Dow Inc. (NYSE:DOW) This fall 2022 Earnings Name Transcript

Dow Inc. (NYSE:DOW) This fall 2022 Earnings Name Transcript January 26, 2023

Operator: 2022 earnings convention name. As a reminder, this convention is being recorded. I’ll now flip it over to Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, chances are you’ll start.

Pankaj Gupta: Good morning. Thanks for becoming a member of Dow’s fourth quarter earnings name. This name is obtainable by way of webcast, and we have now ready slides to complement our feedback in the present day. They’re posted on the Investor Relations part of Dow’s web site and thru the hyperlink to our webcast. I am Pankaj Gupta, Dow Investor Relations Vice President. And becoming a member of me in the present day on the decision are Jim Fitterling, Dow’s Chairman and Chief Govt Officer; and Howard Ungerleider, President and Chief Monetary Officer. Please learn the forward-looking assertion disclaimer contained within the earnings information launch and slides. Throughout our name, we’ll make forward-looking statements concerning our expectations or predictions concerning the future. As a result of these statements are primarily based on present assumptions and elements that contain dangers and uncertainties, our precise efficiency and outcomes could differ materially from our forward-looking statements.

Dow’s Kinds 10-Q and 10-Ok embrace detailed discussions of principal dangers and uncertainties, which can trigger such variations. Except in any other case specified, all financials the place relevant exclude vital objects. We can even discuss with non-GAAP measures. A reconciliation of probably the most straight comparable GAAP monetary measure and different related disclosures is contained within the Dow earnings launch, within the slides that complement our feedback in the present day in addition to on the Dow web site. On Slide 2, you will notice the agenda for our name. Jim will start by reviewing our fourth quarter outcomes and working phase efficiency. Howard will then share our outlook and modeling steerage. And to shut, Jim will then define our aggressive place for long-term worth creation.

Following that, we’ll take your questions. Now let me flip the decision over to Jim.

Jim Fitterling: Thanks, Pankaj. Starting on Slide 3. Within the fourth quarter, Crew Dow continued to take proactive actions to navigate slower GDP development, difficult vitality markets and buyer destocking. We proactively lowered our working charges to successfully handle working capital, carried out operational mitigation plans and price saving measures and prioritized higher-value merchandise the place demand remained resilient, together with in practical polymers and efficiency silicones in addition to in mobility, renewable vitality and pharma finish markets. These actions, mixed with our continued concentrate on money enabled us to ship money move from operations of $2.1 billion within the quarter. Money move conversion was 166%, and we returned $620 million to shareholders.

Dow’s money technology displays our continued concentrate on operational and monetary self-discipline, which was essential as we navigated an especially dynamic 12 months in 2022, as you see on Slide 4. Within the first half of the 12 months, we capitalized on sturdy demand throughout our various world portfolio whereas leveraging our spinoff and feedstock flexibility and low-cost positions to mitigate greater uncooked materials and vitality prices. Within the second half of the 12 months, financial situations deteriorated pushed by report inflation, rising rates of interest, ongoing pandemic lockdowns in China and continued geopolitical tensions. Within the face of those evolving market dynamics, Dow was resilient, producing money move from operations of $7.5 billion for the total 12 months. Whereas executing our disciplined and balanced strategy to capital allocation.

We delivered returns on invested capital of 15%, above our 13% throughout the financial cycle goal, as we prioritized greater return, decrease threat and quicker payback investments. We achieved credit standing and outlook upgrades on account of our strengthened steadiness sheet, and we have now no substantive debt maturities due till 2027. And we returned a complete of $4.3 billion to shareholders, together with $2.3 billion in share repurchases and $2 billion in dividends. On the identical time, we proceed to advance our Decarbonize and Develop technique and speed up circularity to create long-term shareholder worth as we meet rising buyer demand for extra sustainable options. I am pleased with how Crew Dow continues to ship for our prospects, drive shareholder worth and help our communities as we progress towards our 2050 carbon neutrality goal, and you’ll see various these highlights depicted on this slide.

