it's still guiding up on integrated margins, But there could be potential for some upside from there.

Speaker 3

Yes, Michael, the other thing is don't forget there's a $25,000,000 headwind from a turnaround in functional polymers, Which is in P and SP as well sequentially.

Operator

Your next question comes from the line of John McNulty with BMO Capital Markets.

Speaker 7

Further, on the U. S. Side of the market, obviously, there is some capacity coming in the polyethylene area. Can you speak to the demand trends that you're We're seeing if there's any pockets of either strength or incremental weakness that you're seeing. And then also, can you give us kind of an update as to how you're seeing The mix of domestic versus export demand, and how you expect that to trend through 2023?

Speaker 2

Yes. Good morning, John. The global demand has been improving. North America, We had some benefit obviously in the Q1 because the industry had about 14% of capacity online due to Force measures and unplanned events and there were some delays in capacity startups in the Q1. We still see North American fundamentals to be very robust as we go into the Q2 and through the year.

Speaker 2

I think logistics challenges appear to be behind us both marine pack cargo, road shipments are all Kind of getting back to normal space. The biggest drag right now probably on PNSP It's in Europe. Europe has been pretty slow, still some destocking going on there. We're having some advantage From cracking propane and Ternusen and Tarragona, and so we've been cracking max propane there. So that helps a little bit.

Speaker 2

But I think the weight of the European market is really the biggest drag right now. I expect North American market to be pretty robust.

Operator

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please go ahead.

Speaker 4

Yes. Good morning. Jim, in listening to your prepared remarks, it sounds like you're still evaluating potential for Rationalization of some higher cost assets. And so I'm wondering if you could speak to the possible size, scope and timing of that effort And whether you're really looking at Europe as the center of gravity given geopolitical and energy changes there or something larger and broader than that?

Speaker 2

Yes. Good morning, Kevin. I would say Europe obviously As the attention, because in most cases, it's moved into the high cost position around the globe. And there's a lot of pressure from higher energy costs as well. LNG costs into Europe right now Or in the $14 to $17 a 1,000,000 BTU range, while we sit here in the U.

Speaker 2

S. At between $2 $3 And so I think you can sense over the long term that that continues to be the same for the long term that will put a lot of pressure on the European market. A lot depends on how the European Union and also how the individual member states respond via energy policies and And other changes that they are looking at and hard to anticipate when they'll make those decisions. But Energy cost is going to be a big driving force and that will be one that will be hard to overcome. So we'll continue to look at those assets.

Speaker 2

We don't want to jump the gun and get ahead of any policy changes that might make them still competitive long term. But those are the biggest things on big assets, big sites that are in our head right now.

Operator

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Please go ahead.

Speaker 11

Yes. Good morning. Jim, wanted to dig a little bit on the comment you made about a $70,000,000 sequential headwind in chloropali. So a couple of questions there. Is that mostly with the European assets or is that on the U.

Speaker 11

S. Contract chlor alkali you get? And is most of that pain coming from caustic or you're also seeing margin squeeze on the chlorine and chlorine derivatives?

Speaker 2

Yes. Good morning, Duffy. Our exposure on caustic is really Europe and Latin America. So most of that $70,000,000 is on that. None of what was in that guidance, that outlook guidance was related to Our contracts with Olin, so nothing related to that.

Speaker 2

And I would say that's Clearly driven by the market dynamics and the market demand that is driving lower prices and also lower operating rates in those Regions. So we'll continue to keep an eye on that. Housing, I think if housing begins to turn a little bit, that'll be one of the First things that will help out. And then industrial demand has also been relatively soft. Those two drivers will be the ones that will start to make that turn.

Operator

Your next question comes from the line of Josh Spector with UBS. Please go ahead. Yes.

Speaker 10

Hi. Thanks for taking my question. I just wanted to follow-up on volumes. I'm thinking maybe another quarter or 2 out. The past couple of quarters, your volumes have been down something in the range of 8% to 10% year over year.

Speaker 10

That seems to be kind of where you're guiding to the 2nd quarter. And I mean, generally, we're seeing a slower uptick than what we expected sequentially and some market weakening. So I'm just curious, at this point, should we be Assuming that volumes are down a similar level to that in 3Q and obviously the comps get easier in 4Q, but I'm wondering what in your view would change that Trajectory or if that's the right way to think about it.

