Operator:

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Dow Inc. 2024 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now like to turn the conference over to Andrew Riker. Andrew, the floor is yours.

Jim Fitterling:

Thank you, Andrew. Beginning on slide three, in the second quarter, team Dow delivered sequential top and bottom line growth, as well as the third consecutive quarter of year-over-year volume growth. We achieved this despite a slower-than-expected global macroeconomic recovery, particularly in areas like building and construction and consumer durables. Net sales were $10.9 billion, down 4% versus the year ago period and up 1% sequentially, driven by gains in packaging and specialty plastics and performance materials and coatings. Volume increased 1% versus the year ago period with gains led by the United States and Canada. Excluding hydrocarbons and energy sales, which were down primarily due to lighter feed slate cracking in Europe, volume increased 4%. Sequentially, volume increased 1% with gains in all regions except Asia Pacific, which was flat. Local price decreased 4% year-over-year. Sequentially, local price increased 1% led by gains in Europe, the Middle East, Africa, and India or EMEA. Operating EBIT was $819 million, up $145 million sequentially, reflecting gains in packaging and specialty plastics and performance materials and coatings. Cash flow from operations was $832 million on higher earnings and an efficient release of working capital, resulting in an 85% cash flow conversion on a trailing 12-month basis. Our focus on cash flow generation enabled $691 million in returns to shareholders, including $491 million through dividends and $200 million in share repurchases. In June, we published our 2023 Intersections Progress Report. This report showcases the positive impact that we are making on the environment and society and importantly, how those actions support long-term profitable growth. Now turning to our operating segment performance on slide four. In the packaging and specialty plastic segment, operating EBIT was $703 million, down $215 million a year-over-year, this was driven by lower integrated margins, higher planned maintenance activity, and lower non-recurring licensing sales. Local peak declines were due to lower downstream polymer prices, primarily in Asia Pacific. Volume decreased year-over-year as higher demand for functional polymers and polyethylene was more than offset by lower merchant hydrocarbon sales, primarily due to lighter feed slate cracking in Europe. Sequentially, operating EBIT increased by $98 million, primarily due to higher integrated margins behind both price and volume gain. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $7 million, an improvement of $42 million versus the year-ago period. Results were driven by improved equity earnings, partly offset by lower integrated margins. Local price declined year-over-year, but volume was up, driven by gains in polyurethane and construction chemicals. Sequentially operating EBIT decreased $80 million, driven by higher planned maintenance activity and higher equity losses, as well as lower volumes. And in the performance materials and coating segment, operating EBIT was $146 million, up $80 million, compared to the year-ago period, driven by broad-based business and geographic volume growth. Local price declined year-over-year, but volume was up, driven by gains in both businesses and all geographic regions. Sequentially operating EBIT increased to $105 million, driven by volume and price gains in both businesses and lower planned maintenance activity. Now I'll turn it over to Jeff to review our outlook and share some examples of our playbook in action.

Jim Fitterling:

Thank you, Jeff. Moving to slide eight, our expectations for 2024 reflect a slower pace of recovery in certain end markets. Dow is positioned to capture more than $3 billion in EBITDA upside as we return to mid-cycle earnings levels. We are encouraged by the positive top line signals across our portfolio. This is demonstrated by our year-over-year volume improvement in the last three quarters, as well as price stabilization across the entire enterprise over that same period. In packaging especially plastics, we anticipate supply demand fundamentals to continue improving as the recent polyethylene capacity builds in North America have been fully absorbed by growing global demand. We're also starting to see rationalization of higher cost assets, particularly in Europe. And going forward, we did not expect to see any new capacity in the cost-advantaged Americas until the 2026, 2027 timeframe. In industrial intermediates & infrastructure, we've maintained a disciplined approach to our inventory management. The beginning of an interest rate cutting cycle will accelerate demand in our polyurethan’s business. In industrial solutions, the majority of our U.S. Gulf Coast capacity is aligned to higher value EO derivatives. With the successful restart of our Glycol-2 facility in Louisiana, we will see positive impact in consumer, mobility, pharma, and energy and markets. And in performance materials and coatings, industry siloxane capacity additions are expected to slow due to prolonged negative cash margins impacting non-integrated players. And lastly, our coatings business is highly correlated to existing home sales with market demand forecasted to see pre-pandemic levels by next year. With these positive indicators combined with an economic recovery, Dow is positioned to capture significant annual earnings upside at mid-cycle levels. Next on slide nine, the work we've done to strengthen our financial foundation has allowed us to invest countercyclically in lower risk, higher return projects that will drive more than $3 billion in annual earnings growth by 2030. Our near-term investments are progressing and remain on track to deliver more than $2 billion of underlying mid-cycle EBITDA by mid-decade. To-date, we have added the capacity to deliver $800 million of that $2 billion. So far this year, we've enhanced our product mix to produce higher value elastomers for photovoltaic films and ethylene copolymers that are site in Tarragona, Spain. We're also advancing multiple downstream silicones debottlenecking projects to support growth for liquid silicone rubber and adhesives. Our team in Fort Saskatchewan is making solid progress on our path to zero project. Phase 1 startup is expected in 2027, and Phase 2 will start up in 2029. The project will deliver an additional $1 billion of either got annually at full run rates by 2030. Construction continued in the second quarter where we started our piling program, which will anchor the foundation of our new net zero cracker. Major foundation work is expected to begin in the third quarter. We're also advancing our transform the waste strategy to deliver more than $500 million in incremental underlying EBITDA by 2030 through partnerships and direct investments. In June, we announced the Dow signed an agreement to acquire Circulus, a leading U.S.-based mechanical recycler. This will help us accelerate our goals, while enabling more high-performance circular products that brands and customers are demanding. We expect a deal which includes two facilities with combined capacity of 50,000 metric tons of recycled materials annually to close in the third quarter. Consistent with our best owner mindset, we also announced in the second quarter that we reached an agreement with Arkema to sell our laminating adhesive business, which is part of the packaging and specialty plastics portfolio. That transaction is expected to close by the fourth quarter of 2024. And lastly, in the second-half of the year, we're planning to commercialize products with greater circularity using offtake from both the Valoregen mechanical and Mura advanced recycling facilities. In closing, on slide 10, Dow remains focused on driving earnings growth by executing our playbook, delivering on our capital allocation priorities, and closely managing costs as we advance our long-term strategy. We're committed to operational and financial discipline. We've delivered returns in past generations better than our peer benchmark and we will maintain our low cost to serve mindset, while capturing high value demand and optimizing margins. Our financial flexibility allows us to invest countercyclically in higher value areas that will raise our underlying earnings and drive circularity. With all of this, Dow is well positioned to create significant upside in top and bottom line growth as cycle dynamics improve and we unlock the full benefit of these investments enabling higher shareholder returns. With that, I'll turn it back to Andrew to get us started with the Q&A.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Hassan Ahmed with Alembic Global. Please go ahead.

Jim Fitterling:

Good morning, and I'm happy [Technical Difficulty]. You know, as we look at the outlook for PNSD end of the third quarter, I do expect [Technical Difficulty] $0.02 on margin improvement there. You've got a combination of [Technical Difficulty] actual numbers there, and direction is correct. We do expect, and we have in the plan, that we expect ethane to be up a $0.01 or $0.02, it is not as instantaneously as we sit here today. What I do expect it will be one of the reasons that gas and methane is so low is because you have free flow [Technical Difficulty] down through the Hurricane Beryl. And that backs up volume here at the Gulf Coast. That's going to reverse itself, but I think when that happens, our expectation is, you'll see some ethane pricing move up. In Europe, we have still positive [Indiscernible] spread, but it's a little bit less than what it was in the second quarter, but it's still very advantageous for us to crack propane. I mentioned cracking white, you know, we cracked white in the quarter, which led to less byproduct sales for cracker byproducts in Europe. But the derivative demand is good. If you look at derivatives volumes, across the board they've been up. Asia was a little bit low in the second quarter, mainly because Asia was pushing a lot of export volumes out, especially in China, to get ahead of some tariff barriers. And that kind of caused some congestion over there. I think that's working itself out and I think we'll see continued strong export environment out of the U.S. Gulf Coast. As you mentioned, inventories are low right now. Inventories are right in line with where they've been historically and exports are very strong. So I do think the environment is there for pricing to take hold in the third quarter. I expect the derivative volumes to be strong. We've got advantage cost positions and operating rates are strong for us. So I think net-net turnarounds won't be any more than they were in the second quarter. I think you'll see some slight improvement in third quarter.

Vincent Andrews:

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

Operator:

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

Jim Fitterling:

Yes. Thank you, Steve. [Technical Difficulty] Fort Saskatchewan [Technical Difficulty] But in general, it's pretty similar to what we see today. And as I mentioned before, I think the upside there is the ability to get the additional value out of the [Technical Difficulty], and it's zero, so one and two admissions. [Technical Difficulty] Those policy and deliverables, I think of how you catch better data and how you deliver the service to better knowledge. And circularity we believe a combination of mechanical [Technical Difficulty] cycle. I think we still feel that long-term and the two-thirds of our volume is expected to be the best in [Technical Difficulty]. Mainly because we're trying to talk about [customer] (ph) forms, we believe, to get the high quality, which is what we need to get those margins. You guys have to integrate [Technical Difficulty]. On the technical side, when the circular investment is a great position [Technical Difficulty], we're focused on trying to move [Technical Difficulty]. When typically we're not looking at making big investments in the [Technical Difficulty], but I think our ability with that time, I kind of stayed to take the company on a circular and move the quality of that 50,000 tons per [euro] (ph) always up allows us to get the kind of management uplift over those in GE that we need to deliver about 500 more. And so it's going to be different by different markets, but it's all going to be driven by the quality of the material that we produce out of those assets. Certainly the demand is there [Technical Difficulty] is in supply, and upon high quality new type of product.

David Begleiter:

Thank you. Good morning. Jim, you're run rating at roughly $6 billion at EBITDA. Consensus for next year is $7.3 billion. How much of that earnings ramp is in Dow's control?

Operator:

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

Jeff Tate:

Yes, good morning, Jeff. Appreciate the questions here. Starting on the corporate side. When we look at the second quarter, you're right, it was slightly lower, more favorable than what we traditionally had. I would say, as you're thinking about the second-half of the year, going to be pretty much in the range of $60 million to $65 million of negative EBITDA, which we've delivered in past times. What we had in the second quarter was we had actually some gains from our insurance operations as well as some lower environmental cost accruals as well. So when you think about the second-half of the year, you can expect it to be in that $60 million to $65 million range. In relation to share repurchases, you're right, we have continued to trend to cover dilution, and that's one of the things from a capital allocation perspective that we've been consistent with. And as we think about the CapEx ramp-up that we have and our commitment to deliver overall 65% more back to our shareholders -- we're going to stay consistent with that at this point because of the cash flow expectations as well as our ability to be able to manage all of those capital allocation priorities. But we will look at from a criteria perspective, what will give us the greatest return over that time period in comparison to the commitments that we have for our capital allocation prioritization.

Mike Sison:

Hey, good morning. In the first-half, your free cash flow didn't generate a lot. Could you give us a feel of how much free cash flow you generate in the second-half and maybe for the full-year?

Jeff Tate:

Yes. Good morning, Mike, thanks for the question. From our perspective, first of all, when you look at the second quarter, we saw some really positive side, where would deliver over $800 million in cash from operations. Our conversion rate was at 55% and our free cash flow was a positive $109 million. All of those are sequential improvements over what we delivered in the first quarter. So we're really trending well. As we think about the full-year, Mike, one of the things that we would act is from a working capital standpoint, you can expect the use of cash anywhere from the $600 million to $800 million range. You've seen in our slide deck here, we got some guidance on some of the other key levers related to full year cash flow. But 1 of the areas where we're pleased about is our ability and the joint ventures to be able to get greater dividends out of debt, which we're focused on moving forward as well as our -- looking at our liquidity right now, we're in a really good position. We've got well over $3 billion of cash and cash equivalents and total liquidity of $13 billion. And right now, we don't have any debt maturities of substantive levels until 2027. And the other thing I'd also like to remind you of as well is the fact that over the past several years, DOW has done a solid job of being able to deliver what we like to call unique-to-Dow cash levers of anywhere from $1 billion to $3 billion. And our expectation is that we'll deliver at least $1.5 billion of those levers here in 2024.

Kevin McCarthy:

Yes, thank you, and good morning. Can you comment, as you look across your portfolio on the monthly cadence in June, as well as your order books in July. Were there any businesses that stood out varied versus your prior expectations through that period. And on a related note, can you comment on the barrel hurricane impact in the third quarter and whether you're expecting that to have a net positive or negative or neutral impact on the quarter? Thank you.

Jeff Tate:

$50 million.

Operator:

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

Jim Fitterling:

Yes. Good question, John. I think it's -- I think you can already see in the market that it's starting to have some impact of firming things up, because it happened early in the Hurricane cycle and early August or early July is typically not when we would tend to see the first hurricanes come through. We tend to see them more in the August time frame. And so I think what you're seeing is that's firming up the sentiment that there will be price increase moves. I think what you're going to see in terms of impacts are going to be different grade by grade so depending on what derivatives are down and what grades are going to become a little bit tighter. And then you've got some planned downtime that's happening on the third quarter as well. So you've got some plan outages for the third quarter. I'd say we're back up and running hard, trying to catch up to those volumes and get customers stock back up at this point. And there is a little bit of concerns starting to come through the market from customers about being ready for the next impact. Hats off to our team for moving product out in railcars and other areas ahead of it. So we were able to get things positioned to be able to react so that we could keep product moving to customers and we always do a good job of preparing for that and doing things in advance.

Josh Spector:

Yes, hi. Good morning. I was wondering if you could give some early thoughts on fourth quarter. So a couple of quarters ago, you thought that there'd be some maybe unseasonal improvement as volumes improve. As we sit today, would you think about a normal seasonal in fourth quarter, call it, down $100 million, $200 million in EBITDA sequentially? Or are there other factors you call out that would buck that trend? Thank you.

Operator:

Your next question comes from the line of Frank Mitsch with Fermium Research. Please go ahead.

Jim Fitterling:

Yes, good morning, [Frank] (ph), thanks. They brought me probably another microphone here. So I'm sorry about if the first question wasn't answered or understood well. On pricing, we've got prices out around the world everywhere except Argentina for July and August in North America, we've got plus 5 and plus 5 out in the market. That is going to -- you're going to see price stick in the quarter. So price is going to come through. Now the question is how much of all that comes through? I think what we put into the estimate as we've put in that we're going to see $0.02 per pound margin improvement. So net of price. And as I mentioned, I think ethane costs will come up through the quarter. I think it will come up $0.01 or $0.02 through the quarter, if you look quarter-over-quarter. So I think net of that ethane cost increase, you're going to see a $0.02 per pound margin increase in North America. I'd say volume on derivatives around the world supports that inventory levels support that. And I think there's the outside things that we can't predict, like will we have more hurricane activity, but inventories in the chain are low. So I would expect that it's going to go through. When it comes to Glycol, the start-up was smooth and as expected on Glycol-2. Obviously, we've got to get through the product mix, and we've got to get some safety stocks built back up, and that's part of the ramp-up that happens from $75 million to $90 million to $100 million. Could it ramp up more than 90% in the fourth quarter? I guess it could, I mean, usually year-end, there's a little bit of seasonal slowness. So our expectation is it would probably ramp more into the first quarter, which is when we tend to get into some higher volumes across some of the markets. But that's what we've got in the estimate right now.

Laurence Alexander:

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

Operator:

Your next question comes from the line of John Roberts with Mizuho. Please go ahead.

Jim Fitterling:

I still think you're going to see strength, John, in plastics. I don't remember if silicones had turnaround time in the fourth quarter last year. It should be up based on the downstream demand forecast that we've seen. Normal seasonality, I would expect out of coatings, but I think in plastics and silicone, you're going to see up. And in II&I, because of industrial Solutions and Glycol-2 being back, you're going to see up, the question mark will be how much do we see in terms of demand uptick on durable goods, and that will be what determines whether PU is up or not.

Duffy Fischer:

Yes, good morning. Two questions. First, Jim, you made a comment that you thought your coatings raw material business did quite well in Q2. A lot of the paint companies have come out and their volumes seem weak. So can you just kind of triangulate that? And then for Jeff, the other assets and liabilities on the cash flow statement has eaten almost $1 billion of cash so far this year, which is much higher than normal. What is that? And what happens that going forward?

Jeff Tate:

Yes. Good morning, Duffy. In terms of other assets and liabilities, you're right. The primary driver there is we had a reduction in long-term tax payables related to some of our tax audit reassessment over the period. As you may recall, even in first quarter, we had a significant item more specific to one of our regions as well. So those things were somewhat unique from that vantage point here. So it should stabilize here moving forward.

Patrick Cunningham:

Hi, good morning. I'm just curious on siloxanes pricing in Asia. Would you characterize this as lingering oversupply issues? Or is just the pace of demand recovery not as strong as expected -- and I think there was maybe a bit more confidence on the pricing environment in the second quarter. Did that revert over the past couple of months? Thank you.