Now turning to our working phase efficiency on Slide 5. Within the Packaging & Specialty Plastics phase, web gross sales had been $6.1 billion, down 16% year-over-year as value features throughout all areas and practical polymers had been greater than offset by decrease polyethylene and olefin costs. Quantity declines had been pushed primarily by decrease olefins and packaging demand in Europe, which was partly offset by a resilient world demand for practical polymers. Sequentially, web gross sales had been down 17% pushed by decrease hydrocarbon gross sales and polyethylene costs. Working EBIT for the phase was $655 million in comparison with $1.4 billion within the 12 months in the past interval, primarily attributable to decrease built-in polyethylene margins. Sequentially, working EBIT was down $130 million as decrease uncooked materials and vitality prices had been greater than offset by decrease polyethylene costs and working charges.

Shifting to the Industrial Intermediates & Infrastructure phase. Web gross sales had been $3.7 billion, down 20% from the 12 months in the past interval. Volumes declined primarily attributable to decrease demand in Europe for industrial, shopper durables and constructing and development purposes. Sequentially, web gross sales had been down 10% as seasonal demand will increase for deicing fluid had been greater than offset by declines in constructing and development, shopper durables and industrial purposes. Working EBIT for the phase was $164 million in comparison with $595 million within the year-ago interval, pushed by decrease demand and growing vitality prices, notably in Europe. Sequentially, working EBIT margins expanded by 40 foundation factors as decrease vitality prices versus the prior quarter had been partly offset by decrease volumes.

And within the Efficiency Supplies & Coatings phase, we reported web gross sales of $2.1 billion, down 20% year-over-year as native value features for efficiency silicones and architectural coatings had been greater than offset by decrease costs for siloxanes and acrylic monomers. Quantity was down as resilient demand in mobility was greater than offset by declines primarily in constructing and development finish markets. Sequentially, web gross sales had been down 22% attributable to seasonally decrease demand for coatings, industrial and constructing and development purposes in addition to native value declines for siloxanes and acrylic monomers. Working EBIT for the phase was a lack of $130 million in comparison with earnings of $295 million within the year-ago interval attributable to native value declines primarily in siloxane and decrease working charges within the quarter.

Sequentially, working EBIT declined $432 million, pushed by decrease costs, demand and working charges. I am going to now flip it over to Howard to evaluate our outlook and actions on Slide 6.

Howard Ungerleider: Thanks, Jim, and good morning, everybody. We count on the market dynamics we skilled in late 2022 to proceed into early ’23. Whereas the tempo of inflation has moderated, total price ranges stay elevated, which has continued to set off tighter financial coverage in most elements of the world and is weighing on each enterprise funding and shopper sentiment. The vast majority of financial forecasts are calling for slower GDP development globally relative to 2022, though dynamics differ by area, with most areas besides Europe nonetheless forecasting constructive year-on-year development. Within the U.S., we see indicators of moderating demand and the continuation of year-end destocking developments early within the quarter. Constructing and development finish markets have been notably impacted by inflation and rising rates of interest with housing begins declining by greater than 20% year-over-year in December.

Manufacturing PMI contracted for the third consecutive month of 48, whereas gentle car gross sales within the U.S. had been down for the total 12 months by 8 proportion factors. Easing inflation is resulting in bettering shopper confidence, albeit from depressed ranges in late 2022, whereas shopper spending stays resilient. In Europe, we count on demand to stay constrained regardless of current enhancements in regional vitality costs. Whereas the transfer to five-year highs in fuel storage is a constructive signal, altering climate forecasts are resulting in volatility within the futures markets. Excessive inflation and geopolitical tensions proceed to weigh on shopper spending and industrial manufacturing. December manufacturing PMI has been contracting since July, and development PMI reached its lowest degree since Might.

In China, whereas we’re very inspired by current ships in COVID coverage to ease restrictions and open up orders, we count on these actions to take a while to enhance financial exercise. That is an space we’re intently monitoring because it has the potential to offer a supply of great demand restoration following the Lunar New 12 months. And in Latin America, total financial development is predicted to gradual, pushed by political tensions, excessive inflation and restrictive financial coverage. Given this dynamic backdrop, we’ll proceed to take a area by area, business-by-business strategy to managing our operations and adapting our companies to the evolving market realities. Turning to Slide 7. As we highlighted at our final earnings name, we’re proactively responding to the present financial atmosphere with a playbook of focused actions to ship $1 billion in price financial savings.

This begins with sustaining a low price to serve working mannequin by implementing actions to optimize our labor and repair prices, together with a worldwide workforce discount of roughly 2,000 roles. We’ll proceed to extend productiveness with end-to-end course of enhancements now that our digital basis is in place, and we can even shut down choose belongings whereas additional evaluating extra actions throughout our world asset base, notably in Europe to make sure long-term competitiveness whereas additionally enhancing our price effectivity. These structural actions are anticipated to ship a complete of $500 million in EBITDA financial savings this 12 months. Moreover, we’ll ship one other $500 million of financial savings by means of actions to maximise money move whereas decreasing our operational bills.