Speaker 2

Yes. Good question on the volumes. I would say North America volumes are coming back, which I think is going to be a real positive. If you look at same quarter last year, I mentioned we were down 11% on volume. That was really led by EMEA.

Speaker 2

So EMEA was down 15% during that same timeframe. So you can see that on some of the other The cost advantage regions were still doing relatively well. The other thing to think about is Asia We did start to see after February, we started to see some positive expansion in the China market, which we had not seen Early in the Q1. And so if you looked at PNSP and IINI, both volumes were down A lot in the Q1. We had some, as Howard mentioned, non recurring licensing activity, which Not really a volume, but an EBITDA play.

Speaker 2

And then we had the Sadara cracker turnaround, which took volumes out as well for them. And so I think you're going to see Asia Pacific volumes pick up in the second quarter, and I would think that that would continue. We're starting to see even in areas like MEG, we're starting to see the spot market pick up a bit and the operating rates in China pick up a bit. So that will help. And then the question will be, when do we start to see some positive momentum out of Europe?

Speaker 2

So I would think through the year, we should start to see this gradually improve. And that's what our plan for the year is, is First half of the year, if you follow where we are, we'll make a little bit less than half of our target for the year and we'll make the rest in the back half largely On good price volume management, good control over operations and our own self help on delivering that $1,000,000,000 of cost saves.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Speaker 2

Good morning. Just to follow-up on that sequential build, what are you thinking about in terms of the amount of summer inventory build Or how to think about the seasonality in Q3, given the mix or choppy end markets you described? As Howard mentioned, we're really focused on efficiency. And so we're looking to get 2 to 3 days of efficiency. I'd love to get that efficiency through higher sales rather than through the opposite way, but We're keeping inventories well under control.

Speaker 2

For example, we ended the Q1 really similar, Maybe even slightly lower than we ended the Q4 in terms of actual volume and inventory. I don't think we're in a scenario where there's any reason To really build big inventories going into the season, maybe in a specific business like Coatings needs to build a little bit ahead of the seasonal demand. But for the rest, we have the ability to ramp up rates to match that demand and that's what we're going to do. So I feel like inventory, we're going to manage it pretty tight through the year. I don't see any Outside drivers out there that would give us a signal that we should be doing anything more, we would need to see some really strong demand drivers and demand signals To move off of that tight inventory management.

Operator

Your next question comes from the line of Christopher

Speaker 6

Great. Thank you so much. It's obviously been a few years with China now finally emerging from COVID, but can you just kind of give us your latest and greatest thoughts on your 3 main segments regarding the potential for new Chinese supply Across polyethylene, MDI and then just the remainder of fluoxanes, which you've already been mentioning. Just given that they're finally emerging from this, just any update in your thought process there

Speaker 2

Look, on siloxanes, there were about 4 additions in China last year on siloxanes capacity. You had each one of them range, they were between 100,200,000 tons each. And There are some more planned additions coming throughout this year, but I think the net total, the biggest year was last year that we saw about 600 1,000 tons added. So I think we're through that. MDI, I think is a timing game as we've said before.

Speaker 2

I feel good about Where supply demand is with MDI, in the short term, the operating rates have been between 75% 80%. And it's all depending on your view of how fast the Chinese capacity is going to come on. We think it's going to be spread out a little bit more Over time versus all coming on in 2023. And so our view is that the industry operating rates should hold up In that high 70s, almost 80% range, which historically is a constructive range for MDI. And in polyethylene, I haven't seen, as you know, most of the capacity over the last 10 years has been added in China.

Speaker 2

The supply additions and also the delays and the cancellations Mean that things are going to be pretty balanced to maybe even slightly net short over the next couple of years, Maybe in the range of 2,000,000 to 5,000,000 tons net short. So I think supply additions in polyethylene is not the big Concern right now, I think it's we're focused more on growing that recycling business and also making sure that we've Got our footprint in the lowest cost to operate jurisdictions. North America, Middle East In U. S. Ethane, Canadian ethane, Argentina, all substantially advantaged to European and Asian NAFTA right now and even MTO and CTO.

Speaker 2

So, we want to continue to build out our footprint in more cost advantage regions going forward.

Operator

Your next question comes from the line of Mike Leithead with Barclays. Please go ahead.

