Pankaj Gupta welcomed participants to the Dow Second Quarter 2023 Earnings Conference Call and introduced Jim Fitterling, Dow's Chair and Chief Executive Officer, and Howard Ungerleider, President and Chief Financial Officer. He then outlined the agenda for the call, which included Jim reviewing the second quarter results and operating segment performance, Howard providing an outlook and modeling guidance and an update on cost savings actions and financial position, and Jim discussing how Dow is continuing to advance its long-term strategies while navigating short-term dynamics.

In the second quarter, Team Dow navigated a challenging macroeconomic environment with slow global growth. Despite lower year-over-year sales and earnings, they achieved sequential earnings improvement by leveraging their diverse portfolio and implementing cost savings actions. Net sales were down 27% year-over-year, and operating EBIT was $885 million, down from $2.4 billion in the year ago period. Cash flow from operations was up more than $800 million versus the prior quarter, and their strong financial position gives them the flexibility to advance their long term strategic priorities.

Dow's balance sheet remains strong with strong investment grade credit ratings and the company returned $743 million to shareholders in the quarter and nearly $1.4 billion year-to-date. In the Packaging and Specialty Plastics segment, operating EBIT was $918 million compared to $1.4 billion in the year ago period due to lower global energy and feedstock costs and volume declines in EMEA. The Industrial Intermediates and Infrastructure segment had a loss of $35 million due to lower local prices and demand. The Performance Materials and Coatings segment had operating EBIT of $66 million due to local price decreases and lower global demand for silicones and coatings applications.

Jim gave the floor to Howard to review their outlook and actions for the third quarter. The macroeconomic environment is expected to be challenging due to lagging effects of higher monetary policy on consumer demand and slower than expected recovery in China. In the US, industrial activity is weak while consumer demand is resilient. Europe is in recession while China is experiencing growth, but the anticipated economic rebound has yet to fully materialize. In India, manufacturing PMI is expanding, while in Japan it is contracting. The company is taking a disciplined approach to managing their operations and adapting their business to the evolving market realities.

The Packaging and Specialty Plastics segment is expected to have a $50 million headwind due to lower prices and increased feedstock costs, as well as a $100 million headwind from lack of project based licensing sales. The Industrial Intermediates and Infrastructure segment is expected to have a $15 million tailwind from cost savings actions, but a $100 million headwind from an unplanned event. The Performance Materials and Coatings segment is expected to have a $50 million headwind due to price pressure and seasonal demand, but a $35 million tailwind from cost savings actions.

Dow is on track to deliver $1 billion in cost savings by 2023 and has already achieved 35% of the savings in the first half of the year. The company is also expecting a $25 million tailwind in the third quarter due to the completion of second quarter turnarounds. Additionally, the company is executing actions to reduce maintenance turnaround spending and rationalizing select higher cost, lower return assets in order to improve its financial position. These actions are expected to give the company significant flexibility and optionality to continue advancing its strategic priorities.

Howard has outlined how Dow has reduced their cash commitments by $1 billion since spin, and expects annual net interest expenses to be down 40% from 2019. Jim Fitterling then discussed the company's long term growth strategy, which includes a focus on profitability and decarbonizing growth. This includes the FCDH unit, which is now fully operational and reducing energy usage, as well as the small modular nuclear energy facility in Seadrift, Texas, which is expected to provide safe, low carbon power and steam. Additionally, Dow is utilizing a capital efficient approach to quickly scale production and grow their supply of recycled and bio based products.

This paragraph outlines the company's plans to commercialize 3 million metric tons of circular and renewable solutions by 2030, as well as their Fort Saskatchewan, Alberta project. The project will create a net zero CO2 emissions ethylene and derivatives complex and add 1,300 kilotons of ethylene and polyethylene capacity annually by 2027, with an additional 600 kilotons in 2029. An average of $1 billion of CapEx will be spent annually on the project from 2021 through completion, with a target of returning CapEx to D&A levels after Phase 1 is completed.

Dow is well-positioned to lead the industry in providing sustainable products with a lower carbon footprint. They are taking a disciplined and phased approach to decarbonizing their assets, growing earnings, and keeping their capital expenditure within their depreciation and amortization across the cycle. Dow is proactively reducing costs and maximizing cash flow to strengthen their balance sheet and improve their cash generation profile, enabling them to be more resilient in their capital allocation priorities.

In the third quarter, packaging, especially plastics, saw strong volume increases across all four regions of the world. Despite this, there was a $50 million headwind due to higher feedstock costs and lower average pricing. This was mainly felt in June, when pricing closed out softer.

Jim Fitterling discusses the North American price settling down $0.03 in June and the strength of China, India, and Mexico in terms of exports. He also mentions that integrated margins ended slightly higher than the first quarter in North America, but expects them to improve in Europe in the third quarter. He believes the pressure on North America is from feedstock costs, which are hard to project how long they will stay.

The paragraph discusses the availability of ethane, frac spreads, and NGL inventories. It also mentions the strong exports, particularly to China, and the self-help initiatives that have been taken by the team which have resulted in 75% of the 2,000 roles exiting at the end of June. Additionally, there is an expectation of sequential volume growth in P&SP from Q2 to Q3 due to the increase in marine pack cargo and shipments.

Jim Fitterling discusses the current capacity additions and demand increases for ethylene and polyethylene. He notes that China has had the benefit of a NAFTA advantage, allowing them to supply more domestically. He also notes that a quarter of the industry capacity is over 40 years old and is under pressure due to its high carbon footprint and cost position.

Jim Fitterling discussed MDI price trends in the United States, which are remaining relatively strong in automotive, but have been impacted by a decrease in demand for durable goods like appliances. He also discussed the expansion of MDI distillation in Freeport, which will allow them to retire the La Porte asset, and noted that the announced capacity is expected to come on later than expected.