Operator:

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

Jim Fitterling:

It's a good question, Mike. But I would also ask you to think about it and even a longer-term time frame, it takes years to plan and make these investments. And we have to look at what's happened in plastics take for an example. Since 2019, we've seen a 20% increase in volumes in plastics, you can't obviously respond to the market when you see the increase and start to get this capacity in place. You've got to get in place to take advantage of the mid-cycle and the up cycle ahead of time. So typically, when we're at this point in the cycle, it's a common question that everybody asks, but we've got to look through at the long-term trends and the long-term trends for plastics say the growth is going to continue to be there. We've tried to move into the areas where there is differentiation and there's higher growth rates. Whether that's silicones, whether that's plastics, whether that's industrial solutions on the higher value of specialty EO derivatives where we're investing. That's where the dollars are going. So those three markets are consuming most of your capacity expansion. What we've been doing in polyurethanes is more rationalizing the footprint around the higher-value markets, more downstream less commodity-like PO more MDI containing components. And on coatings, obviously, being able to move with the market as the housing market improves. So I feel good about the long-term direction. We're not back at mid-cycle yet. As we get back to mid-cycle, there's a $3 billion step-up in earnings at mid-cycle margins. And then once path to zero comes on in the '27, '29 time frame, and you get to peak, there's another $3 billion step-up to peak.

Chris Parkinson:

Great, thank you so much. Jim, in your $2 billion of mid-cycle upside for PNSP. I understand there are obviously a lot of moving factors there. But if we stick to the U.S. Can you just offer some insights in terms of what you're expecting in terms of integrated PE margins, just given where the current SD dynamic is, export trends, NGLs. Just any color in terms of kind of getting that back would be especially helpful. Thank you.

Operator:

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

Jim Fitterling:

I do. I think when we look at North American demand, we're starting to see the total domestic demand plus exports getting north of 5 billion pounds. So this is a step-up. Obviously, exports have been a big driver historically, 30% of total demand was export, you're running about 45% of that demand in 2023. Also, I would tend to look at not just U.S. data, but I would also look at Mexico, I mean, we moved product into Mexico the same way we move into the U.S. market. And as I mentioned, one of the biggest consumption increases has been in Mexico with manufacturing reshoring moving into that area. So I think we're seeing good volumes this year in the U.S. I think we're going to continue to see that improve at a steady rate.

Jim Fitterling:

Andrew?

Operator:

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Operator:

Greetings and welcome to the Dow First Quarter 2024 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn it over to Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT was $87 million compared to $123 million in the year ago period. Results were driven by lower prices in both businesses, which were partly offset by 3 items:

lower energy and feedstock costs, improved equity earnings and volume gains in Polyurethanes & Construction Chemicals. Sequentially, operating EBIT was up $72 million driven by improved equity earnings and lower energy and feedstock costs, primarily in EMEAI.

James Fitterling:

Thank you, Jeff. Moving to Slide 8. Dow is well positioned to capture demand and drive earnings growth as the economic recovery takes hold. This is reflected in our competitive advantages and early cycle growth investments which are advancing while also demonstrating Dow's continued focus on operational and financial discipline. And we have a differentiated portfolio with structurally advantaged assets, global scale and low-cost positions in every region. Healthy oil-to-gas spreads, supported by growing natural gas and NGL production in North America, favor our cost advantage and ability to capture continued margin improvements as the economic recovery gathers strength.

Operator:

[Operator Instructions] And your first question comes from the line of Hassan Ahmed at Alembic Global.

James Fitterling:

Hassan, good question. I would say, obviously, there are differences around the globe depending on the cost positions. And we have a footprint that is very highly advantaged in North America and Latin America and the Middle East. Europe is right now where you've seen most of the focus on supply reductions with a couple of announcements of crackers being shut down. I'd also say China, there's a lot of pressure on operating rates there because the cash margins are negative and have been negative for some time and there's a big arbitrage window open between the United States and China. And so all of those things have really led to much higher operating rates in the cost-advantaged regions.

David Begleiter:

Jim, last quarter, you gave a bit of an earnings walk up to about $6.4 billion, $6.5 billion of EBITDA this year. Do you still believe that number is achievable, if not beatable, given the solid Q1 results?

Vincent Andrews:

If I could just ask, in the PSP guidance for 2Q and that step up to $150 million, can you just walk us around the world and tell us sort of how you're bridging that $150 million?

Frank Mitsch:

And let me also echo my congratulations to Pankaj. Best wishes in Industrial Solutions. Jim, I was wondering if you could talk about operating rates across the Dow portfolio in general. How has that -- that appears to be one of the positives in the quarter. If you could offer some commentary on your expectations for the Dow engine in 2Q and beyond on the operating rate front.

Operator:

Your next question comes from the line of Steve Byrne from Bank of America.

James Fitterling:

Steve, on the hydrogen-fueled cracker, we recover part of the higher unit costs there through the price on carbon. And the team is working on as well, trying to get the premium pricing for that offtake. And I would say our view on that is that it will be there. There's a strong demand for low-carbon emission products, ethylene-based materials. And so we're working on that right now. But the returns on that project are going to be equal or greater than Texas-9 all in. And so when you take a look at it, we are very optimistic about where we're going to be with that project .

Joshua Spector:

I was wondering if you could share some thoughts on free cash flow for '24 since you kind of reiterated your expectations there on EBITDA. How do you see that tracking? And any update you can provide on any of the nonoperating items that you thought could bridge free cash flow for this year as well?

Jeffrey Tate:

Yes. Well said, Jim. Josh, building on Jim's statement there, the other thing I would mention is that we've also started to see, as the volumes have been improving, we're seeing sales ramp up and we saw the sales ramp up throughout the quarter. So our receivables are also ramping up as well from a working capital standpoint. We're also going into a heavy turnaround period as well, which we anticipated. So all of this is in line with our expectations and our projections, especially for the first half of the year in terms of the working capital uses of cash that we would expect and have.

Michael Sison:

Nice quarter. Congrats, Pankaj, again. In terms of 2Q volumes, will Hydrocarbons & Energy be a headwind again? And I guess, how much, I'm just curious on sort of the core volume growth for PSP. And then just quickly curious on siloxanes if -- why you think there could be improvement in 2Q versus 1Q?

Operator:

Your next question comes from the line of Jeff Zekauskas from JPMorgan.

James Fitterling:

Jeff, I think the biggest thing, when you look from first quarter to second quarter on II&I is because of the Glycol 2 situation in Plaquemine. We had some insurance recoveries in the first quarter that don't recur in the second quarter. So that creates what looks like a bit of a headwind. I think the underlying business is good and the underlying demand is good. If you look at Polyurethanes & Construction Chemicals, obviously, we've seen a step up in Europe and in operating rates. Sadara is also doing more of the marketing of some of those materials and so we see a little bit less volume coming through Sadara, from Dow marketing the Sadara offtake. So that has a little bit of an impact. But I would say -- our view is, we're still seeing construction slightly better and we're seeing, obviously, Europe much better cost position and that's driving the improved operating rates and just that insurance delta is probably the biggest thing. Jeff?

Operator:

Your next question comes from the line of Kevin McCarthy from Vertical Research Partners.

James Fitterling:

Kevin, always hard to predict exactly the pace that things are happening. But we've been under pressure on -- the high-cost assets have been under pressure from a cash cost standpoint for some time. So we're -- it's normal around this time you would start to see retirements. The thing that we should consider when we're looking at our assets likely to be retired, the age of the assets and the older the asset in general, you get a couple of things, those unit costs are not as competitive. It's maintenance costs start to ramp up.

Kevin Estok:

This is Kevin Estok on for Laurence. Just to touch back on silicone trends. I was just wondering if you guys have seen any visibility into restocking in Europe and whether you've seen maybe any green shoots in construction globally.

Patrick Fischer:

Yes. Just a question around your coatings and monomers business. You had volumes up but when you look at a lot of your big competitors -- or not competitors, customers who have announced already, PPG, Sherwin, [indiscernible], their revenue was all down in Q1. What's your sense for what's happening in the coatings market this year? Are you guys overshipping, do you think, in Q1 for where the demand level for paints will be this year? And then just how do you see pricing trending in that business for you guys?

Operator:

Your next question comes from the line of John Roberts from Mizuho.

James Fitterling:

Any particular products, John, that you're thinking of?

James Fitterling:

I see. I haven't seen it in plastics for sure. I don't know if we've seen any of that in polyurethanes or construction chemicals. Our days of inventory are low. I mean, we're at 41 days of sales in inventory, which is 1 day better than we were in fourth quarter. So I'm certainly not seeing it in our case. And we're pretty focused in Europe on the domestic market. We're not -- we don't rely on Europe as an export hub. So I think that's to our advantage there. The Red Sea, I believe, is going to be the way it is for the next -- for the rest of the year probably. I mean, if things were resolved today, I think it would take about 6 months for the shipping channels to move back around. So I'll just -- we'll just have to keep an eye on it. It hasn't had an impact on us so far. And we're not exporting out of there. So -- and we're still expecting good operating rates in second quarter.

Patrick Cunningham:

You called increased demand in functional polymers for the first time in a few quarters. Can you speak to some of the specific areas of strength or products for which you're seeing increased demand? And you've also called it out as the source of some higher return, high EBITDA contribution, incremental growth projects. How meaningful is that benefit in 2024?

Operator:

Your next question comes from the line of Chris Parkinson from Wolfe Research.

James Fitterling:

We're moving up in the second quarter. I would say it almost moved up that $0.03 at the end of the first quarter. And the numbers have continued. The macroeconomic indicators have continued to get stronger, not weaker. So I think with the volume that we're seeing on the downstream derivatives with improved economic business and the consumer still being strong, I think you're going to see it move up in the second quarter. So I think we're very firm on the [ 3 ] April. And as I mentioned, we started at the low point at the end of December and we just saw steady improvement through the first quarter. And so I think we're off to start the second quarter at a much higher rate and see some momentum as we move through that quarter.

Michael Leithead:

I wanted to ask a follow-up to an earlier question on cash flow, maybe for Jeff. I guess, if you hit your EBITDA targets for this year, are you forecasting working capital to be a use of cash or a source of cash this year and to roughly what magnitude?

Operator:

Your next question comes from the line of Aleksey Yefremov from RBC Capital -- sorry, KeyBanc Capital Markets.

James Fitterling:

Aleksey, it's from both. We saw better demand on siloxanes and better pricing and we saw better downstream. We saw improvements in building and infrastructure, which were primarily seasonality driven. We saw gains in personal care. We saw gains in industrial and chemical processing, where some of the products are used as intermediates. We saw gains in mobility and we saw gains in consumer electronics. So all the downstream markets were up. The siloxanes demand was up. The operating rates were up. The pricing on siloxanes were up. So it was pretty balanced on both sides.

Arun Viswanathan:

I hope you guys are well and good working with you, Pankaj, as well. And so I guess my question is, you're on a run rate now of, say, $6.3 billion, $6.4 billion, $6.5 billion of annual EBITDA. Do you still think maybe mid-cycle level is around $8 billion? And if that is the case, how do you bridge kind of going from $6.5 billion to $8 billion, is that -- that $1.5 billion, would -- are there any discrete items maybe that you'd call out as far as capacity additions? Or is it mainly going to be volume recovery based?

Operator:

That concludes our question-and-answer session. I will now turn the conference back over to Pankaj Gupta for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Operator:

Greetings, and welcome to the Dow Fourth 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. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn it over to Dow Investor Relations' Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3, in the fourth quarter, we continue to execute with discipline and advance our long-term strategy in face of a dynamic macroeconomic environment. Net sales were $10.6 billion, down 10% versus the year-ago period, reflecting declines in all operating segments. Sales were down 1% sequentially as volume gains in Packaging & Specialty Plastics were more than offset by seasonal demand declines in Performance Materials & Coatings. Volume increased 2% year-over-year, with gains across all regions except Asia Pacific, which was flat. Sequentially volume decreased by 1%, including the impact of an unplanned event from a storm that was equivalent to a Category 1 hurricane at our Bahía Blanca site in Argentina. Local price decreased 13% year-over-year, with declines in all operating segments due to lower feedstocks and energy costs. Sequentially, price was flat, reflecting modest gains in most regions. Operating EBIT for the quarter was $559 million, down $42 million year-over-year, primarily driven by lower prices. Sequentially, operating EBIT was down $67 million, as gains in Packaging & Specialty Plastics were more than offset by seasonally lower volumes in Performance Materials & Coatings. Our cash flow generation and working capital management enabled us to deliver cash flow from operations of $1.6 billion in the quarter. We continued to reduce costs and focused on cash generation, completing our $1 billion of cost savings for the year. And in the fourth quarter, we pursued additional de-risking opportunities for our pension plans, including annuitization and risk transfer of $1.7 billion in pension liability and a one-time non-cash and non-operating settlement charge of $642 million. We also advanced our long-term strategy while returning $616 million to shareholders. And we reached final investment decision with our Board of Directors for our Path2Zero project in Fort Saskatchewan, Alberta. Now, turning to our full year performance on Slide 4. Our 2023 results demonstrate strong execution and a commitment to financial discipline. Against the dynamic macroeconomic backdrop, Team Dow continued to take proactive actions. As a result, we generated $5.2 billion in cash flow from operations for the year, reflecting a cash flow conversion of 96%. We also returned $2.6 billion to shareholders through dividends and share repurchases. Our efforts continue to be recognized externally through industry-leading awards, certifications and recognitions, and we continue to outpace our peers on leadership diversity. I'm proud of how Team Dow is delivering for our customers, driving shareholder value and supporting our communities as we progress our long-term strategy. Now, turning to operating segment performance on Slide 5. In the Packaging & Specialty Plastics segment, operating EBIT was $664 million, up $9 million compared to the year-ago period. Results were driven by lower input costs and higher operating rates, where we closed out the year strong and hit record ethylene production levels on a full-year basis. Local price declines were driven by lower global prices, while volume increases were led by higher packaging demand, primarily in the U.S., Canada and Latin America. Sequentially, operating EBIT increased by $188 million. This was driven by higher integrated polyethylene margins, the impact of planned maintenance activity in the third quarter and higher licensing revenue. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $15 million compared to $164 million in the year-ago period. Results were driven by lower local prices in both businesses as well as reduced supply availability in Industrial Solution. Sequentially, operating EBIT was down $6 million, driven by seasonally lower volumes in building and construction end markets, which were partially offset by seasonally higher demand for deicing fluid and higher demand for mobility applications. And in the Performance Materials & Coatings segment, operating EBIT was a loss of $61 million compared to a loss of $130 million in the year-ago period, driven by lower costs and reduced planned maintenance turnaround activity. Volume was up year-over-year, driven by higher demand in project-driven building and construction end markets. Sequentially, operating EBIT decreased $240 million, primarily due to seasonally lower volumes. Next, I'll turn it over to Jeff to review our outlook and actions on Slide 6.

Jim Fitterling:

Thank you, Jeff. Moving to Slide 9, our Decarbonize & Grow and Transform the Waste strategies uniquely position us to capitalize on demand for more sustainable and circular solutions across our attractive market verticals. Altogether, by 2030, these investments enable us to deliver an increase of more than $3 billion to our underlying earnings through the cycle, while reducing scope 1 and 2 emissions by 5 million metric tons and commercializing 3 million metric tons of circular and renewable solutions annually. In November, we reached the key milestone as our Path2Zero project in Fort Saskatchewan, Alberta achieved final investment decision by our Board of Directors. We also continue to advance our Transform the Waste strategy via intentional actions, strategic partnerships and offtake agreements. In the fourth quarter, Valoregen's 15,000 ton per year mechanical recycling line in France achieved mechanical completion. And Mura Technology in the UK commenced commissioning, which is expected to contribute 20,000 tons per year of advanced recycling capacity. Both Valoregen and Mura expect to reach commercialization in the first half of this year. As a next step of our sustainability strategy, Dow has established a Green Finance Framework, which was published on our Investor website today. This allows us to further align our funding with our goals and targets, while also providing an opportunity for the investor community to take part in the execution of our sustainability strategy. Altogether, we remain confident in our long-term earnings growth with continued focus on a more sustainable future, while maintaining a disciplined and balanced approach to capital allocation. Now, turning to Slide 10, polyethylene demand is expected to continue to grow at approximately 1.2 times to 1.4 times GDP through 2050. A growing population, regulations and consumer preferences support this. And our customers have expressed an increasing need for low and zero carbon emissions and circular products. As global demand grows, no new cost-advantaged ethylene capacity is expected to come online in North America until the late 2026 to 2027 timeframe, which is expected to tighten the supply-demand balance in the near term. We are well positioned to capture new and growing demand with our existing assets and partnership agreements. In addition, we are investing in low-carbon emissions infrastructure to capture growing demand for polyethylene as you will see on Slide 11. Our Fort Saskatchewan project will build upon the strong foundation of our Texas-9 cracker where we have proven our best-in-class execution, capital efficiency, reliability and emissions reduction. Canada's feedstock cost advantage provides Dow with lower cash cost compared to the rest of the world, even more advantaged than the U.S. Gulf Coast. We also anticipate potential upside from the commercialization of low and zero emissions products. Total CapEx spend is expected to be $6.5 billion on this to keep growth project, excluding any incentives, with Dow's total enterprise CapEx to ramp in 2024 to approximately $3 billion and exceed depreciation and amortization levels annually through 2027. We remain committed to keeping our CapEx within D&A across the economic cycle and expect to return to those levels as we complete this project. We expect to receive governmental support totaling more than $1.5 billion in cash and tax incentives that will bring the net capital outlay for this project to $5 billion. The majority of these incentives are expected to be received by Dow through 2030, which is closely aligned with our CapEx deployment for the project. We will begin construction in the first half of 2024 with Phase 1 startup of approximately 1.3 million tons per year of capacity expected in 2027. In Phase 2, we will add another 600,000 tons of capacity, which is expected to start up in 2029. Phase 2 also includes the retrofit of our existing cracker, reducing net 1 million metric tons per year of CO2 Scope 1 and 2 emissions. Closing on Slide 12, the actions we've taken since spin have strengthened our balance sheet, increased cash flow and enhanced the financial flexibility and resilience of our business. In 2023, we built on that foundation moving swiftly to deliver $1 billion in cost savings and focus on cash generation as economic conditions remain challenging. As a result, we delivered on all of our capital allocation priorities, including a fully funded dividend, $625 million of share repurchases and growth investments, all while maintaining the strongest balance sheet we've ever had at this part of the cycle. With all of our debt at fixed rate, we have no substantive debt maturities due until 2027 and $13 billion of available liquidity. Additionally, we have returned approximately 90% of our net income to shareholders since spin, well above our 65% target across the economic cycle. With global reach, presence in attractive end markets and advantaged cost position in early-stage growth investments in flight, we are well positioned to capture attractive growth opportunities as economic conditions recover. With that, I'll turn it back to Pankaj to open the Q&A.