This consists of lowering turnaround spend, bought uncooked supplies, logistics and utilities prices. Importantly, we’ll do that whereas sustaining protected and dependable operations, which, as at all times, stays our prime precedence. These proactive actions will optimize our price construction in response to the near-term macroeconomic uncertainty whereas sustaining our long-term value-creation focus. Turning to our outlook for the primary quarter on Slide 8. Within the Packaging & Specialty Plastics phase, bettering logistics and decrease working charges led to the fifth consecutive month of stock declines for U.S. polyethylene in December. Decreased world working charges are persevering with to drive feedstock and enter prices down with ongoing destocking by means of the worth chain impacting practical polymer power and demand in Europe.

Whereas decrease turnaround prices can be a sequential tailwind, we count on decrease demand ranges in Asia to affect fairness earnings and decrease nonrecurring licensing exercise from the prior quarter will affect earnings. In complete, we count on a $75 million headwind for the phase sequentially. And the Industrial Intermediates & Infrastructure phase, demand stays secure for vitality markets, and we’re monitoring demand for deicing fluids with a hotter than common winter. Nonetheless, inflationary pressures in contracting PMIs proceed to affect industrial demand, and we count on decrease seasonal volumes in constructing development finish markets. We additionally anticipate an roughly $25 million headwind attributable to a third-party outage, which is inflicting a provide disruption on the U.S. Gulf Coast from winter storm Elliott.

And within the Efficiency Supplies & Coatings phase, we count on demand restoration for efficiency silicones following year-end buyer destocking in addition to improved provide availability and decrease prices. Nonetheless, we additionally anticipate decrease siloxane pricing within the quarter as we proceed to see stress from elevated trade provide. We count on greater deliberate upkeep turnaround prices on this phase at our Deer Park acrylic monomer website in efficiency screens. All in, we anticipate a $25 million tailwind for the phase. In complete, we count on the primary quarter to be according to the fourth quarter efficiency with the $75 million in discrete headwinds I discussed. Turning to the total 12 months. We’re persevering with to offer our greatest estimates of a number of earnings assertion and money move drivers.

I’ll spotlight a couple of notable year-over-year inputs. We count on decrease fairness earnings within the 12 months down roughly $300 million to $400 million. Whole turnaround spending is anticipated to be down by $300 million as we implement our playbook of price financial savings actions whereas sustaining protected and dependable operations. We count on share depend to stay comparatively flat as we plan to proceed masking dilution. And eventually, we anticipate growing our capital expenditures to $2.2 billion, nicely inside our D&A of $2.8 billion as we proceed to advance our greater return, quicker payback tasks and proceed to execute on our decarbonized and development technique. General, the macroeconomic backdrop stays dynamic in 2023, we see the potential for extra upside from greater oil to fuel spreads, reopening in China following the Lunar New 12 months and easing inflation and provide chain constraints.

We additionally proceed to pay shut consideration to a spread of indicators, together with stress from greater rates of interest on constructing and development, PMI ranges, world vitality markets and geopolitical dynamics. Dow stays nicely positioned primarily based on our world footprint, feedstock flexibility and the sustainable options we offer for our prospects. We’ll proceed to leverage these aggressive benefits to ship long-term worth for our shareholders. With that, I am going to flip it again to Jim.

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Jim Fitterling: Thanks, Howard. Shifting to Slide 10. Whereas the near-term atmosphere stays difficult, we proceed to see enticing secular developments throughout our market verticals of packaging, infrastructure, shopper and mobility. With resilient money move technology and a robust credit score profile, we’re nicely positioned to proceed advancing our Decarbonize and Develop technique to capitalize on these alternatives. We Delivered on our development funding commitments outlined in early 2022. These investments are anticipated to collectively generate $2 billion in run price EBITDA by the center of this decade. In Packaging & Specialty Plastics, we mechanically accomplished and commenced remaining commissioning of our FCDh unit in Louisiana within the fourth quarter.