Howard Ungerleider discussed the share count issue, noting that the GAAP loss in the first quarter necessitated the use of the basic share count. He also noted that the company had repurchased $250 million worth of shares in the second quarter and would continue to be opportunistic going forward. Jim Fitterling then discussed the 8% decline in volume in the second quarter, noting that Europe was down 14%, Asia Pacific and Latin America were relatively strong, and North America was flat. He concluded that the global economic slowdown had started mid-last year and had caused a decline in GDP.

Jim is discussing the current state of the industrial intermediates segment, and how the leading and lagging indicators suggest that the economy is currently in a slowdown. He also notes that there are some positive signs, such as the Federal Reserve's ending of rate increases and green shoots in the housing market, which could lead to an improvement in 2024. Jim is also discussing the actions that are being taken in the industrial intermediates segment, such as two-way resupply arrangements with Olin, in order to help propylene oxide.

Jim Fitterling breaks down the earnings of Industrial Intermediates into two parts: polyurethanes and construction chemicals, and industrial solutions. He discusses the asset moves they have been making to right size their propylene oxide and increase their MDI distillation capacity in Freeport. He also talks about the extended series contracts in the US Gulf Coast and Germany with Olin, and how it benefits both companies. Lastly, he mentions that industrial intermediates has been growing well.

Jim affirmed that the company's focus on downstream alkoxylates is to support growth in home and personal care, paints and coatings, agricultural intermediates, and higher value derivatives for pharma and energy applications. He also noted that they will be deemphasizing their exposure to ethylene glycol, which is a commodity. Frank Mitch asked Jim if he expects ethane pricing to become more balanced with natural gas in the near term, to which Jim responded affirmatively. Additionally, Sadara has been impacted by planned maintenance and the macroeconomic environment in the last couple of quarters.

Jim Fitterling and Howard Ungerleider of Dow Chemical discussed their expectations for Sadara in the back half of the year. They expect ethane supply to increase and some of the supply that has been used for natural gas will come off due to the weather moderating. Sadara had turnarounds which impacted the results but they are now fully operational and have a strong exposure to Asia Pacific. They also have a number of structural and operational improvements underway to increase margins.

Jim Fitterling and Howard Ungerleider discussed the free cash flow conversion rate, with Fitterling noting that a 80% conversion rate is normal. They also discussed the top line guidance for the third quarter, with sales expected to be down 5-9% due to feedstocks and packaging costs, a one-time licensing fee, $50 million in cost savings, and a $100 million turnaround at the St. Charles cracker.

The third quarter is expected to be advantageous for Dow due to advantaged cost positions and the ability to export, however, there are headwinds from raw material costs and the loss of capacity from glycol in Plaquemann. Performance Materials and Coatings is expected to have a slower seasonal return due to weaker architectural coatings compared to last year, and price pressure in siloxanes. All three divisions are expected to be down, primarily due to price.

Howard Ungerleider discusses the company's outlook for the third quarter, which is expected to be operationally flat. He also discusses the cost savings of $100 million and the projected margin compression from third-party indices. He also talks about the $100 million one-time impact on margin from lost sales and the cost to rebuild and recommission the Plaquemines glycol plant. Finally, he touches on the potential for buyback activity in the second half of the year, as well as dividend growth and the current coverage ratio.

Jim Fitterling and Howard Ungerleider are discussing the company's plans for stock buybacks in the 2024-2027 period. They are planning to cover dilution each quarter, and have already done $250 million of stock buyback in Q2. They are also looking for any additional cash flow interventions or levers, such as structural working capital, tax optimization, and potential cash extraction from joint ventures. They are expecting to win a Canadian litigation for several $100 million.

Jim Fitterling believes that the global economy is still relatively strong, with China, India, and Mexico all having strong GDPs. He notes that the US Gulf Coast is well-positioned to export higher-value functional polymers to these countries. He also believes that the recovery of the global economy is not solely dependent on China, but also on housing in North America and Europe, as well as the decrease in energy costs in Europe.

Europe's economy is under pressure, and about 30% of the footprint is in Europe, mainly in polyurethanes and construction chemicals. In North America, housing is starting to show positive signs with more people thinking about moving due to high rents and lack of supply. Infrastructure bills have been passed, leading to increased capital spend. Demand has increased in wire and cable for telecommunications and high-voltage transmission, aerospace production, automotive and heavy machinery. Automation is also being used to increase productivity in manufacturing.

Jim Fitterling discusses the trends in PM&C for the rest of the year, noting that demand is driven by sectors such as electronics and mobility, commercial buildings, industrial, home and personal care, automotive, and infrastructure builds. These sectors have either been flat or up, with the exception of electronics and mobility, which are up but not to the same extent as last year. Siloxanes capacity in China is also putting pressure on the demand.

Jim Fitterling explains that the contractor business has returned and the paper business has been off due to the COVID-19 pandemic. He also notes that there is 450,000 tons of new siloxanes capacity coming in 2022, with 300,000 tons in 2023 and another 300,000 tons beyond 2024. In terms of cost savings, there is a $100 million step-up from the second quarter of 2020 to the third quarter, and the fourth quarter will have a $300-350 million cost savings. The $1 billion cost savings will be spread out over the rest of the year, with $150 million in the first quarter of 2021.

Howard mentioned that Dow is focusing on cost savings and cash levers to generate $2 billion in total, as well as improving their mix and taking advantage of their low-cost positions. Pankaj Gupta concluded the call by thanking everyone for joining and informing them that a copy of the transcript would be posted on their website in 48 hours.

This summary was generated with AI and may contain some inaccuracies.