Operator:

[Operator Instructions] Your first question comes from the line of Hassan Ahmed from Alembic Global. Your line is open.

Jim Fitterling:

Good morning, Hassan. I think that's a great question. I think one of the reasons that December and fourth quarter ended up stronger than expected, especially I'll use Packaging & Specialty Plastics as an example, was because you had a pretty mixed year in 2023. And in December, you can sometimes see the behavior of that. In the last half of December, things slowdown and people manage cash and they don't buy. That was not what we experienced in December. We actually experienced strong demand right through the month. I don't think that's an indication of restocking, but I do think it's an indication that inventories are low through the supply chain and the consumer demand was resilient, and so people had to buy to keep their supply chains moving. So, I would say through the value chains today and almost all the businesses, it looks like there's not an excess of inventory out there. And as demand is coming, people are having to buy to keep the chains full. Secondly, inventories are low in areas like P&SP, Industrial Solutions, because the arbitrage is open and our own footprint, 85% of our own global footprint is in light cracking jurisdiction, where we crack ethane and propane which have been highly advantaged. And so that's what allowed us to set an ethylene record for the year. I would say we're not -- I don't think we're in a restocking cycle yet. I think people are coming together around the soft landing here. I mean, we're seeing positive signs on housing permits. That doesn't turn into housing demand until we start to see, say, maybe interest rates come down. If interest rates come down in the second quarter, maybe you start to see some pickup in housing construction, and that starts to show up more toward the back half of the year. You've got to remember that energy costs are low, and so people are thinking that energy costs are low and I'm still able to buy at reasonable prices going forward. There may not be a reason for them to do a big restock right now. But this will turn. And as energy costs start to move up and the whole complex starts to move up with demand, I think at that point, I think we would be wise to keep our eye on what's happening with the potential for restock. It might just be a little soon right now.

Mike Sison:

Hey, guys. Nice end of the year. I'm just curious, you had good volume growth in PSP in the Q4. Do you expect that to continue into the first? And maybe any thoughts on how your operating rates for polyethylene will sort of improve sequentially and the cadence for the year?

Operator:

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

Jim Fitterling:

Yes. On project starts, we've got the things that we've got coming up, obviously, is we've got some alkoxylation capacity that came up in '22 and '23, it's running really well. We started up the MDI distillation facility in Freeport in the third quarter. I think that will start to show some positive benefit to us as we move forward. That's about a 30% increase in MDI distillation, and also reduction of a footprint getting us out of the La Porte site. We've got CDF alkoxylation, second wave expansion in fourth quarter of this year, and then Terneuzen in fourth quarter of 2025, both of that supports growing demand and energy and also consumer solutions and pharma business, so that's good. Amines business for carbon capture is growing well, and so that's good. If you look at plastics industry, there's really no new capacity coming out in plastics say one train at the Shell plant in the United States. Otherwise, all the plastics capacity is in the market, inventories are low, export channels running strong, and we saw volume growth year-over-year in the fourth quarter. So, I feel good about the overall outlook for plastics as we're going into 2024. When you get into polyolefins, our polyurethanes and propylene oxide, a little bit different story. That capacity come on in China. We've seen the same in siloxanes last year. I think we're working through that. The silicones growth is going to eat up that siloxane capacity, but we've got to see the durable goods market and the housing markets come back to tighten up PO. Propylene Glycol side has been strong. But as you know housing and automotive drives PPE a lot. Those two things drive the propylene markets and we're going to keep a close eye on them.

Jim Fitterling:

Jeff, do you want to cover pension and what we did?

Operator:

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

Jim Fitterling:

Sure. I'll take the cold snap, and then, Jeff, I'll have you take a look at the costs. Look, on the freeze, Jeff, I just want to go back, two years ago, this is the third consecutive year of freeze on the Gulf Coast. And we've improved plans every year to be able to be ready for that. This year will be the lowest impact we've had of any of the three years. And so, the big impacts that hit us were at Deer Park and at Seadrift, but almost all of that is back up and running now. So, we were able to rebound pretty quickly. You never go completely unscathed, but I think we managed through it pretty well. We haven't had to disrupt any customers because of downtime. And I think we're going to recover pretty strong here and be running hard by the end of this month. So, I feel that we've navigated it pretty well. And we didn't see enough of an impact that we put that into first quarter estimates. I think our biggest delta in first quarter is we've got quite a few turnarounds in the first quarter, and so that's our biggest impact about $200 million of turnarounds in the quarter -- $150 million. And then, we expect some margin and some seasonality in first quarter, say, plus $200 million on margins and minus $150 million on turnarounds in the quarter. So that's the biggest net-net on the first quarter '24 guidance. Jeff, do you want to hit how the $1 billion costs fell across the business?

Jim Fitterling:

We ended the year at a $1.4 billion run rate on that. So, if you look at full year 2024, Jeff, we still got another $400 million coming in in terms of the cost savings for '24, but we have $200 million of higher turnarounds in 2024, so net-net $200 million coming into 2024. I hope that covers what you're looking for.

Steve Byrne:

Yes. Thank you. I'd like to get some help from you on why were the earnings in PM&C so much lower than what you were expecting, say, in the third quarter slide deck. Would you attribute this to just lower pricing, higher raws? Help me on this one. And maybe in particular, coatings, you've got a key customer raising price and targeting mid-single digit lower raws. Your propylene costs are higher. Why not able to push more price in this segment, or cut back on operating rates or something along those lines? What's your outlook for that segment?

Operator:

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

Jim Fitterling:

Good morning, Josh. We've got $0.05 price increases on the table for January and February. I would say, globally, we're looking pretty flat quarter-over-quarter on pricing. I'm expecting to see some price up in EMEA. I mentioned the Suez Canal and the impact that had on Middle East volumes going up into EMEA. So, I think we're going to see that up. I think we're going to see price up in Asia Pacific. I think we're going to see it relatively flat in the Americas. Integrated margins for the Americas ought to be about where they were in the fourth quarter. Integrated margins in Europe should be up a few cents, that's what the market markers will look at right now. And input costs are in line. I mean, even though we have that cold snap, natural gas costs are very competitive. Ethane costs are very competitive. Propane, they're a little bit high because of the heating demand. But I think that may start to come off a little bit as we move through this cold spell.

David Begleiter:

Thank you. Good morning. Jim, you highlight the U.S. chemical railcar loading is up 10%. What do you think is driving that? And given the strong start to the quarter, do you expect volumes to be up in all three segments in Q1? Thank you.

Operator:

Your next question comes from the line of Laurence Alexander from Jefferies. Your line is open.

Jim Fitterling:

Yeah. I think when we look at -- if you look at what we put in the deck on polyethylene demand, our view is that both mechanical recycling and advanced recycling are going to continue to grow. There's going to be demand drivers to grow all of those segments. We're in the middle of discussions on a global plastics treaty right now. We've got a big conference in Ottawa at the end of April, beginning of May. There's another one in Korea toward the end of the year. And I think what's coalescing around the industry and also the consumer brand owners and some of the NGOs that we work with, there's a focus on enhanced producer responsibility as part of it to drive circularity, focus on recycled content mandates, a focus on all forms of recycling and bio-based products that are made from waste or alternative feedstocks and in some cases like we have a project that's making bio-based materials from waste from corn production, corn stover that's used to convert into bio feedstocks. You're going to see demand all forms of that in place. We've got some capacity coming up in Europe. And we started there because the enhanced producer responsibility. The teams are there. Some of the mandates are there. And the demand from the downstream is very strong. That's coming when you look around the states in the United States. That's coming in Canada. I think we're going to see it come globally. So, I feel that over time you're going to see more focus on low-carbon fossil approaches like we're doing with Alberta. So, how can you make plastics from fossil fuels that have zero CO2 emissions. You're going to see focus on advanced recycling and mechanical recycling. And all of the above and we're just going to place bets in different regions based on what the market demand dictates. Good uptake from the customers. We see good volume growth there. We see pricing ahead of virgin materials. And of course virgin materials are relatively low right now. And we continue to work to get plants certified with ISCC PLUS so that we can certify that recycle content for our customers.

Kevin McCarthy:

Yes, good morning. Jim, on a year-to-date basis, we've seen polyethylene export prices rise by, let's say, $0.04 to $0.05 a pound. I'm curious as to what you think is driving that. Would you attribute that pattern to better demand or some of the logistics challenges that have emerged in the Red Sea or perhaps other factors? And then maybe as a related question, if you don't have any unplanned outages, how hard do you think you might be able to run your U.S. Gulf Coast ethylene-linked assets in the first quarter? Just trying to get a sense of whether the export market might be strong enough to lift up the U.S. domestic market.

Operator:

Your next question comes from the line of Frank Mitsch from Fermium Research. Your line is open.

Jim Fitterling:

Yeah. I think, Frank, I think coming back to that and I probably didn't answer what Vince was asking very well at the beginning. I think you're probably looking back half of this year to 2025 before you start to see mid cycle types of returns. We're not to mid cycle yet. I mean, obviously, we're navigating the bottom here. But I think with interest rates potentially coming off in the first half of the year some amount that stimulates some demand and mid cycle probably get there. So, maybe $300 million to $400 million of that you'll see in 2024, the balance into 2025.

Duffy Fischer:

Hey, good morning. If you could just on the $50 million to $100 million on the equity income improvement, can you walk through your major JVs and just kind of say what's additive, what's subtractive from that number?

Operator:

Your next question comes from the line of John Roberts from Mizuho. Your line is open.

Jim Fitterling:

Sure. And nice to hear your voice on the call, John. Welcome back. Yeah, we've got a number of non-product producing infrastructure assets that we continue to evaluate. We have in flight for this year greater than $1 billion. I think maybe even greater than $1.5 billion of additional cash proceeds from transactions related to that. We had a very successful divestiture in 2020 of our rail and marine infrastructure assets, and that is working well. And the idea was there was to liberate some cash, but keep a competitive cost structure. And that same mindset is in place here. And we think obviously the cash proceeds are going to help us with reinvesting in revenue-generating assets like the Alberta project as we move forward. And then, the other cash-related kind of unique levers to Dow for the year is we've got the last part of the settlement from the Nova litigation, we should wind all that up and that's about $500 million for the year. So, I'd say net-net, we're pursing north of $1.5 billion plus the Nova litigation to try to get those kind of unique cash levers into the company. Anything else you want to add, Jeff?

John Roberts:

Great. Thank you.

Patrick Cunningham:

Hi, good morning. So you mentioned -- in II&I, you mentioned turnarounds maybe weighted towards the first quarter, Plaquemine coming back in 2Q, Freeport bringing on the increase in MDI distillation. Should we expect more significant sequential earnings improvement through the year, and maybe help size where we can exit the year for this segment? And then if you could also just briefly comment on what's driving the direction of MDI and MEG spreads into 1Q, that would be great. Thanks.

Operator:

Your next question comes from the line of Mike Leithead from Barclays. Your line is open.

Jim Fitterling:

Yeah, it's a good question. We've had no cash contributions that needed to be made to Sadara '21, '22, '23. I'm not expecting any going forward. Sadara itself, like us, when you navigate the bottom of the cycle, it's focusing on self-help actions to try to pull levers to keep costs down. There is talk in the kingdom about a raise and feedstock prices, and so we'll obviously have a look at things that we can do within Sadara to offset those costs. But those haven't taken hold just yet. And then obviously, the market comes back. Sadara is very levered to oil price. And so, oil clears the market for plastics, especially because that drives the Asia Pacific operating prices and costs. And so, when oil price comes up, which the expectations are that, that's going to be constructive as we move into '25 and beyond, there hasn't been a lot of investment in oil production, demand is back above -- demand for oil is back above where we were pre-pandemic, and yet we have big parts of the market that are not back about where we were pre-pandemic. So, I think the outlook for demand is that the demand is going to come as the global markets improve, but the supply is going to lag. And so, we're sitting here at $80 oil, that could firm up. You could start to see the top end of oil be pitched more toward $90, $100 as you get into the '25, '26 timeframe. And that has a pretty substantial impact to the bottom-line in Sadara. So near term, we're going to navigate our cost at Sadara to keep the cost down and to be able to handle those feedstock costs longer term, obviously lean into the market as the economy improves.

Aleksey Yefremov:

Thanks. Good morning, everyone. Jim, you just made a couple of comments that siloxanes capacity could be absorbed by demand growth. And to me, you sound a little more positive here than in the past. Do you think this upstream silicones market could see margin uplift maybe within the next 12 months? Or is this a longer-term project?

Operator:

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

Jim Fitterling:

Yeah. I think the things that are constructed to me as we're moving forward is no new capacity coming in, in Packaging & Specialty Plastics. You've got high operating rates in all the cost advantaged regions of the world. And you've got export arbitrage window open to China, as I mentioned, double-digit growth for us in China. And I think our view is we're able to move -- continue to move products. India has been strong. So, we're moving product into India. Mexico has been really strong. We supply a lot of plastics to Mexico by rail. I think that's all positive. I would say our view in Americas, our view in Asia Pacific as China comes back, so will the rest of Asia Pacific, and then our view in Europe is a bit mixed. Energy cost is better in Europe, which I think in the short term helps. It's not as big a drag as it was. But I think longer term, Europe has got some structural issues if we can't get energy costs down even lower. It puts a big weight on the consumer, which puts a big weight on demand, it puts additional weight on the industrial economy. So fortunately, we've got some cost advantage positions there that help us, and I think we'll navigate through that. Back half of the year, we've got Industrial Solutions coming back to full strength. We've got our new projects coming on. I just mentioned $300 million to $400 million from that. That's all in that volume growth number that I talked about. And the margin expansion is just the oil to gas spread on our existing business and the strength that we're going to see in some pricing in polyethylene for the year. So, I think we're going to ramp in to '25, get ourselves kind of back on to a mid-cycle run rate and we're going to -- in the meantime, we're going to pull the levers like we've been doing to manage cash, keep the balance sheet strong, be the first mover in the next wave with the Alberta project, just like we were with Texas-9. This is the right time to do it. This is the time to lock-in the low cost for construction, and we're ready to roll.

Pankaj Gupta:

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

Operator:

Greetings, and welcome to the Dow Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Dow Investor Relations, Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3. For the third quarter, 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 billion in cost savings in 2023 and delivered a sequential improvement to operating cash flow of more than $300 million. Net sales were $10.7 billion, 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. Volume was up 1% sequentially, led by gains in Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Volume was up 3% sequentially, excluding merchant sales and Hydrocarbons & 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 EMEAI. Operating EBIT for the quarter was $626 million, down from $1.2 billion in the year ago period and $885 million in the prior quarter. Our consistent focus on cash flow generation and working capital management enabled team Dow to generate cash flow from operations of $1.7 billion, resulting in a 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 priority while also returning $617 million to shareholders in the quarter through dividends and share repurchases. Year-to-date, we've returned nearly $2 billion 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 four decades, supported by strong investment-grade credit ratings with no substantive long-term debt maturities due until 2027. Now turning to our operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, operating EBIT was $476 million compared to $785 million in the year ago period. 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 million, driven by lower integrated polyethylene margins, increased planned maintenance activity and lower licensing revenue. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $21 million compared to $167 million in the year ago period. 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 million driven by volume gains and lower costs, which were partly offset by the Louisiana event. And in the Performance Materials & Coatings segment, operating EBIT was $179 million compared to $302 million in the year ago period, driven by local price declines in both businesses. Volume was down as gains in commercial building and construction end markets were more than offset by lower demand for personal care and coatings applications and residential construction. Sequentially, operating EBIT increased $113 million, driven by higher operating rates and cost savings. Next, I'll turn it over to Howard to review our outlook and actions on Slide 5.

Jim Fitterling:

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 2030, position us to deliver more than $3 billion in underlying earnings while reducing greenhouse gas emissions by 5 million metric tons and commercializing 3 million 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-polymer facility at our manufacturing site in Freeport, Texas. This new facility replaces Dow's existing capacity in La Porte, Texas, and expand supply by an additional 30% at the site to support high-value demand growth in polyurethane systems while also reducing our greenhouse gas emissions by more than 45% compared to the La Porte asset. Our Path2Zero 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 Bahía Blanca, Argentina, which will drive the site to source 75% of its electric power supply from renewable sources by 2025. In Terneuzen, 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. The public private partnership is a crucial element of our Path2Zero effort at Terneuzen. Dow investment and timing will depend on the level of collaboration, subsidies 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 third quarter, we successfully leveraged our U.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 Surlyn ionomers, which support high-end applications like perfume and cosmetics packaging. In addition, Valoregen in France and Mura technology in the U.K. 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 million of incremental run rate EBITDA by 2030. 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 Path2Zero project in Fort Saskatchewan, Alberta, on Slide 9. The project will enable Dow to capture sustainable growth opportunities while also delivering on our 2030 greenhouse gas emissions reduction targets and advancing our long-term goal of carbon neutrality by 2050. Construction is planned to begin next year with Phase 1 start-up expected in 2027 and Phase 2 expected in 2029. We expect to spend an average of $1 billion 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 pad. We remain fully committed to keeping our CapEx within DNA 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 Path2Zero 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. This allows us to lead the way to a more circular economy and become a major off-taker 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 million in incremental earnings by 2030. Continuing on Slide 11. Our actions to commercialize 3 million 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. 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 and the cosmetics industry. This has enabled Dow's first sales of bio-based and advanced recycling polymers in the third quarter. Closing on Slide 12. Since Spin, we have executed against our strategic priority and consistently demonstrated financial and operational discipline. 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 chains 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&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 three decades. 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's 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 & Platt. 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 1, 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.