Speaker 4

Great. Thanks. Good morning. I was hoping you could help me reconcile Slide 5 and Slide 7 a bit. If we look at Slide 5, your main product verticals look pretty challenged near term.

Speaker 4

And then on Slide 7, you talk about why they should see pretty Growth over the next 1 to 2 years, obviously, I recognize there's a bit of a time disconnect or differential there. But I guess, Internally, how do you get comfortable that what we're seeing near term is only transitory or maybe the other way around, when do you

Speaker 2

Yes. Good question, Michael. I mean, I think a lot right now, a lot of the weight on the market is the inflationary pressure and the things have remained Stickier for longer. You are seeing in commodities that pricing is coming down. That hasn't rolled through yet To the consumer and so the weight on the consumer and the consumer's confidence has not been there.

Speaker 2

And the Manufacturing competence indexes have not been that great either. A lot of them have been in contraction until just recently, and we're starting to see some Positivity in the PMI numbers, China just moving positive. It's a little bit mixed still here in North America, but A couple of zones in the Fed are starting to move into positive PMI territory. So I think as that market sentiment improves, We'll get ourselves back on to the normal trajectory. And what typically drives the growth for our products Is GDP and an increasing middle class and both of those we believe are going to continue to drive them for the long term.

Speaker 2

It's true in packaging and specialty plastics. The drive to urbanization drives a lot of volume in silicones and siloxane. So Think about architectural structures, high rise buildings, even multi family homes, which have been weak relatively. And then when you get back into IINI, polyurethane and construction chemicals really driven by housing, housing starts, housing sales, whether it's in Insulation or appliances or durable goods, and in Dow Industrial Solutions, Markets like ag, pharma and recipients, everyday consumer products, household goods, cleaning items That you buy all have positive trends. So I think it is a timing issue.

Speaker 2

There's been a lot of Projects and incentives and policies deployed to drive this capital that's going to be invested in infrastructure, But it takes a while for that to actually ramp up. And so I think that's why we took the near term, long term view of it. And that was what those two slides were meant to represent.

Speaker 3

And Mike, I mean the other positive on long term trend of mobility with EVs, don't forget there's a significant increase in multiple of the All of the need for Dow chemistry in an EV vehicle and an internal combustion engine. So that'll be a real growth driver for our silicone's business As well as our elastomers business and to a lesser extent, urethane acrylics.

Operator

Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Thanks. Good morning, everyone. You work on your Alberta project. Do you have a sense of how much capital costs Have come up roughly since you built the Texas 9 cracker on the Gulf Coast.

Speaker 2

Good morning, Alexei. Thanks for the question. On Alberta, I would think about it this way. Our target there is to try to get the total cost of the project and dollars per ton of capacity To be advantaged to the Texas 9 project and we believe that we can do that based on what we've seen so far. Through the rest of this year, we'll be getting Firm bids on some of the bulk materials that go in and we'll have a feel for that.

Speaker 2

But we've been watching obviously steel, Cement and the other markets that really drive a lot of those bulk costs. I think we'll be able to do that. Part of it is scale. Part of it is learnings on construction and techniques that we picked up off of Texas 9. And so there's some that we'll engineer into this as well.

Speaker 2

But my sense is this is Texas 9 since startup Has been well above 15% return on invested capital, which got to be one of the most successful cracker projects and derivatives Projects ever. And I think when you look at Alberta, we're going to have a chance to replicate maybe even improve on that.

Operator

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.

Speaker 6

Hi, guys. Thanks for taking my question. I just had a question about the $1,500,000,000 Q2 or so implied EBITDA guidance. When you think about that, it looks like there's $75,000,000 of headwinds in there as well. So maybe it's a $1,600,000,000 number.

Speaker 6

So how How would you characterize that within your framework of peak to trough? Would you still consider maybe 2,000,000,000 As a mid cycle Q2 number and so maybe you're 75% to 80% of the way there or and does the cost reductions kind of bridge that gap or How are we thinking about where we are kind of in your earnings trajectory? Thanks.