This breakthrough propylene expertise options as much as 25% decrease capital outlay whereas decreasing vitality utilization and greenhouse fuel emissions by as much as 20% versus standard FCDh items. In Industrial Intermediates & Infrastructure, our newest alkoxylates capability funding in america was accomplished within the third quarter of 2022, and our subsequent in Europe can be accomplished within the first quarter of this 12 months. These tasks will additional serve high-value markets in residence care and pharma and are only a begin. Our subsequent wave of alkoxylates capability investments stay on monitor. In reality, Dow has already efficiently begun locking in provide contracts with a number of shopper and pharmaceutical prospects to help the following wave of development. And in Efficiency Supplies & Coatings, we accomplished 16 downstream silicone debottleneck tasks in 2022 to fulfill demand for prime efficiency, constructing and development, private care and mobility purposes.

Moreover, we accelerated the supply of our digitalization initiatives and now count on the total $300 million run price EBITDA to totally materialize by the top of 2023, nicely forward of our prior goal of 2025. Consequently, we anticipate our digital gross sales to comprise 50% of complete income by 2025. Trying ahead, we count on to proceed development investments in our world operations, together with key capital investments in higher-margin polyurethane programs and extra alkoxylate capability, incremental tasks to broaden downstream, high-value ethylene spinoff capability and continued coatings and silicon debottlenecking tasks. We can even proceed progressing our working investments to enhance manufacturing capabilities and reliability as we shift our product combine towards greater development and higher-value markets.

Turning to Slide 11. Decarbonizing our belongings and driving circularity stays a major development alternative for Dow. We’ve a transparent highway map to scale back carbon emissions by one other 5 million metric tons by 2030. We proceed to put money into revolutionary, renewable vitality and effectivity applied sciences, akin to our collaborative program with Shell to electrically warmth steam cracker furnaces, which is on monitor to start out up in 2025. In Alberta, we reached a preliminary funding choice for our previous to Zero undertaking, and we’re working with the Canadian authorities to substantiate vital incentives in order that we are able to make a remaining funding choice by the top of this 12 months. And our Terneuzen 2030 undertaking, the place we have now a transparent highway map to scale back carbon emissions on the website by greater than 40% by 2030 is making progress as we safe accomplice and authorities agreements and subsidies.

We’re additionally advancing our rework the waste goal to commercialize 3 million metric tons of round and renewable options yearly by 2030. By leveraging our pipeline of strategic partnerships to put money into revolutionary options and scale up manufacturing, we’re nicely positioned to fulfill this rising buyer demand in a disciplined and capital-efficient method. Most not too long ago, Dow and WM introduced a daring new collaboration to deal with hard-to-recycle plastic movies by enabling them to be positioned straight into residential curbside recycling. By 2025, this system is predicted to divert greater than 120,000 metric tons of plastic movie from landfills. We proceed to see sustainability as important for our long-term earnings development. Altogether, by 2030, we stay on monitor to ship $3 billion in underlying EBITDA enhancements whereas decreasing Scope 1 and a pair of emissions by 30% in comparison with our 2005 baseline.

Turning to Slide 12. The actions we have taken since spin to strengthen our steadiness sheet whereas bettering our monetary flexibility and working money move technology are enabling us to be extra resilient as we ship on our capital allocation priorities throughout the financial cycle. Our free money move efficiency is now greater than tripled on a trailing 12-month foundation. We considerably improved our liquidity place, ending the 12 months with almost $14 billion. And thru our disciplined and balanced strategy to capital allocation, we have considerably decreased our legal responsibility profile with a mixed discount of greater than $11 billion in our web debt and underfunded pension place since spin. Closing on Slide 13, we have now a transparent playbook of actions to drive resilient efficiency within the close to and long run.

We’ve plans to realize $1 billion in financial savings by means of focused actions to extend effectivity and keep a low-cost construction that’s finest in school. We’re sustaining a robust monetary place with a continued concentrate on disciplined and balanced capital allocation, and we’re advancing our Decarbonize and Develop and circularity methods, delivering incremental run price EBITDA enhancements by means of the top of the last decade, positioning us for an financial restoration whereas decreasing our carbon dioxide emissions. As we leverage our aggressive benefits, operational agility and concentrate on money move technology that has served us nicely since spin, we’ll proceed to ship long-term worth for our shareholders. With that, I am going to flip it again to Pankaj to open up the Q&A.

Pankaj Gupta: Thanks, Jim. Now let’s transfer on to your questions. I want to remind you that our forward-looking statements apply to each our ready remarks and the next Q&A. Operator, please present the Q&A directions.

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