Pankaj Gupta:

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&A. Operator, please provide the Q&A instructions.

Hassan Ahmed:

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 million worth of tailwind -- EBIT tailwind on the P&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. What sort of pricing regime for polyethylene are you baking into that? What sort of pricing regime for ethane are you baking into that?

Operator:

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

Jim Fitterling:

Good morning, David. Good question. Obviously, we're about 12 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 to a positive direction. Inflation is the thing that's weighing on people's minds right now. We're continuing to invest in our 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 million to $500 million 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. Our cost positions are good. And so I think that we're positioned that once the weight of inflation starts to moderate that 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 billion 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, be free cash flow before financing breakeven, you saw a $300 million improvement this quarter in operating cash flows, and we were still able to opportunistically buy back some shares in the third quarter. 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 organic investments to get the benefit in the next up cycle.

Operator:

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

Jim Fitterling:

Hi, good morning. Vince, yes, as we get into the Alberta project, it will be '25 to '27 that is the peak construction of that project. Phase 1 starts up in '27. You would expect that we would get to somewhere in the 3 to 3.5 range for CapEx during that '25 to '27 time frame. That's very similar to where we were during the Gulfstream project, we peaked at kind of that same level. Obviously, we're in a little bit different spot than we were at Gulfstream. We're just doing Alberta Path2Zero, 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 expectations on what CapEx is going to look like.

Jeff Zekauskas:

Thanks very much. In your $1 billion cost-cutting program, how much of that comes out of SG&A and R&D? And in your slides, you say that your share count in the fourth quarter is 7.10 and in the third quarter, it was7 or 7.5. Are you rounding or is the share count going up?

Howard Ungerleider:

Yes, Jeff, I was smiling. So yes, it is just purely rounding. The share count actually went down about 2 million shares quarter-on-quarter. Year-on-year, it went down 11 million 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 fourth quarter.

Frank Mitch:

Thank you, Howard, hi congrats. Thanks for all the help and friendship over years and certainly looking forward to your next chapter. This - the third quarter was the third quarter 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?

Operator:

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

Jim Fitterling:

Yes. Just taking a look at - I'll take a look at it both by segments, but I think you also have to take a look at it by regions. In P&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 advantaged positions, even Terneuzen and Tarragona were Pro-Nap spreads of greater than $100 - $120 a tonight. 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. We see that as well even on the Gulf Coast. Industrial Solutions, operating rates have been good. Our own issue in Plaquemine is the thing that has that capacity out. And then in Consumer Solutions, on silicones, we tend to see good operating rates in the quarter above 80%. And if you take a look at PM&C, those are slightly down, because of the typical year-end slowdown in demand in coatings. 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 advantaged 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.

Kevin McCarthy:

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 affecting the way you're planning for the future?

Operator:

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

Jim Fitterling:

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 downstream when we get into the consumer brands and the retailer space, we have to go on reported data that we clean out of their public reports. 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. 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. 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.

John McNulty:

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&I segment. 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 $250 million run rate in terms of EBITDA. Is that a reasonable way to think about how you start out looking at 2024?

Operator:

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

Jim Fitterling:

Yes. Good morning, Josh. Obviously, in siloxanes, there was significant new capacity in 2022 and 2023, and we expect that to moderate in 2024 and beyond. That's put pressure on siloxanes 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 fourth quarter, some demand related. Some obviously related to higher silicones pricing, upstream silicon metals pricing, which is kind of moving things up. But I think what you're going to start to see, is that you're going to have less capacity coming on and 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, '25.

Patrick Cunningham:

Hi. Good morning. On the long-term decarbonization strategy, given the weaker macro 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?

Operator:

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

Jim Fitterling:

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. Manufacturing PMI in September was up, so second 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 a rise in the sale of closes and textiles as well as some refined oil products. 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. And one of the things that drives the 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 moved quarter-over-quarter are good. 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 nondurable items.

Duffy Fischer:

Yes. Good morning, guys. In both PMC and iCube, if you could walk through, pricing you called out is down sequentially in each of the SBUs, but 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 as kind of permanent?

Operator:

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

Jim Fitterling:

Yes. I think as a lot saying improve, you can see some positive uptick in Consumer Solutions and 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 will 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. Coatings has been slow due to construction. I think there are some signs starting that applications for permits are starting to pick up on construction. That's kind of a U.S.-centric view. 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.

Laurence Alexander:

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?

Howard Ungerleider:

Yes. Sure, Jim. And Laurence, thanks and I 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 five or six years is really a big step change on cash. And managing cash, just as well as we're managing margins and EBITDA and operating rate in EU. We have structurally taken out about eight days. When you think about it on a cash conversion cycle since spin, eight days has been structural and the other improvements have been more around the cycle. So obviously, that will continue, as we've headed into this down cycle period. Probably we've taken out about $1 billion 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 $1 billion use of cash. But overall, eight 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 two days in the next year or two will come out structurally. So, I think a nice target is 10 days cycle-to-cycle from a 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.

Howard Ungerleider:

Just one more day. Maybe two. That's it.

Mike Leithead:

Great. Thanks. Appreciate you squeezing me in here. Just briefly on packaging. I think sequentially, EBIT was down about $440 million on $480 million lower sales, almost 100% drop through. Can you help us better understand the moving pieces in the quarter there?

Operator:

Thank you. There are no further question at this time. I will now turn the call over to Mr. Gupta for closing remarks.

Operator:

You may now disconnect.

Operator:

Greetings, and welcome to the Dow Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Dow, Investor Relations, Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3, we continued to navigate a challenging macroeconomic environment with slow global growth in the second quarter. Despite lower year-over-year sales and earnings, Team Dow delivered sequential earnings improvement by executing on our financial and operational playbook. We leveraged our diverse portfolio to capitalize on gains in packaging and modestly higher seasonal demand in building and construction. This resulted in a sequential improvement in volume. In addition, we continue to implement our $1 billion of proactive and targeted cost savings actions delivering $250 million of savings in the quarter and $350 year to date. Net sales were $11.4 billion, down 27% versus the year ago period, reflecting lower demand and prices due to slower macroeconomic activity. Sales were down 4% sequentially, as volume gains were more than offset by lower local prices. Volume decreased 8% year-over-year, led by a 14% decline in Europe, the Middle East, Africa, and India, or EMEA. Volume was up 1% sequentially, driven by gains in Asia Pacific and Latin America, as well as in industrial intermediates and infrastructure and performance materials and coatings. Local price decreased 18% year-over-year and 5% sequentially due to lower demand on weak macroeconomic activity, as well as lower global raw material costs. Operating EBIT for the quarter was $885 million, down from $2.4 billion in the year ago period, primarily driven by lower local prices. Operating EBIT increased $177 million sequentially, driven by gains in packaging and specialty plastics. We generated cash flow from operations of more than $1.3 billion, up more than $800 million versus the prior quarter, driven by improved working capital. On a trailing 12 month basis, our cash flow conversion is 98%. Our strong financial position gives us the flexibility to continue to advance our long term strategic priorities, supported by our disciplined and balanced capital allocation strategy. In the quarter, we returned $743 million to shareholders through dividends and share repurchases. Year to date, we've returned nearly $1.4 billion. And our balance sheet remains healthy, supported by strong investment grade credit ratings. We also published our 2022 INtersections Report in June. The report once again received limited assurance by our external audit firm and showcases Dow's continued progress on our ambition to be the most innovative customer centric, inclusive and sustainable material science company in the world. Now turning to our operating segment performance on Slide 4. In the Packaging and Specialty Plastics segment, operating EBIT was $918 million compared to $1.4 billion in the year ago period. Local price declines were driven by lower global energy and feedstock costs, which in turn impacted polyethylene prices across all regions. Volume declines, primarily in EMEA, were driven by lower demand for olefins and aromatics. Sequentially operating EBIT improved by $276 million, driven by lower energy and feedstock costs. Moving to the Industrial Intermediates and Infrastructure segment, operating EBIT was a loss of $35 million, compared to earnings of 426 million in the year ago period. Results were driven by lower local prices and demand in both businesses. Volume declines were primarily driven by lower demand for consumer durables, building and construction, and industrial applications. Sequentially, operating EBIT was down $158 million due to lower local prices and increased planned maintenance turnaround activity. And in the Performance Materials and Coatings segment, operating EBIT was $66 million compared to $561 million in the year ago period. Local price decreases were driven primarily by declines for siloxanes and acrylic monomers. Volume was down on lower global demand for silicones and coatings applications. Sequentially, operating EBIT increased $31 million, driven primarily by seasonally higher volumes. Next, I'll turn it over to Howard to review our outlook and actions on Slide 5.

Jim Fitterling:

Thank you, Howard. Moving to Slide 8. We remain confident in our long term growth as we drive the transition to a more sustainable future with a focus on profitability and maintaining our disciplined and balanced capital allocation priorities. Our decarbonizing growth strategy is expected to increase underlying earnings by $3 billion annually, while also reducing greenhouse gas emissions by 30% by 2030 versus 2005 levels. Notable updates this quarter include, our FCDH unit is now fully operational and is ramping up rates. Leveraging breakthrough technology, the unit expands our capacity at lower capital and cost intensity, while reducing energy usage and greenhouse gas emissions relative to conventional PDH units. In collaboration with X-energy, we are preparing to submit a construction permit application to the US Nuclear Regulatory Commission for our small modular nuclear energy facility in Seadrift, Texas. We plan to break ground in 2026, and the project is expected to provide the site with safe, reliable, low carbon power and steam. In parallel, we are utilizing a capital efficient approach to quickly scale production and grow our supply of recycled and bio based products. By 2030, we expect to advance our Transform the Waste strategy by commercializing 3 million metric tons per year of circular and renewable solutions. Our collaborations with Valoregen and Mura Technology both remain on track to start up their respective mechanical and advanced recycling facilities in the fourth quarter. Together, these investments will help us unlock long term growth opportunities as we meet increasing customer and brand owner demand for more sustainable and circular solutions. Taking a closer look at our Fort Saskatchewan, Alberta path to zero project on Slide 9. This flagship project will create the world's first net zero CO2 emissions ethylene and derivatives complex, another example of how we're delivering long term value growth through sustainability. By 2030, the project will decarbonize 20% of our global ethylene capacity, while expanding our global polyethylene supply by 15% and tripling polyethylene capacity at our Alberta site. We are on track to secure partner agreements and subsidies during the second half of this year and we are targeting board and regulatory approval along with a final investment decision by year end. Construction is projected to begin in 2024 and start-up of the project will occur in two phases. Phase 1 will add approximately 1,300 kilotons of ethylene and polyethylene capacity annually by 2027. Phase 2 will contribute another approximately 600 kilotons annually by 2029. We expect to spend, on average, roughly $1 billion of CapEx annually on the project beginning next year through project completion. By mid-decade, our total CapEx for the company is projected to ramp above D&A between 2025 and 2027 as we implement Phase 1 of the Alberta project. We remain fully committed to keep our target CapEx within D&A across the economic cycle and expect to return those -- to those levels after the completion of the first phase of this project. At full run rates, we expect the project to deliver $1 billion of EBITDA annually and targeted returns on invested capital above our enterprise goal of 13% over the economic cycle, driven by the Alberta feedstock cost advantage, which provides Dow with lower ethane costs compared to the rest of the world, even more advantaged than the US Gulf Coast. Industry leading capital efficiency, building on the success of our Texas 9 investments, which has delivered over 15% return on invested capital since startup with best-in-class capital intensity, conversion costs and CO2 emissions. A higher value sustainable product offering which drives value as we capitalize on technologies that deliver low and zero CO2 emission solutions with enhanced performance for our customers and by leveraging third party investments for decarbonization and CO2 infrastructure assets, which will reduce our capital spend consistent with our best owner mindset. Altogether, we are well positioned to lead the industry and meet the needs of customers and brand owners as they seek products with a lower carbon footprint. Our disciplined and phased approach will enable us to decarbonize our assets, grow earnings and keep CapEx within D&A across the cycle. Closing on Slide 10. Dow remains focused on advancing our long term strategy, while navigating challenging short term market dynamics. We're proactively reducing costs and maximizing cash flow, while maintaining a broad focus on financial flexibility and operating discipline. The actions we've taken since spin to strengthen our balance sheet and improve our cash generation profile are enabling us to be more resilient as we deliver on our capital allocation priorities across the economic cycle. As a result, we have raised our underlying earnings above pre pandemic levels, substantially improved our three year cumulative free cash flow, reduced our net debt and pension liabilities by more than $10 billion and delivered around 84% of net income back to our shareholders since spin, well above our target of 65% across the economic cycle. At the same time, our diverse, differentiated and global product portfolio is well positioned to capture the above GDP demand growth across our attractive market verticals. With increasing customer demand for more sustainable and circular solutions, we'll continue to advance our Decarbonize and Grow and Transform the Waste strategies, which will raise our earnings profile, reduce our greenhouse gas emissions and create a more circular economy. With that, I'll turn it back to Pankaj to open the Q&A.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Vincent Andrews of Morgan Stanley. Please go ahead.

Jim Fitterling:

Good morning, Vince. Great question. Packaging, especially plastics was strong in all four regions of the world. We saw volume increases in all four of them. And we saw overall the biggest volume increases across all the businesses in P&SP for the quarter. In terms of the $50 million headwind, obviously, June closed out a little bit softer on pricing. North American price has settled down $0.03 in June. And that's because you've had some new capacity that came online during that time. Inventories came down actually during the month of June. I think, which is a reflection of the strength in China, also India, also exports to Mexico. All three of those regions are relatively strong. Asia Pacific and Latin America led in terms of volume. And, obviously, Europe was the weakest of the three -- of the four regions. So my expectations is, while feedstocks have come up a bit in North America, a lot of that is really due to the hot weather that we've had and ethane staying in natural gas. The projection is that, that will continue through the third quarter, but if the weather breaks, then obviously we'll see some of that come out. But our expectation is, we'll start with that lower pricing in July, and then we've got actions out there in July of up $0.03 up $0.05 for August. And as we speak, Asia is increasing about $20 to $30 a metric ton in July.

David Begleiter:

Thank you. Good morning. Jim, staying on the $50 million decline in feedstocks and pricing. Looking at Integrated margins, that would suggest it would be worse than down $50 million. So what are you doing to offset the perhaps the greater headwinds in at least consultant margins versus your forecast down $50 million? Thank you.

Howard Ungerleider:

And Dave, in terms of what additional tailwinds are there to help compensate or offset some of those headwinds that you talked about. A big chunk of it, we continue to ramp our marine pack cargo and our shipments, so you should expect sequential volume growth in P&SP from Q2 to Q3. And then also it's a self-help that the team delivered in the second quarter. I mean, if you look at all of the -- at a high level from an enterprise perspective, a big chunk, if not, almost all of the delta of sequential improvement came from the self-help and the interventions. And so, at the end of June, we had about 75% of those 2,000 roles and either enterprise level numbers exit. And so, I mean to think about half of that is impacted in P&SP. So the self-help and interventions will also be a tailwind sequentially for P&SP.

Hassan Ahmed:

Good morning, Jim and Howard. Just wanted to sort of ask a quick question around the supply addition side of things

Operator:

Thank you. Your next question comes from the line of Jeff Zekauskas of JPMorgan. Please go ahead.

Jim Fitterling:

Yeah. I'll take a look at MDI and then I'll have Howard get the share buyback part of that. Look, on MDI, I think things are in relatively good position. We've seen MDI continue to be relatively strong in the market where MDI impact, obviously, automotive has continued to be strong. Where we've seen demand down is obviously in durable goods like appliances. And so, that has in some systems offering there that has put some pressure on prices. I think we are in the process of starting up MDI distillation down in Freeport, which is an expansion off of the La Porte capacity, but allows us to retire the La Porte asset. And so, I think relatively speaking, MDI is holding up relatively well. And I think from a supply demand balance standpoint, our expectation is that, some of the capacity that’s been announced out there is going to come on later than expected. And I think that's going to offer a little bit tighter operating rates than what the industry analysts might be predicting.

Operator:

Thank you. Your next question comes from the line of Mike Sison of Wells Fargo Securities. Please go ahead.