Speaker 2

Howard, do you want to go through the walk through on the outlook? Yes. No, I think,

Speaker 3

I mean Arun, you're thinking about it right in terms of the walk from Q1 to Q2. I would say my Jim, you may have your own view. Look, I think $2,000,000,000 is light from a normalized basis. We're still looking at that $6,000,000 to 12,000,000 Current portfolio view from trough to peak and that's heading in the middle of the decade that should be more like 7.5 or 8 to as much as 13 or eventually 14 once we add In the Alberta project, so I think a more normalized EBITDA for us is in that $9,000,000,000 to $10,000,000,000 range in the normalized macro. So when you're looking at $1,500,000,000 plus or minus, you're still you're right around the floor of the earnings quarter on an annualized basis.

Speaker 3

And then That $1,000,000,000 cost saves that will ramp 65% that will get us, will come to the bottom line in the second half of the year. That just is there to protect and ensure that we can deliver in that $6,000,000,000 plus or minus range.

Operator

Your next question comes from the line of Patrick Cunningham with Citi. Please go ahead.

Speaker 12

Hi, good morning. Thanks for taking my question. In the release, you highlighted some year over year strength in functional polymers for renewable technology. Can you highlight Technologies. And then similarly on the near term growth investments, I think functional polymers There's a significant part of that.

Speaker 12

What technologies are end markets end markets are targeted investments here?

Speaker 2

Yes. Welcome, Patrick. And functional polymers is about 25% of the PNSP Folio on the polymer side. And I'd say the 2 biggest areas of strength there are in the solar Photovoltaic films and you think about the protective films that are used to put together the solar panels. We've got a good position there and with Some of the leading producers around the world and we're starting to see some real volumes pick up there.

Speaker 2

So I think you're going to see That industry be the beneficiary in the near term, probably one of the early beneficiaries of the infrastructure and the IRA Monies that have been deployed. And the other area would be wire and cable. We're starting to see a pickup there. So as we put more alternative energy in and we We also have to deal with the aging grid and we have to deal with also infrastructure work that Utilities need to do on the grid to increase the reliability and expand the grid because populations are expanding in a lot of these urban areas. That drives demand for wire and cable products of which we have a leading market position, Whether it's high voltage transmission or whether it's down into medium and lower voltage Things like in the telecom sector.

Speaker 2

So, as we're expanding reach for more wireless access to people, we're going to see more Telecommunications towers go up, that's going to drive more demand for wiring cable products for those projects.

Operator

Your next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Speaker 13

Hey, good morning. Jim, could you provide some more color on your autos end market? The mobility category on Slide 5 Actually looks a little bit better than all of your other major areas. Are you gaining share and how are things tracking relative to your expectations?

Speaker 2

Mobility is a growth platform for us and the team there that's focused on building back Some of that core capability that we had prior to the spend is doing a great job. Silicones are a big part of that. So Improving the resilience of the system with more electronics on the vehicles is great, but We also play a leading part in noise, vibration and harshness in the vehicle. So we've got a long history of doing that. We're starting to see pickup for recycled materials.

Speaker 2

So our SPECFLEX C and also our RENUBA Recycled materials, think recycled mattresses, spec like CPU system is made out of polyols made out of recycled engine oil, Are both seeing pickup in automotive seating applications. We also have a lot going on with acrylic, Both hybrid acrylic and silicone technologies in this area. We've just won some Recent innovation awards for some products I think are going to be real platform winners. Luxense Silicone leather, we just got a big innovation award. This is a really high quality synthetic Silicone based leather, which can be used in automotive applications.

Speaker 2

It's durable. It holds color well. You can clean it easily. Also a lot of pickup with the Bridgestone Self sealing tires, which has a silicone inner layer to it, which allows that tire to seal. And that will completely eliminate the need for a spare on a vehicle.

Speaker 2

That also can be recycled. The silicone And then, we play in the lighting area. In LED lighting, we're a big provider, Both in what you would see in your home every day with LED lighting, but also in moldable optical silicone for think the headlamps In automotive applications, as they become more sophisticated, they move more to the moldable optical silicone In those applications. So we're excited about it. We think it has the potential to be a significant contributor to our future growth.

Operator

I will now turn the conference back over to Pankaj for any closing remarks.

Speaker 1

Yes. And thank you everyone for joining our call and we appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on our website Within approximately 48 hours. This concludes our call. Thank you once again.

Operator

Ladies and gentlemen, thank you all for joining. You may now disconnect.

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Earnings Conference Call
DOW Q1 2023
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