Jim Fitterling:

Good morning, Mike. Good question. Volumes were down 8%, obviously, Europe was off 14%, so that's a pretty significant part of that volume being down. Asia Pacific and Latin America volumes were stronger, and so they've held up relatively well. North America has been relatively flat about 1% on volume. So I think you can see, obviously, the pressure on Europe showing up in some of those markets. In terms of the look at the macro economy, my feeling is this, we know we're in a global economic slowdown. It really started mid last year. We saw GDP decline through the back half of last year. We saw a little spike up in Q1 of this year, but it's been down in Q2. And the expectation is, it'll be down in Q3 and Q4. I think it's setting up for a ramp back in 2024. People ask a lot of times, are we in a recession? I think we'll determine if we're in a recession or not when we look in the rearview mirror. But the leading indicators, the destocking that happened in the fourth quarter and into the first quarter appears to be over inventories are in relatively good control. MEG ethylene glycol typically leads into a slowdown. We saw that happen last year and, obviously, it led into this slowdown. And then a lagging indicator into a slowdown is caustic and chlorine, both sides of the electrochemical unit. Obviously, we saw a time where chlorine demand was relatively strong and caustic demand was relatively strong. Then we saw caustic fall off, but chlorine stay high. And now we see both caustic and chlorine fall off. And that's a lagging indicator that you're into a slowdown. So I would say all the indicators say we're in it right now. And it feels to me like third, fourth quarters are going to be that low point, and then we start to ramp back from there. And with the Fed seem to be nearing the ending of rate increases, a little bit of green shoots in housing, people moving back into the housing market. I think there is some areas to be optimistic for 2024.

Kevin McCarthy:

Yes. Good morning. Jim, with regards to your industrial intermediates segment, can you speak to some of the actions that you're taking there in terms of propylene oxide and your kind of two way resupply arrangements with [Olin] (ph) on-site there. And then more broadly, maybe as a follow-up to Mike's question, you're guiding 3Q a little bit lower. Do you think you're at or near an earnings bottom in 3Q in Industrial Intermediates or how would you frame that in terms of the bigger picture cycle there?

Operator:

Thank you. Your next question comes from the line of Frank Mitch of Fermium Research. Please go ahead.

Jim Fitterling:

Good morning, Frank. Yes. Look, I think ethane supply is going to continue to increase. There's about 15% of additional supply coming on the 2023, 2024 time frame, and there's 700,000 barrels a day in rejection today with -- this is after the start-up of new assets. So I think the supply is there. I think some of it is obviously been left in the gas because you've had really strong fuel demand for natural gas with the heat in the United States. That has put a big pull on base load power, which today in the US is very dependent on natural gas. I think some of that will come off. You're seeing storage, I think, it's going to hit its peak before the winter season comes. And so, I think as we see some moderation in the weather I think you're going to see potential for ethane pricing to come off. On Sadara, you're right, they had a couple of turnarounds that impacted the results. And, of course, they have a strong exposure to Asia Pacific. They have a very good cost position. So with them back online now and fully operating. And with the demand in Asia continued to be strong, remember, India has GDP rates above 7%. I think you'll see that Sadara will come back a bit in the third quarter and in the fourth quarter.

Operator:

Thank you. [Operator Instructions] Your next question comes from the line of Laurence Alexander of Jefferies. Please go ahead.

Jim Fitterling:

Howard, do you want to take that one?

Operator:

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

Jim Fitterling:

Good morning, Duffy. Well, obviously, on the on the top line, I think sales, obviously, are going to be down about 5% on the high side. It could be down as much as 9%. I think you're going to see -- obviously, we talked a lot about feedstocks and packaging, especially plastics, that'll be one element. We have the one time related items from second quarter to third quarter that won't repeat on licensing, so that's about a $100 million. Cost savings is about $50 million to the positive. And then we just finished -- we just have the turnaround at the cracker St. Charles, which is a $100 million. So I'd say on price, volume -- my expectation is, volume is going to continue to move as we've seen in the second quarter. We have advantaged cost positions around the world and we're taking advantage of that. They're running at high rates and we're able to export. And so, we're going to take advantage of that in the third quarter, and then we're going to navigate the price and, obviously, the headwinds that we have on raw material. I would say the team's already shifting on flexibility. We've got butane in some cases and propane back in the slate in some areas to mitigate some of the higher ethane costs. If you look at II&I, obviously, the big impact will be the loss of capacity out of glycol in Plaquemann. So that'll be a $100 million headwind. That's partly lost margin on those sales and partly the cost of rebuilding the asset and getting it back operational. Cost savings and maintenance activities are actually about a $40 million tailwind. And then we'll continue to see how demand holds up. Automotive demand has been relatively good, but housing and construction has been relatively weak on the polyurethane side. Performance Materials and Coatings, I think volumes are going to hold up well. The price pressure in siloxanes has been the biggest headwind there. Although it's flattened and if it maintains flat, then we may not see as much of a headwind there. Cost savings and lower plan maintenance activity are about a $60 million tailwind for them. So on PM&C, I'd say the other seasonal impact will be a slower seasonal return to kind of a normal seasonal outlook for coatings, because architectural coatings have been relatively weaker. Industrial coatings have been strong, but architectural coatings compared to last year have been relatively weaker. That's kind of the outlook on all three. I'd expect at the high end, all three of them will be down, primarily due to price not so much on volume. And then as obviously demand returns, we'll start to see some pricing power come back in.

Operator:

Thank you. And your next question comes from the line of Christopher Parkinson of Mizuho Securities. Please go ahead.

Jim Fitterling:

Howard, do you want to hit view on buybacks?

Operator:

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

Jim Fitterling:

Good morning, Arun. Look, I think China, even though it's slower than what we are expecting is still relatively good in global GDP. I mean, 4.5% to 5% global GDP and the second largest economy in the world is pretty good. And India has been greater than 7% and Mexico has been strong, and we're well positioned to serve all those markets, and we're seeing that as we increase the exports. And obviously, both China and India still need higher-value functional polymers, which are a highly profitable part of what we export from the US Gulf Coast. So I feel good about that. I don't think it's totally just dependent on China improving. I also think it's dependent on things like housing starting to improve again in North America and the European economy coming back. So energy costs have come down in Europe. Natural gas, LNG prices in Europe have kind of flattened around [$10 a million] (ph) BTU, which is a lot of relief from where they've been, obviously, still much more expensive than United States, which is in the three handle on natural gas, but still much, much improved. And so, I think a lot will depend on the European economy coming back, which has been under a ton of pressure. And of course, we have a lot of exposure in Europe. About 30% of our footprint is in Europe, and it's most heavily in polyurethanes and construction chemicals. And then I think in North America, we look in for housing to take a step back, which has started to show some positive signs on new permits and mortgage applications. I think high rents and lack of supply on the housing market are leading to more people thinking about moving in. There's some other bright spots in the economy that I think are coming. We had all the passage of the infrastructure bill, the inflation Reduction Act, the CHIPS Act, which are meant to have a big impact, obviously, here in the United States. But there's a lag between the passage of those bills and the capital spend that goes along with it. We've already seen in areas like wire and cable for telecommunications and high-voltage transmission. We've already seen very strong demand with our downstream customers. And I don't think that's going to back off. So you see that demand already. The return to travel has meant that aerospace production, plane production is back up. You see that in the coatings sector, especially those that have exposure to coatings for the aerospace industry. Obviously, automotive continues to be relatively strong and stronger than last year. Heavy machinery continues to be strong because in a lot of parts of the world, we need to increase mining to keep up with the metals that we need to make this happen. And then automation, we don't talk about it much, but with inflation on wages, many companies are looking more to AI, machine learning and automation of existing manufacturing to get productivity out of manufacturing. So if you're thinking about components that are going into controls and automation and either new construction of new manufacturing lines or revamping existing ones, those companies have pretty big backlogs right now. So I think as housing picks up, it's going to pick up construction and it's going to pick up consumer durables, which had been weak all year really since mid-last year. And I think we look at that to be kind of the indicator of the turn. That will be an indicator in China. That will be an indicator here in North America as well.

Patrick Cunningham:

Hi. Good morning. Price declines in PM&C continue to be fairly substantial. How do you expect demand and trends for the balance of the year? And what are your sort of expectations for new siloxane capacity in 2023?

Operator:

Thank you. And we have time for one more question from the line of Josh Spector of UBS. Please go ahead.

Jim Fitterling:

Yes. I think when we looked at the guide for the third quarter, there's $100 million step-up from second quarter. So that will be on a year-over-year basis, about $350 million of cost saves. And I think fourth quarter is going to be in that $300 million to $350 million as well. So two-thirds of the $1 billion, $650 million to $700 million comes out in the back half of this year. Obviously, there's some sequential carryover into next year. So you got about $150 million in the first quarter of next year from the sequential carryover. So the kind of the year-over-year and first quarter will be a step up as well. And those are the spending impacts and then obviously, the businesses are all working on margin improvement within their portfolios. And then Howard mentioned, in addition to the $1 billion of cost saves, we're working on $1 billion of cash levers, unique to Dow cash levers. And I think he just outlined them on the previous question. So I'd say, net-net, we're focusing on cash, both on the cost side and on the cash levers where we can liberate some cash and also improving mix within the businesses and taking advantage of our low-cost positions and running those assets are and then trimming on the high-cost side where we can to set ourselves up for the ramp-up in 2024.

Pankaj Gupta:

Yes. Thanks, 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 about 48 hours or so. This concludes our call. Thank you once again.

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. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn it over to Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow 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, proactively 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 billion in cost savings in 2023 are progressing with $100 million achieved in the first quarter. These actions will ensure we continue to focus on cash flow generation through our low-cost to serve operating model. Turning to the details of the quarter. Net sales were $11.9 billion, 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. 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 million, down year-over-year due to lower local prices and volumes. Sequentially, operating EBIT improved by $107 million, with gains primarily driven by performance materials and coatings. Cash flow from operations was $531 million in the quarter. On a trailing 12-month basis, cash flow conversion was 85%. 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 million 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 operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, operating EBIT was $642 million compared to $1.2 billion 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. 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 million. Improved input costs and higher operating rates in our most cost advantage assets were more than offset by lower sales from non-recurring licensing activity and lower equity earnings. Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT for the segment was $123 million compared to $661 million in the year ago period. Results were driven by lower pricing and demand, as well as higher energy costs, particularly in EMEA. Sequentially, operating EBIT was down $41 million. Lower energy costs were more than offset by decreased demand and pricing for propylene oxide, its derivatives, and in isocyanates, in 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 million compared to $595 million in the year ago period. Local price declines for siloxanes were driven by competitive pricing pressure from supply additions in China. 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 million, 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.

Jim Fitterling:

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 million metric ton 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. In Infrastructure, more than $3 trillion 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 technology, such as biodegradable polymers or 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 contained 3 times to 4 times more silicone content than internal combustion engine vehicles. Lighter weight vehicles are also aided by our high value polyurethane systems and EPDM technologies. Further, we continue to execute our targeted suite of higher return, lower risk projects, which are expected to add $2 billion in underlying EBITDA by the middle of the decade. These investments put us in an advantaged 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 second quarter we expect to select an analysis site in the U.S. Gulf Coast to develop a small modular nuclear energy facility by 2030. Nuclear technology will be key in generating safe and reliable power and steam at our sites, while enabling zero CO2 emissions manufacturing. In Alberta, we recently awarded Fluor with a contract to provide front end engineering and design services for our Path2Zero 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. As a reminder, this investment for the world's first net zero CO2 emissions ethylene and derivatives complex will 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 Valoregen, Mura Technology, and WM among others. Valoregen's 15 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. And Mura remains on track to start up the first of its kind, 20 kiloton per year advanced recycling plant in Teesside in the United Kingdom in the second half of this year. This is the first step in our strategic partnership with Mura to launch as much as 600 kilotons per year of advanced recycling capacity by 2030. As the key off taker of post-consumer and advanced recycled feed from both of these partnerships, Dow well commercialize circular polymers in high demand from global brands. Altogether by 2030, we are on track to deliver an additional $1 billion in underlying EBITDA improvement through our Alberta project, commercialize 3 million metric tons per year of circular and renewable solutions and reduce Scope 1 and 2 CO2 emissions by 5 million 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. 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 three year average is nearly 2 times the peer average and 3 times the sector and market averages. Our differentiated portfolio, cost advantaged assets and operating discipline have resulted in three 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 & Specialty Plastics further expanded its outperformance over the next best peer on an EBITDA per pound of polyolefin basis by $0.05 per pound. It also delivered five 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 in 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 will raise our underlying earnings profile, while reducing our carbon footprint and increasing recycled content. 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&A.

Operator:

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

Jim Fitterling:

Yeah. Good morning, Vince. Good question. They -- obviously, we had some headwinds, obviously, in the fourth quarter in silicones with some outages that did not recur in the first quarter. So that was part of the impact. 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, the other is getting ready for seasonally higher volumes going into the second quarter. And then we think we'll see more of a traditional seasonal pickup in the coatings and monomers 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.

Hassan Ahmed:

Good morning, Jim and Howard. Question around packaging and specialty plastics. Look, I was a bit surprised to see EBITDA being sequentially flat keeping in mind that, obviously, we got $0.06 a pound worth of polyethylene price hikes and ethane was down sequentially. So that's sort of part one of the question. And part two 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? Thanks so much.

Jim Fitterling:

Yes. On two other points on that comparison. So don't forget that in the fourth quarter, we had the innovation catalyst and actually a licensing sale. Those are lumpy. That was about $70 million in the fourth quarter that didn't recur. So that was a headwind sequentially. And then also the bulk of Q1, we had the cracker in Sadara out for a planned maintenance turnaround. So that's now back up and running, and that should be a tailwind improvement in the second quarter.

David Begleiter:

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?

Howard Ungerleider:

Yep. I mean turnaround sequentially are going to be about a $75 million headwind. $25 millions of that in P&SP and the balance in Industrial Intermediates.

Steve Byren:

Yes. Thank you. I just wanted to confirm that the margin benefit from propane to propylene that's not realized in the PM&C segment. Is that right? And perhaps a question about the headcount reduction, 2,000 target for the year. What is that off of the total number? And is your benchmarking analysis that it highlight that is an area to focus on, like, EBITDA per employee or something like that? Thanks.

Howard Ungerleider:

No. That's correct. Agreed.

Jeff Zekauskas:

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? Is that, I don't know, $400 million? Is it a higher number or a lower number? Your cash flows probably will work their way up this year?

Howard Ungerleider:

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 days 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. To your question about the full year, I would say, we're working on between two and three days of structural efficiency, improvement in working capital. On a dollars basis, that's anywhere between $300 million and $500 million for the year in terms of improvement in cash.

Mike Sison:

Hi, 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 million. So just curious why the improvement in P&SP, wouldn't be stronger in 2Q? Are you thinking polyethylene margins are coming down? Or just maybe any other factors that the improvement would have been better?

Howard Ungerleider:

Yes, Michael, the other thing is, don't forget, there's a $25 million headwind from a turnaround in Functional Polymers, which is in P&SP as well sequentially.

John McNulty:

Yeah. Good morning. Thanks for taking my questions. So maybe just to dig a little bit further on the U.S. side of the market, obviously, there is some capacity coming on in the polyethylene area. Can you speak to the demand trends that you're actually 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?

Operator:

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

Jim Fitterling:

Good morning, Kevin. I would say Europe, obviously, adds 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 are in the $14 to $ 17 a million Btu range, while we sit here in the U.S. between $2 and $3. And so, I think you can sense over the long-term that, that continues to be the same in 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 other changes that they're 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. 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.

Duffy Fischer:

Yes. Good morning. Jim, wanted to dig a little bit on the comment you made about a $70 million sequential headwind in chlor-alkali. So a couple of questions there. Is that mostly with the European assets? Or is that on the U.S. contract chlor-alkali you get? And is most of that pain coming from caustic? Or are you also seeing margin squeeze on the chlorine and chlorine derivatives?

Operator:

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

Jim Fitterling:

Yes. Good question on the volumes. I would say North American 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. So EMEA was down 15% during that same time frame. So you can see that some of the other cost advantaged regions were still doing relatively well. The other thing to think about is Asia Pacific. We did start to see -- after February we started to see some positive expansion in the China market, which we had not seen earlier in the first quarter. And so, if you look at P&SP and II&I, both volumes were down a lot in the first quarter. We had some, as Howard mentioned, nonrecurring licensing activity, which is not really a volume but an EBITDA play. 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? So I would think through the year, we should start to see this gradually improve. That's what our plan for the year 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 billion of cost saving.

Laurence Alexander :

Hi. 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 in the top end markets you’ve described?

Operator:

Your next question comes from the line of Christopher Parkinson with Mizuho. Please go ahead.

Jim Fitterling:

Sure. Let me try to do this MDI and siloxanes. Look, on siloxanes, there were about four additions in China last year on siloxanes capacity. You had each one of them range, they were between 100,000 and 200,000 tons each. And so -- 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 650,000 tons added. So I think we're through that. MDI, I think, is a timing game, as we've said before, I feel good about where supply/demand is with MDI. In the short term, the operating rates have been between 75% and 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. 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 million to 5 million 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 and U.S. ethane, Canadian ethane, Argentina, all substantially advantaged to European and Asian naphtha right now and even MTO and CTO. So, we want to continue to build out our footprint in more cost advantaged regions going forward.

Mike Leithead:

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. And then on Slide 7, you talk about why they should see pretty attractive growth over the next one to two 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 only transitory or maybe the other way around, when do you start rethinking some of the timing of your expansion investments if demand remains weaker for longer?

Howard Ungerleider:

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 need for Dow chemistry in an EV vehicle than in an internal combustion engine. So that will be a real growth driver for our silicones business as well as our elastomers business and to a lesser extent, urethane acrylics.

Aleksey Yefremov:

Thanks. Good morning, everyone. You work on your Alberta projects, 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?

Operator:

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

Jim Fitterling:

Howard, do you want to go through -- walk through on the outlook?

Operator:

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

Jim Fitterling:

Yes. Welcome, Patrick. And Functional Polymers is about 25% of the P&SP portfolio on the polymer side. And I'd say the two 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. 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, and we're starting to see a pickup there. So as we put more alternative energy in and we would 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. So, as we're expanding reach for more wireless access to the people, we're going to see more telecommunitication towers go up, that's going to drive more demand for wire and cable products for those projects.

Matthew Blair:

Hi there. Good morning. Jim, could you provide some more color on your auto 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?

Operator:

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

Operator:

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

Operator:

[Call Starts Abruptly] 2022 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn it over to Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3. In the fourth quarter, Team Dow continued to take proactive actions to navigate slower GDP growth, challenging energy markets and customer destocking. We proactively lowered our operating rates to effectively manage working capital, implemented operational mitigation plans and cost saving measures and prioritized higher-value products where demand remained resilient, including in functional polymers and performance silicones as well as in mobility, renewable energy and pharma end markets. These actions, combined with our continued focus on cash enabled us to deliver cash flow from operations of $2.1 billion in the quarter. Cash flow conversion was 166%, and we returned $620 million to shareholders. Dow's cash generation reflects our continued focus on operational and financial discipline, which was important as we navigated an extremely dynamic year in 2022, as you see on Slide 4. In the first half of the year, we capitalized on strong demand across our diverse global portfolio while leveraging our derivative and feedstock flexibility and low-cost positions to mitigate higher raw material and energy costs. In the second half of the year, economic conditions deteriorated driven by record inflation, rising interest rates, ongoing pandemic lockdowns in China and continued geopolitical tensions. In the face of these evolving market dynamics, Dow was resilient, generating cash flow from operations of $7.5 billion for the full year. While executing our disciplined and balanced approach to capital allocation. We delivered returns on invested capital of 15%, above our 13% across the economic cycle target, as we prioritized higher return, lower risk and faster payback investments. We achieved credit rating and outlook upgrades as a result of our strengthened balance sheet, and we have no substantive debt maturities due until 2027. And we returned a total of $4.3 billion to shareholders, including $2.3 billion in share repurchases and $2 billion in dividends. At the same time, we continue to advance our Decarbonize and Grow strategy and accelerate circularity to create long-term shareholder value as we meet growing customer demand for more sustainable solutions. I'm proud of how Team Dow continues to deliver for our customers, drive shareholder value and support our communities as we progress toward our 2050 carbon neutrality target, and you can see a number of those highlights depicted on this slide. Now turning to our operating segment performance on Slide 5. In the Packaging & Specialty Plastics segment, net sales were $6.1 billion, down 16% year-over-year as price gains across all regions and functional polymers were more than offset by lower polyethylene and olefin prices. Volume declines were driven primarily by lower olefins and packaging demand in Europe, which was partly offset by a resilient global demand for functional polymers. Sequentially, net sales were down 17% driven by lower hydrocarbon sales and polyethylene prices. Operating EBIT for the segment was $655 million compared to $1.4 billion in the year ago period, primarily due to lower integrated polyethylene margins. Sequentially, operating EBIT was down $130 million as lower raw material and energy costs were more than offset by lower polyethylene prices and operating rates. Moving to the Industrial Intermediates & Infrastructure segment. Net sales were $3.7 billion, down 20% from the year ago period. Volumes declined primarily due to lower demand in Europe for industrial, consumer durables and building and construction applications. Sequentially, net sales were down 10% as seasonal demand increases for deicing fluid were more than offset by declines in building and construction, consumer durables and industrial applications. Operating EBIT for the segment was $164 million compared to $595 million in the year-ago period, driven by lower demand and increasing energy costs, particularly in Europe. Sequentially, operating EBIT margins expanded by 40 basis points as lower energy costs versus the prior quarter were partly offset by lower volumes. And in the Performance Materials & Coatings segment, we reported net sales of $2.1 billion, down 20% year-over-year as local price gains for performance silicones and architectural coatings were more than offset by lower prices for siloxanes and acrylic monomers. Volume was down as resilient demand in mobility was more than offset by declines primarily in building and construction end markets. Sequentially, net sales were down 22% due to seasonally lower demand for coatings, industrial and building and construction applications as well as local price declines for siloxanes and acrylic monomers. Operating EBIT for the segment was a loss of $130 million compared to earnings of $295 million in the year-ago period due to local price declines primarily in siloxane and lower operating rates in the quarter. Sequentially, operating EBIT declined $432 million, driven by lower prices, demand and operating rates. I'll now turn it over to Howard to review our outlook and actions on Slide 6.

Jim Fitterling:

Thank you, Howard. Moving to Slide 10. While the near-term environment remains challenging, we continue to see attractive secular trends across our market verticals of packaging, infrastructure, consumer and mobility. With resilient cash flow generation and a strong credit profile, we are well positioned to continue advancing our Decarbonize and Grow strategy to capitalize on these opportunities. We Delivered on our growth investment commitments outlined in early 2022. These investments are expected to collectively generate $2 billion in run rate EBITDA by the middle of this decade. In Packaging & Specialty Plastics, we mechanically completed and began final commissioning of our FCDh unit in Louisiana in the fourth quarter. This breakthrough propylene technology features up to 25% lower capital outlay while reducing energy usage and greenhouse gas emissions by up to 20% versus conventional FCDh units. In Industrial Intermediates & Infrastructure, our latest alkoxylates capacity investment in the United States was completed in the third quarter of 2022, and our next in Europe will be completed in the first quarter of this year. These projects will further serve high-value markets in home care and pharma and are just a start. Our next wave of alkoxylates capacity investments remain on track. In fact, Dow has already successfully begun locking in supply contracts with several consumer and pharmaceutical customers to support the next wave of growth. And in Performance Materials & Coatings, we completed 16 downstream silicone debottleneck projects in 2022 to meet demand for high performance, building and construction, personal care and mobility applications. Additionally, we accelerated the delivery of our digitalization initiatives and now expect the full $300 million run rate EBITDA to fully materialize by the end of 2023, well ahead of our prior target of 2025. As a result, we anticipate our digital sales to comprise 50% of total revenue by 2025. Looking forward, we expect to continue growth investments in our global operations, including key capital investments in higher-margin polyurethane systems and additional alkoxylate capacity, incremental projects to expand downstream, high-value ethylene derivative capacity and continued coatings and silicon debottlenecking projects. We will also continue progressing our operating investments to improve production capabilities and reliability as we shift our product mix toward higher growth and higher-value markets. Turning to Slide 11. Decarbonizing our assets and driving circularity remains a significant growth opportunity for Dow. We have a clear road map to reduce carbon emissions by another 5 million metric tons by 2030. We continue to invest in innovative, renewable energy and efficiency technologies, such as our collaborative program with Shell to electrically heat steam cracker furnaces, which is on track to start up in 2025. In Alberta, we reached a preliminary investment decision for our past to Zero project, and we are working with the Canadian government to confirm necessary incentives so that we can make a final investment decision by the end of this year. And our Terneuzen 2030 project, where we have a clear road map to reduce carbon emissions at the site by more than 40% by 2030 is making progress as we secure partner and government agreements and subsidies. We are also advancing our transform the waste target to commercialize 3 million metric tons of circular and renewable solutions annually by 2030. By leveraging our pipeline of strategic partnerships to invest in innovative solutions and scale up production, we are well positioned to meet this growing customer demand in a disciplined and capital-efficient manner. Most recently, Dow and WM announced a bold new collaboration to address hard-to-recycle plastic films by enabling them to be placed directly into residential curbside recycling. By 2025, the program is expected to divert more than 120,000 metric tons of plastic film from landfills. We continue to see sustainability as essential for our long-term earnings growth. Altogether, by 2030, we remain on track to deliver $3 billion in underlying EBITDA improvements while reducing Scope 1 and 2 emissions by 30% compared to our 2005 baseline. Turning to Slide 12. The actions we've taken since spin to strengthen our balance sheet while improving our financial flexibility and operating cash flow generation are enabling us to be more resilient as we deliver on our capital allocation priorities across the economic cycle. Our free cash flow performance is now more than tripled on a trailing 12-month basis. We substantially improved our liquidity position, ending the year with nearly $14 billion. And through our disciplined and balanced approach to capital allocation, we've significantly reduced our liability profile with a combined reduction of more than $11 billion in our net debt and underfunded pension position since spin. Closing on Slide 13, we have a clear playbook of actions to drive resilient performance in the near and long term. We have plans to achieve $1 billion in savings through targeted actions to increase efficiency and maintain a low-cost structure that is best in class. We're maintaining a strong financial position with a continued focus on disciplined and balanced capital allocation, and we're advancing our Decarbonize and Grow and circularity strategies, delivering incremental run rate EBITDA improvements through the end of the decade, positioning us for an economic recovery while lowering our carbon dioxide emissions. As we leverage our competitive advantages, operational agility and focus on cash flow generation that has served us well since spin, we will continue to deliver long-term value for our shareholders. With that, I'll turn it back to Pankaj to open up the Q&A.

Operator:

[Operator Instructions]. Your first question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Jim Fitterling:

Sure. Good morning, Vince. Thanks for the question. First, I think it's important to look back at the fourth quarter on PM&C and understand the fourth quarter. Coatings and Performance Monomers kind of got back to the normal fourth quarter seasonality that we would see, which a year ago was very different because we were still recovering from all the supply disruptions from winter storm URI and everything else that was associated with that. So I think you'll see that they'll come back to a more normal season in 2023. And you also saw the impact of destocking. Destocking in the fourth quarter represented, and this is across the businesses, about 50% to 60% of the slowdown that we saw in the fourth quarter. So I think the destocking is going to work itself through in the first quarter. And then I think you'll see us get back to normal seasonality there. I do think positively on China for coatings and performance monomers. I do think we're seeing China opening up. We're not seeing issues with people coming to work. So I think we're optimistic that the government will probably try to stimulate the construction economy there, and we'll start to see that take off through the year. On silicones and siloxanes, you had two impacts. One was the market impact of things slowing, which was the lower siloxane prices that hit hardest in China, obviously, at the end of the year. The other one was self-inflicted. We happen to have all three of the silicones pillar plants, the siloxanes pillar plant down at some point in the fourth quarter. And that lower operating rate really hurt us. They're, all 3 back up and running. So I think that issue is behind us. So I would expect you'll start to see siloxanes demand pick back up. We saw destocking in all the downstream areas in silicones, personal care, home consumer goods, and we also saw it, obviously, in building and construction. I think that will start to rebound as the year progresses.

David Begleiter:

Thank you. Good morning. Jim and Howard, given the recent decline in European natural gas prices, how are you thinking about the competitiveness of the European operations going forward?

Operator:

The next question comes from Hassan Ahmed of Alembic Global. Please go ahead.

Jim Fitterling:

Good morning Hassan. Good question. Obviously, the outlook -- I would go back to integrated margins and take a look at our outlook and our expectations for integrated margins in the quarter. We think both in the U.S. and in Europe, they'll be up about $0.04 on integrated polyethylene margins. I would say, yes, natural gas costs have come off. We see a fair amount of benefit in that, obviously, from PMC, which is a large energy user. And so that helps in a location like Stade. But we only really are cracking natural gas to any big degree in Terneuzen and some in Tarragona. So it has a little bit more limited effect there. Most of the rest of the economics are naphtha. I do think prices -- obviously, fourth quarter to first quarter, you've got to remember, we start the quarter with a lower base and then we build up from there. So you're going to have some of that lag effect that bakes into it. That's part of the guidance. And then we also are expecting a little bit of destocking to still continue into the quarter from a volume and operating rate perspective. So those are the big things that went into the guidance. Anything else you want to add, Howard?

Operator:

Thank you. The next question comes from P.J. Juverkar of Citigroup. Please go ahead.

Jim Fitterling:

Yes. Good morning P.J. Both good questions. I would say in Europe, I would think about it in two ways. First, I would think about the crackers. And I would say from a cracker economic standpoint, yes, on a naphtha basis, they have become incrementally the highest cost on the assets that are able to crack LPGs like Terneuzen and Tarragona and where utility costs are lower like in Spain. They probably are fairly competitive with that Asian situation. So we haven't flexed as much up and down in Europe on the cracker operations. They've run at pretty steady rates throughout. We did flex up and down a bit when it got into our II&I business like polyols, polyurethanes, isocyanates in Europe, where the energy cost at STADA and Germany are much, much higher. And so what you would see there is we have some amount of that energy cost, that is very competitive and at a low rate, but then the increment is much higher. So we would run to that competitive rate. And I think that is what still continues to be in the front window and the thing that we have to address with the government. I would say on second part of the question, remind me.

Jim Fitterling:

China. Yes. Look, I think it's going to be positive. We had growth in the fourth quarter in packaging, especially plastics and Industrial solutions. The places that were weakest for us were anything related to building and construction, so polyurethanes, construction chemicals, coatings and monomers, although that was fairly even quarter-over-quarter. And then Consumer Solutions because of the, as I mentioned, siloxane prices and also our asset being down there. For the year, we had growth in Packaging & Specialty Plastics, Consumer Solutions and Industrial Solutions, pretty good growth. And it was really construction businesses that were the most impacted. Construction is 25% of China's economy. It was off 40% last year. I'm certain that the government is going to try to stimulate that and get that going again. I don't know how fast it will happen. As I mentioned, we're not seeing any big COVID spreads that are unmanageable right now. People are reporting into work, and I'm hearing this from other CEOs as well, people reporting into work, things are moving as expected. So I do expect we're going to see a little bit of positive move from China.

Jeff Zekauskas:

Thanks very much. Two-part question. Your local price in Industrial Intermediates & Infrastructure was down 1%. Was that a combination of puts and takes, that is some chemicals were up and some chemicals were down? And can you talk about MDI pricing? And then secondly, for Howard, what kind of working capital benefits do you expect for 2023? Can you have a working capital inflow of $500 million or $1 billion? Can you size that?

Howard Ungerleider:

Yes. Thanks, Jeff. Look, let's start with the fourth quarter on working capital. That was actually a tailwind versus the prior quarter, so sequentially of $1 billion and more than $400 million versus the same quarter last year. I would say it really depends on what's going to happen with feedstock costs and revenue growth. We're certainly expecting some volume growth as we move through the year, especially with Jim's comments on China reopening. And overall, global GDP growth is still expected to be positive of around 1.5%, which should drive some industrial production and should drive some growth. You know that since spin, we've been very focused on working capital. We're continuing to target a couple of days of structural working capital improvement. So I would say, at a bare minimum, we're looking at $200 million to $300 million of working capital improvement 2023 versus 2022. I'm very proud of the Dow team on their focus on cash flow. When you look at what we've been able to do since spin, we have actually improved our cash from ops every single year, 2019 through 2022. And last year was $7.5 billion of cash from ops and $400 million better overall than 2021. And so one of the ways we do that is work on working capital. We're also working on other unique to Dow cash flow levers. I estimate that is around inclusive of that $200 million to $300 million working capital, we're focused on $1 billion of pulling on $1 billion of unique to Dow levers. Working capital is certainly one of them. The other one, as you saw in the fourth quarter, we successfully concluded 1 of the 2 big novo litigations that we have. We're hopeful that we can solve the second one or resolve the second one in calendar year 2023. That could be another up to as much as $0.5 billion of unique Dow cash that we expect. And then we've got a few other projects that are in the works to round out that $1 billion.

John McNulty:

Thanks for taking my question. So it seemed like the destocking was kind of at really accelerated levels in the fourth quarter. Can you give us a little bit of color as to which of the segments do you feel like you're largely through that? And if anything, you may be -- maybe we're even at a balance side or even a restock phase? And I guess tied to that, -- can you speak to the operating rates you saw in the fourth quarter and how you expect that to change as we look to 1Q?

Operator:

Thank you. The next question comes from Mike Sison of Wells Fargo. Please go ahead.

Jim Fitterling:

Yes. Just to give you an idea, I would say, probably you saw because of destocking, you probably saw a 10% lower operating rate due to destocking. Rough numbers, Howard, where do you think, [indiscernible] million.

Operator:

Thank you. The next question comes from Steve Byren of Bank of America. Please go ahead.

Jim Fitterling:

Sure. Good morning Steve, good questions. 2,000 headcount reduction is not all specific to Europe, although Europe is a big part of the earnings decline that's driving us to take these actions. The site and asset decisions we've made so far are really smaller locations, smaller scale locations where we know they will be challenged through the year. We haven't released a list of those we're working through that with the European Works Councils, et cetera, but we will be doing that as we get toward the end of this quarter. But -- the $1 billion is really made up of two buckets

Kevin McCarthy:

Yes, good morning. Jim, I'd welcome your thoughts on the supply side of polyethylene. We've seen spot prices start to percolate higher over the last 3 or 4 weeks. So I was wondering if you could comment on where you see downstream inventory levels among converters at this point? And also if I rewind to maybe September, we had a lot of purposeful throttling back of operating rates from Dow and others that dovetailed into winter storm Elliot in late December. I think at least one of your competitors has declared force majeure on a tornado of all things. So if we look at that holistically, do you think there's enough supply disruption to kind of rebalance the polyethylene market and move higher from here?

Howard Ungerleider:

I would also just add that another bright spot that we see as we head into 2023 is the improving situation marine pack cargo and the ability to export out of North America. I mean, I can't speak for our peers, but certainly, we certainly have ramped our capability. And so that really should not be a bottleneck at least for the first half of the year, and don't have the visibility in the second half, but certainly as we ramp through the balance of Q1 into Q2, we should see increased marine pack cargo exports out of the U.S.

Matthew Skowronski:

Good morning. This is Matt Skowronski on for John. Two commodities that Dow participates in, siloxanes and MDI, have had competitor capacity come online recently. You called out weaker pricing in siloxanes in your guide for the first quarter. But can you just talk about how long you expect it to take for pricing these commodities to recover?

Operator:

The next question comes from Christopher Parkinson of Mizuho. Please go ahead.

Jim Fitterling:

Good question, Chris. I would go back that this is the basis of obviously, the earnings corridor slide that we put together and we shared last year and at earnings day back in 2021. And so if you look at it, I think we look at the midrange of the kind of the through-the-cycle range as being what we target for the growth. And that's kind of how we report the growth. And then peak potential would be when you would see those scenarios like you mentioned with lower NGL prices and higher oil prices. Now like we got into with 2021 and the first half of 2022, that was kind of peak levels for plastics. I do think the possibility exists that oil price is going to continue to be driving higher because we've had underinvestment in oil production, inventory is at the bottom of their five-year average. And if you started investing in oil production today, it would be three to five years before you would see any movement in that number. And I do think that any demand pull on that is going to start to move oil prices up, anything speculative that happens will move it up quickly because those inventory levels are so low. Meanwhile, NGL production is continuing to grow at a pretty good clip. I think it's going to be up pretty substantially here in the United States this year. And so that keeps costs down on NGLs. And so that's positive. So Canada, U.S., Argentina, I feel good about the positions we have there. Obviously, Kuwait, Saudi Arabia, we feel good about that. Our cracking into news and Spain. I think that's positive. So you've seen the high watermark for plastics, delivered $8 billion of EBITDA which is right in line with what we've got here with peak potential, EBITDA range. And I think we're trying to get in other segments up to that peak potential as well. So I feel good about where we're going long term, and that's also one of the reasons we wanted to make the investment in Canada, if all the conditions are right, we want to make that investment to continue to leverage that position. Hard to say what's going to happen with all that energy policy, plays a big part in it. I think the one thing that governments aren't correctly addressing is that all the things that we've passed for IRA, for new alternative technologies, that's all great. We're very supportive. It's a fantastic package. We also need some support for conventional oil and gas production because we are going to need a reliable power and natural gas is going to provide the low carbon reliable power for the foreseeable near future.

Operator:

Thank you. The next question comes from Frank Mitch of Fermium Research. Please go ahead.

Jim Fitterling:

Howard, do you want to take it?

Frank Mitch:

And how much was the cash charge on that?

Pankaj Gupta:

I think that's all the time we have for today. For your reference, a copy of our transcript will be posted on Dow's website within approximately 48 hours. This concludes our call. Thanks, everyone, for your time this morning.

Operator:

Good day, and welcome to Dow’s Third Quarter 2022 Earnings Call. [Operator Instructions] I will now hand over to Pankaj Gupta, Investor Relations, Vice President.

Jim Fitterling:

Thank you, Pankaj. Beginning on Slide 3, in the third quarter, team Dow continued to proactively navigate higher energy costs and geopolitical uncertainties that are impacting consumer demand, particularly in Europe. As macroeconomic conditions began to erode in the quarter, we responded quickly by implementing a set of actions to prioritize resources toward higher return products, align production rates to supply chain and logistics constraints as well as demand and reduce operational costs across the enterprise. In addition, our advantage portfolio enabled us to capitalize on demand strength in higher value functional polymers in Packaging & Specialty Plastics, and performance silicones in Performance Materials & Coatings. Third quarter net sales were $14.1 billion, with sales declines of 5% year-over-year and 10% quarter-over-quarter. Local price increased 3% year-over-year with gains in Performance Materials & Coatings and Industrial Intermediates & Infrastructure. Sequentially, price declined 6% and was down across all operating segments and regions. Volume was down 4% versus a year ago period as declines in Europe, the Middle East, Africa and India or EMEA more than offset volume growth in the U.S. and Canada and Asia Pacific. Sequentially, volume was down 3% led by EMEA. Continued strength of the U.S. dollar also impacted net sales by 4% year-over-year and 1% sequentially. Operating EBIT for the quarter was $1.2 billion. Our consistent focus on cash flow generation and working capital management in the quarter supported cash flow from operations of $1.9 billion or a conversion of 104% of EBITDA and free cash flow of $1.5 billion. We returned $1.3 billion to shareholders in the quarter, including $800 million in share repurchases and $493 million in dividends. And our balance sheet continues to have no substantive long-term debt maturities due until 2027. Turning to our operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, net sales were $7.3 billion, down 5% year-over-year as price gains and resilient demand in functional polymers were more than offset by lower polyethylene pricing. Sequentially, net sales were down 11%, also driven by lower polyethylene prices with reduced volumes as we decreased operating rates in response to continued global marine pack cargo logistics constraints and lower demand in EMEA. Operating EBIT for the segment was $785 million, compared to $2 billion in the year ago period and $1.4 billion in the prior quarter. These results were impacted primarily by higher raw material and energy costs and lower local prices. Moving to the Industrial Intermediates & Infrastructure segment, net sales were $4.1 billion, down 9% from the year ago period with price gains in both businesses. Volume was down as strong demand for pharmaceutical, agricultural, and energy applications in Industrial Solutions were more than offset by declines in polyurethanes and construction chemicals due to inflationary pressures in EMEA, decreased consumer durable demand and the slowing housing market. Sequentially, net sales were down 7% and stable volumes primarily in mobility end-markets were more than offset by lower local price and currency. Operating EBIT for the segment was $167 million compared to $713 million in the year ago period and $426 million in the prior year. As lower EMEA demand and increased energy and raw material costs were partly offset by higher prices. Sequentially, operating EBIT margins declined by 560 basis points on lower price and higher energy costs. And in the Performance Materials & Coatings segment, we reported net sales of $2.7 billion, up 5% year-over-year, with price gains in both businesses and all regions. Volume was down as resilient demand in mobility and home care end-markets were more than offset by declines in building and construction. Sequentially, net sales were down 12%, driven primarily by lower demand and decreased local price for siloxanes due to supply additions in China as well as with planned maintenance turnaround activity. Operating EBIT for the segment was $302 million compared to $284 million in the year ago period as margins expanded by 20 basis points due to price gains for both silicones and coatings applications. Sequentially, operating EBIT declined $259 million driven by lower prices for siloxanes and increased raw material and energy costs. I will now turn it over to Howard to review our outlook and actions on Slide 5.

Jim Fitterling:

Thank you, Howard. Turning to Slide 7. As a result of our actions over the last several years, we’ve created a streamlined portfolio with unique levers to manage through the current macro backdrop. We have global scale and leading positions across the diverse set of attractive market verticals, geographies, and value chains. This gives us significant flexibility to quickly respond to evolving demand trends and capture demand better than our peers. 65% of our production capacity is in the cost advantage in Americas, and we have 2 to 3 times more LPG flexibility in Europe versus our peers. Our advantaged cost position and unmatched feedstock and derivative flexibility enables us to optimize our margins and our commitment to operational and financial discipline underpinned by a culture of benchmarking and a best owner mindset have resulted in a low cost operating model and strong cash conversion. These advantages have served us well since spin, providing a solid financial foundation that supports long-term value creation despite the current unprecedented events impacting the market. Importantly, our early cycle growth investments and our efficiency programs are enabling us to raise our underlying mid-cycle earnings above pre-pandemic levels. We’ve nearly tripled our three-year trailing cumulative free cash flow since spin across a variety of macro environments, and we’ll continue to execute on levers to drive even higher cash flow, including working capital improvements, joint venture dividends and cash interest savings. And our balance sheet is now the strongest it’s been in my more than 35 years with the company creating a solid financial position that offers significant flexibility. The combination of robust cash flow generation and a strong credit profile enables us to deploy capital in a disciplined and balanced manner as we advance our decarbonize and grow strategy, while also consistently returning cash to our shareholders through the economic cycle. Moving to Slide 8. In 2022, we expect to deliver an incremental underlying EBITDA run rate of approximately $300 million to $400 million, comprised of $300 million from growth initiative across our operating segments, as well as $50 million to $100 million from efficiency levers. We have two Alkoxylation investments coming online this year to serve high value home care and pharma end markets. Our 60 kiloton project in the United States started up in the third quarter, and our 34 kiloton project in Spain is on track to start up in the fourth quarter. Our 150 kiloton FCDh pilot plant in Louisiana is also on track to start up in the fourth quarter. And year-to-date, we have completed 13 downstream silicones debottlenecking projects. Longer-term, we remain on track to grow underlying EBITDA by greater than $3 billion by 2030 while reducing our carbon emissions by 30% versus our 2005 baseline. Our suite of higher return, lower risk, and faster payback investments will deliver $2 billion in additional run rate EBITDA, while we also reduce our carbon emissions by approximately 2 million metric tons by the middle of this decade. These investments target higher value applications that enable us to capitalize on increasing demand for more sustainable and circular solutions. Let me highlight a couple of examples. Our ENGAGE Elastomers increase the lifetime of solar panels and enable over 50 gigawatts of solar power generation around the world. And we recently launched SiLASTIC, the world’s first silicone-based self-sealing tire solution that can be easily recycled, which is being commercialized in upcoming Bridgestone tires under the technology name B-SEALS. We also remain on track to reach preliminary investment decision by year end for our Path2Zero project in Alberta to build the world’s first zero carbon emissions, ethylene and derivatives cracker complex, which will grow our global polyethylene supply by 15%, while the carbonizing 20% of our global ethylene capacity. This project will generate an additional $1 billion of underlying EBITDA by 2030. As we deliver on our growth strategy, we remain committed to the discipline and balanced approach to capital allocation that has served us well since spin. Our first priority is to maintain safe and reliable operations. We continue to advance our growth investments with CapEx at or below D&A and drive return on invested capital greater than 13% across the economic cycle. With adjusted debt-to-EBITDA inside our long-term target range of 2 to 2.5 times, we have the financial flexibility to deploy cash to maximize long-term shareholder value creation, and we’re targeting to return 65% of our operating net income to shareholders. Since spin, we’ve exceeded this target returning an average of 78%. Turning to Slide 9, despite near-term macroeconomic challenges, innovating circular and sustainable solutions remains a key aspect of our long-term decarbonize and grow strategy. We see increasing demand for these products, which represent a significant growth opportunity for Dow with attractive pricing that will support longer-term higher quality earnings. We have continued to accelerate our actions to capitalize on this opportunity and create a circular economy. And we recently announced a new commitment to commercialize 3 million metric tons of circular and renewable plastic solutions annually by 2030. This new goal expands our sustainability targets and our focus on advancing a circular plastics business platform to meet our customers increasing demands for more sustainable and circular products as evidenced in the recent letter published by the Consumer Goods Forum, citing demand for advanced recycled plastic material. To achieve this goal, we will exceed our original target to enable 1 million metric tons of plastic waste to be collected, used, reused or recycled, and we’re well on our way as we scale a robust pipeline of more than 20 strategic collaborations to enable recycling infrastructure to partner across the value chain to bring hard to recycle waste into the circular economy and to help communities address waste management and recycling gaps. This includes our most recent and significant commitment to-date to scale advanced recycling with Mura Technology, which positions Dow to be the largest consumer of recycled plastic feed stock for polyethylene globally. These collaborations are a unique advantage as demand for circular solutions continues to grow. When you consider together this circular and renewable sales target along with the additional capacity from our Alberta Project, in 2030, our combined circular, renewable and zero carbon emissions capacity will comprise greater than 50% of our global polyethylene capacity. I’ll close on Slide 10. Our strategic priorities remain unchanged. We will continue to operate with agility as we navigate the current market dynamics as evidenced by our recent actions to balance production while ensuring we remain well positioned to capture demand as market conditions improve. At the same time, we remain focused on executing our long-term growth strategy, expanding our competitive advantages and delivering on our financial priorities to position the company for long-term success. With that, I’ll turn it back to Pankaj to open up the Q&A.

Operator:

Thank you. [Operator Instructions] We will take the first question from P.J. Juvekar from Citi. Please go ahead.

Jim Fitterling:

Good morning, P.J. Two really good questions. I think when we look at the IRA, which has a lot of good elements in it for our sustainability agenda both hydrogen and CCS as well as advanced nuclear. The challenge right now is where do you have the availability of the existing pipeline infrastructure to get carbon off of an existing asset into a CCS category. That’s why we put the project in Terneuzen and the project in Alberta first, because we have existing capacity there. And I should say in Terneuzen not yet, but Terneuzen has got a plan in place to get it in place. This is going to help us get some infrastructure in place in the U.S. Gulf Coast, so will make that possible. And as that becomes available, we’ll look at accelerating deployment here in the U.S. Gulf Coast. And I would say $85 a ton, we think long-term, those numbers are probably going more towards a $100 a ton or higher. And that should really help accelerate hydrogen and CCS. On CapEx in the U.S. and the future of chemicals in Europe, third quarter, the two big challenges we had were – the biggest was primarily electricity-related, and third quarter you saw European electricity cost go as high as €400 of megawatt hour, they’ve come off a little bit now because natural gas has come off. About half of our footprint in Europe has advantaged electricity. So we did in the quarter was bring down rates to the advantaged positions or kind of run and break even in Europe and obviously load other assets with that demand. I think in the short-term, you’re seeing more product flow into Europe from the Middle East and some right now from China. I think longer term we’re working with the governments through energy policy changes that are going to help. One of the reasons we announced the project in STADA one of the five floating regas units that’ll be put in Germany to really help Germany diversify away from just solely Russian gas. I think the European question, long-term will be in front of us through next year, but in the short-term, we’ve got a good game plan to navigate the winter and to navigate next year, and that’s why we announce the billion dollars worth of cost reductions for 2023.

Hassan Ahmed:

Good morning, Jim and Howard. Just trying to reconcile the Q4 guidance you guys have given, it seems to me you’re guiding to an EBITDA of roughly $1.45 billion. If that is the case, I’m just trying to sort of understand what sort of polyethylene pricing you’re baking into that guidance. Because it just seems that there’s some price hikes on the table, some consultants are out there sort of doubting some of those price hikes going through, so if you could provide any color around that?

Operator:

We will now take the next question from Jeff Zekauskas from JPMorgan.

Jim Fitterling:

Yes. Good morning, Jeff. Thank you for the question. On MDI in Industrial Intermediates & Infrastructure, the supply demand balances through the middle part of the decade look good on MDI, where we’ve seen market weaknesses in consumer durables, mobility is held up pretty well. Electric vehicles are really probably the shining star on growth in that space. But it’s housing and construction where we’ve seen the biggest weakness. And then of course, appliances closely related to that. I would also say, what you see in the numbers and what you see in the guide, remember that we have quite a bit of footprint in Europe, and so with the energy situation there that just really compresses the margins there. I think it’s less pricing and less that issue than it is the input cost issue. So that’s why we brought rates down to low levels in Europe. China also seeing housing and construction slow. And so I think we’ll see what happens after we come out of this party Congress and whether we see a change in COVID restrictions that might signal that 2023 would be better. In siloxanes capacity has come on in China and that’s really what’s brought the prices down. And we’re really back to the kind of the long-term mid-cycle average prices for siloxanes in the marketplace, and yes, we expect that will continue into 2023. And so I think it’s more, the timing of the supply coming on that’s put that pressure on.

David Begleiter:

Thank you. Good morning, Jim and Howard. Howard, just on modeling guidance. Does the $400 million of sequential EBIT headwinds fully capture the seasonality in Q4 and is any benefit in the guidance from the $1 billion of cost savings you highlight today as well? Thank you.

Operator:

We will now take the next question from Vincent Andrews from Morgan Stanley.

Jim Fitterling:

That’s a good question, Vince. Obviously the retail sector saw a lot of higher inventories and pulled back. I would say in automotive things are still restricted primarily by those supply chains of all the different various parts coming together so the auto companies can make their deliveries. That probably shows up more on internal combustion engine vehicles, somewhat on EVs, but EV growth in the U.S. and EV growth in China have been really, really strong. So, I think that’s going to continue to be good. Our outlook for automotive next year is 86 million light vehicles up from 80 million projection this year I think that’s good. Packaging, I don’t think we saw a lot of destocking in packaging in the market. I would say, we saw adjustment to lower operating rates because of the slowdown of demand in EMEA. EMEA being off 12% was a significant slowdown. Consumer pressures in EMEA are much stronger than even the consumer pressures here, and they’re significant. The durable goods and the consumer electronics is a tough one to call. They’re pretty tightly connected to housing. China housing is down 38%. Their housing starts are down 38% year-over-year. So that’s a pretty low level. I’d say there’s opportunity for upside going into next year. The U.S. has slowed down, but we’re still working off of finishes of houses that are under construction. And so I think the general consensus is demand is a little bit slower for 2023 on housing here. The other bright spot is infrastructure, and so for those businesses that are tied to infrastructure we still see very good infrastructure spending.

Unidentified Analyst:

Hi, this is Richard on for Mike. Just wanted some color on the $1 billion in cost savings for 2023. Is any part of this embedded in the $3 billion to $3.9 billion that you’re targeting to increase sort of the – your earnings range through the cycle? And also is that – does that also include the temporary 15% reductions in polyethylene and maybe additional reductions in capacity, potentially in maybe II&I.

Operator:

We will now take the next question from Kevin McCarthy from Vertical Research Partners.

Jim Fitterling:

Right. That’s a good question on ethane. I mentioned natural gas earlier. So gas production continues to be high, more than half a million barrels a day of ethane in rejection that has really brought the frac spreads down. And so we’ve seen frac spreads come back down to about $0.33 a million Btu, so off of some of the highs that we saw in first, second quarter. And I think our projection is it’s going to continue to be that way. Natural gas productions and 100 Bcf a day right now. And the outlook for next year is 110 Bcf a day. There will be plenty of ethane available. So, I think our feeling is, we expect through winter, $0.40 to $0.60 a gallon on depending on what happens with winter gas demand. That’s really where it was, $0.35 to $0.65 in third quarter, and I think next year we’re going to see continued availability and lower pricing on ethane. And in terms of the cold furnace idling, I don’t have a good number for you to estimate what that is. Essentially, the practice historically would’ve been to keep those assets on hot standby and ready to go, but with the slower demand, there’s no need to do that. And with these higher gas costs, taking them cold and then warming them back up is not going to penalize this in the marketplace.

Unidentified Analyst:

Thanks. It’s Matthew on for Steve. Can we talk about the trending functional polymers a bit? I think price was up year-over-year, but sounds like maybe down sequentially. Did margins in that business improve quarter-over-quarter with base commodities deflating? And when we look at 4Q, does that performance catch up on the downside or do you still think things should hold in pretty well?

Operator:

We will take the next question from John Roberts from Credit Suisse.

Jim Fitterling:

Thanks for the question. I think the storage levels primarily at the ports are waiting for ships to arrive to get the product out. A lot of that product is packaged for the export market, so it isn’t that that product is going to magically turn around into the North American market. And with what we see with demand growth in the North American market, I don’t see a reason to reduce operating rates any further. I’d also say Latin American businesses holding up relatively well. So that gives us some opportunity as well. I think it’s going to be worked out as we get better ship arrival times and better loading. I think you’re going to see those numbers deplete pretty quickly.

Operator:

We will now take the next question from Christopher Parkinson from Mizuho.

Jim Fitterling:

Yes. Good question, Chris. So areas of strength are industrial electronics and think about telecom, 5G infrastructure, data centers and that continues to be pretty good. There can be some supply chain constraints there, but they’re pretty strong. In industrial solutions we make intermediates and incipients for the pharma industry. That demand has been strong; we’re looking at greater than 7% compound average growth rates through 2026. And so that’s – I think that’s going to continue industrial solutions in general, as I would say has good growth trends and silicones, downstream silicones in general have good growth trends. Automotives we’re seeing some supply constraints easing and even those sales this year; deliveries this year are flat year-over-year really robust EV growth especially in China. If you look at China, EVs are up 90% year-over-year and automotive in China is up 25% year-over-year; I think that’s a bright spot. We expect to continue EVs in the United States also strong, and I expect that to continue. That’s good for us because two to three times more silicone materials in the EVs and similar amount of materials that we would have in an internal combustion engine for things like controlling noise, vibration and harshness. Infrastructure’s going to continue to be strong. There’s stimulus packages out there, many governments around the world and that tends to pull a lot in functional polymers, which we just talked about. It will pull some polyurethanes and construction materials that will pull some in coatings in that infrastructure space and some into our industrial solutions. In plastics it tends to pull in things like water pipelines, natural gas pipelines, I think we’ll continue to see that grow. Steady markets, I would say would be oil and gas. We’re starting to see an uptick in oil and gas production that pools a means from our industrial solutions business. Personal care has been very resilient. Cosmetics have come back after a soft second quarter in China and packaging for food. And so the issues in packaging are really more, not demand, but really more the higher energy cost and slowing economic activity in Europe. And then places where I mentioned before a week are related to housing and big ticket items, so appliances, food and beverage activities like furniture and bedding, I mean, not food and beverage, appliances and furniture and bedding slowed down third quarter and into fourth quarter. And then consumer electronics slowed down as well, large TVs, large home PCs and electronic devices. Residential softening here in the U.S., Europe, also in China but commercial construction has been relatively good; mixed residential and commercial buildings especially in big cities. I think next year, India, U.S., Canada, Latin America will be bright spots. We’ll still have to manage through Europe and the situation with Russia/Ukraine having the biggest impact there. And then China we had our – we had our best quarter in China. We were up 13% quarter-over-quarter and 7% year-over-year in volume and could have been better with the ability to get more plastics out of the Gulf Coast. So I think there’s been a lot of concern about what they’ve reported or not reported, but our view is that demand has been good.

Josh Spector:

Yes. Hi, good morning. So I was curious if there is a way to think about the costs you guys are absorbing in Europe from higher energy. So we think about 3Q and 4Q expectations versus the level of 2Q. Is there any way to quantify how much you feel like you’ve had to absorb and not be able to kind of shift away from flexing your production or through pricing or other means? So if pricing or energy prices were to move down would demand environment remains similar? How would you think that would play out? Thanks.

Operator:

We will now take the next question from Arun Viswanathan from RBC Capital Markets.

Jim Fitterling:

Well, the cost position that we have in the Americas is very advantaged and so I think that’s the most important thing to keep in mind. The consumer demand has been strong especially consumer non-durables, consumer discretionary has been good. I would say big ticket items, like I mentioned have already slowed this year. So if anything, there’s a chance for upside next year. I think that same is true on automotive, automotives really been supply constrained. And so we get through some of that. We’ll start to see that move up. We’re starting to see and here, I’m not talking just about Dow’s business, but we’re starting to see prices come down in bulk commodities. It takes those prices a while to work through the fabrication shops and get themselves into the price of a product that a consumer would buy in the store. So those prices have come down through the year, and I think you’ll start to see those show up in the consumer markets next year and that may actually help things improve. European energy situation is totally different than the United States. And right now we’re trying to work through how we can help the governments get to a better energy policy that will help them out. I think that’ll be the biggest improvement globally that’ll help the economy move.

Unidentified Analyst:

Hi, this is Paul on for Aleksey. As we approach winter, how are you guys managing the cost front in both the U.S. and Europe, and do you see the potential for any idling of assets in Europe maybe not your assets but just probably in the industry? Thanks.

Operator:

We will take the next question from Laurence Alexander from Jefferies.

Jim Fitterling:

Good question, Laurence and obviously we’re trying to have the financial flexibility to keep moving on those projects because I don’t think long-term any of those trends are going to change. We see the consumer demand throughout the year in spite of what’s going on in the global macro economy. Consumer has come back to us consistently wanting more and more, more of both mechanical recycled, advanced recycle products and products made with bio-based ingredients, more renewable products and that’s what we’re investing in. Some of it’s our capital, some of it is joint capital together with partners, like I mentioned with Mura Technologies. We have about 20 projects in plastics today. We had a 1 million metric ton target and we have good line of sight to be able to deliver the 1 million and we just increased it to 3 million metric tons of circular and renewable solutions by 2030, mainly because of those brand owners who are telling us the demand is there for those products. And so we will keep those projects moving forward. We will keep our decarbonization and Path2Zero projects moving forward. Obviously we’re going to be disciplined about it. Most of the monies that we spend on Path2Zero right now are engineering dollars, and we will not pull the trigger and start those projects until we see the bulk contracts for steel and fabricated products and long lead time items in the right range. And when we see that we’ll be ready to go. And I think in this next wave, we’ll have first mover advantage with the Canadian project, just like we did with the U.S. Gulf Project that started up in 2017.

Jaideep Pandya:

The first is on the siloxane value chain, could you just tell us what is the current cost differential between Europe versus the U.S. and China on a lended cost basis, if you include the energy cost? And given that significant supplies coming in China in the next 12 to 18 months, especially in Xinjiang and Yunnan what do you expect for siloxane utilization outside of China? That’s my first question. And the second question really is around the ethylene oxide MEG chain. This chain has done extremely well for not just yourselves, but a lot of your peers as well. And again, we are starting to see as freight rates normalize product come out of China. So what do you expect the EO chain in 2023 and 2024? Do you expect a normalization or do you think that demand is going to continue to be good? Thanks a lot.

Jaideep Pandya:

EO and MEG?

Pankaj Gupta:

Yes. Thanks everyone for joining our call. I think that’s all the time we have for today. We appreciate your interest in Dow. For your reference a copy of our transcript will be posted on Dow’s website within approximately 24-hours. This concludes our call. Thanks once again.

Operator:

Good day, and welcome to Dow's 2Q 2022 Earnings Call. [Operator Instructions]. Also today's call is being recorded. I would now like to turn the call over to Pankaj Gupta, Vice President of Investor Relations. Please go ahead.

James Fitterling:

Thank you, Pankaj. Beginning with Slide 3. In the second quarter team Dow delivered top line growth both year-over-year and sequentially. These results reflect the strength of our diverse global portfolio, our focus on execution and our proactive pricing actions. As such, our team was able to navigate dynamic market conditions, the impacts of pandemic lockdowns in China, continued logistics constraints, and higher energy and raw material costs. Sales increased 13% year-over-year with gains in all operating segments and regions. Sequentially, sales were up 3% with gains in all regions except Asia Pacific. Local price increased in all operating segments, businesses and regions, up 16% compared to the prior year period, and up 6% sequentially, with gains in all operating segments and regions. Volume was consistent with the prior year as growth in packaging and specialty plastics was primarily offset by declines in industrial intermediates and infrastructure. Sequentially, volume declined 2% primarily due to lower demand in Europe and China in the quarter. With a low cost position and industry-leading feedstock and derivative flexibility, we generated cash flow from operations of $1.9 billion and free cash flow of $1.4 billion. Our disciplined and balanced approach to capital allocation enabled us to further strengthen our balance sheet. We redeemed $750 million of outstanding notes in the quarter, lowering our annual interest expense by $27 million. As a result, we have no substantial long-term debt maturities due until 2027. We also returned more than $1.3 billion to shareholders in the quarter, including $800 million in share repurchases and $505 million through our industry leading dividend. Furthering our commitment to transparency and accountability, this quarter we also published our annual integrated ESG report intersections. The report highlights our ESG leadership advancements and aligns our data and disclosures with key ESG frameworks. Notably, this year's report features convenient access to data, as well as enhanced disclosures and carbon emission reporting for Scope 1 and 2, intensity metrics and full TCFD implementation. Key highlights from the report include executing our plan to decarbonize and grow, accelerating sustainability investments to enable design for recyclability and more circular plastics, taking deliberate actions to drive inclusion, diversity and equity, and improving governance, transparency and accountability. Dow's report is one of few in our industry to receive limited assurance against formal standards by its external audit firm. And with our latest report, we added our Scope 1 and 2 emissions reporting in accordance with greenhouse gas protocol reporting to the assurance review. We're proud of our progress. And if you haven't already accessed the report, we welcome you to do so through the link included in this presentation or on our website. Now, turning to our operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, operating EBIT was $1.4 billion, compared to $2 billion in the year-ago period, which was elevated due to weather driven events. Price increases year-over-year were more than offset by rapidly rising raw material and energy costs. Sequentially, operating EBIT was up $202 million and operating EBIT margins increased by 120 basis points due to improved product mix and increased integrated margins despite higher raw material and energy costs, primarily in the United States and Canada. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $426 million compared to $648 million in the year-ago period, as increased raw material and energy costs and planned maintenance activity were partly offset by higher pricing. Sequentially, operating EBIT was down $235 million and operating EBIT margins declined by 490 basis points also primarily due to higher costs and planned maintenance. And finally, the Performance Materials & Coatings segment, reported operating EBIT of $561 million, up $336 million year-over-year, as margins expanded by 960 basis points, primarily due to price gains for both silicones and coatings applications as well as improved monomers supply compared to the prior year. Sequentially, operating EBIT declined $34 million as lower siloxane prices in Europe and China were partly offset by margin expansion in the coatings and performance monomers business. I'll now turn it over to Howard to review our outlook on Slide 5.

James Fitterling:

Thank you, Howard. Turning to Slide 8. We continue to advance our Decarbonize and Grow strategy, which we expect will deliver greater than $3 billion in additional run rate EBITDA, while reducing our carbon emissions by 30% by 2030. As a reminder, our path to decarbonize our footprint and grow earnings is a phased side-by-side approach that both retrofits and replaces end of life assets with low carbon emission facilities, while also expanding our capacity. This plan will deliver a 30% reduction in our CO2 emissions between 2005 and 2030, through a disciplined approach based on affordability, macro and regulatory drivers around the world. As a progress update, we continue to invest in renewable energy with access to more than 900 megawatts now. We're also making asset efficiency improvements and investing in innovative carbon efficient technologies like electric cracking and carbon capture. Recently, we announced the startup of an e-cracking research scale unit in the Netherlands that represents a key milestone in our joint technology program. Engineering and development efforts are ongoing for our plan to build the world's first ever net zero carbon emissions ethylene cracker and derivatives complex in Fort Saskatchewan, Alberta, with formal resource loading, vendor selection and project investment decisions by year-end all on track. And work is underway to develop detailed plans to reduce CO2 emissions at our sites in both Europe and in the Americas. These projects collectively demonstrate Dows leadership in the transition to a sustainable world, while driving underlying earnings growth. To that end on Slide 9, while we decarbonize, we also continue to invest in higher return, faster payback projects, capture our efficiency levers, and capitalize on long-term growth opportunities including circularity. In the near-term, our in-flight investments remain on track to deliver an incremental underlying EBITDA run rate of approximately $2 billion by year-end 2025, which includes approximately $300 million of run rate EBITDA in 2022 with growth levers across each of our operating segments. For example, in Packaging & Specialty Plastics, our 150 kiloton FCDh pilot plant in Louisiana is expected to start up in the fourth quarter of this year. In Industrial Intermediates & Infrastructure, our alkoxylate capacity investments are on track to start up in the second half of this year. And in Performance Materials & Coatings, we completed two debottlenecking projects and two growth projects in the second quarter, with nine additional projects expected to be complete by year-end. Importantly, circularity is also a key enabler of our growth strategy as brand owners and our customers increasingly demand more circular solutions. We're leveraging on more than 20 strategic partnerships globally, as we accelerate our circular product capabilities and technologies to meet this demand. Today, we announced a series of circularity projects including a plan with our existing partner Mura Technology to construct multiple world scale advanced recycling facilities in the United States and Europe. These projects will add up to 600,000 tons per year of plastic waste recycling capacity by 2030, representing Dow's largest commitment to date, to scale advanced recycling. As a major off taker, Dow's capacity of circular polymer products will expand significantly as we utilize recycled plastic feedstock to produce new virgin grade and 100% circular derivatives serving fast growing brand owner needs across our market verticals. In parallel, we continue to accelerate our mechanical recycling capabilities through partnerships like the one we announced today with French recycling company Valoregen to build the largest single hybrid recycling site in France. That will be the main recipient of its post-consumer recycled resin for our revolute PCR product range, which recently received certification for plastics recycling traceability and content in Europe. These collaborations will support approximately two-thirds of Dow's 2030 target to enable 1 million metric tons of plastic to be collected, reused and recycled. In addition, our efficiency levers are on track to deliver roughly $600 million of run rate EBITDA from our restructuring program and digital investments by year-end 2025. In 2022, we expect these investments to deliver a run rate EBITDA of $50 million to $100 million. We already achieved the full run rate benefits from our 2020 restructuring program at the end of 2021, and we will see run rate benefits from our digital investments ramping up over the next few years. For example, we've accelerated modernizing and automating our warehouse management systems and we improved our supply chain planning processes using new digital capabilities, enabling us to consolidate multiple customer shipments, lower costs, and reduce our carbon emissions. We also improved the customer experience through enhanced real time delivery tracking capabilities across all modes of product shipping. These digitalization improvements are particularly valuable when global supply chains are as dynamic as they are today. Moving to Slide 10, Dow is well-positioned to generate resilient cash flows and deliver value across a variety of economic environment. This reflects our approach to manage the business with more agility and efficiency, operate with the best owner mindset and continue to ensure accountability, transparency, and a discipline and balanced approach to capital allocation. Our 3-year average EBITDA is now at more than $9 billion, driven by our early industry cycle growth investments, and efficiency programs that have collectively raised our underlying earnings above pre-pandemic levels, as well as improved our cost position versus the previous cycle. We nearly tripled our 3-year trailing cumulative free cash flow since spin. With respect to the balance sheet, we have reduced gross debt by more than $6 billion in spin with a target ratings agency leverage ratio of 2x to 2.5x compared to 2.5x to 3x its spin. All of our debt is fixed rate with less than $1 billion of maturities do over the next 5 years, which represents a reduction of approximately $7 billion in near-term debt maturities since spin. Our underfunded pension status now stands at approximately $3 billion, less than half of where it was at spin. The significant progress we've made has been reflected in our credit ratings, including a recent upgrade from Moody's and positive outlook revisions from Fitch and S&P. With ample cash generation, we remain focused on executing our value creating Decarbonize and Grow strategy, while continuing to deliver attractive shareholder remuneration. To that point, we completed our previous share repurchase program in the second quarter, and initiated our new $3 billion program aligned with our target of returning 65% of operating net income to shareholders over the economic cycle. As Dow looks ahead, our strong cash flow, balance sheet and attractive growth prospects collectively enabled increased optionality to remain agile through a variety of economic environments and continue to deliver value for all of our stakeholders. With that, I'll turn it back to Pankaj to open up the Q&A.

Operator:

[Operator Instructions] We will take the first question from Vincent Andrews from Morgan Stanley.

James Fitterling:

Yes. Good morning, Vince. Thank you for the question. I think importantly, the partnership with Mura today is two-thirds of our 1 million ton goal by 2030 to stop the waste and will drive a lot of volume growth in our post-consumer recycle markets. As we know, those are higher-value premiums in the marketplace today. Most of our brand owners have 30% PCR targets by 2030, and we're seeing rapid growth in our Dow REVOLOOP's brand of PCR containing materials year-over-year. We will be an off-taker from Mura for those capacities. It's multiple plants that will be built in the United States and Europe. I don't have all the detailed timelines on which each -- which time each will RTO, but essentially, we will have the off-take a lot of that material, as you know, to reach the packaging quality that we need for our brand owners. We will also have to be worked in with virgin grade materials. So you can think of the 600kt as additive volumes to virgin materials that we produce today. And then as we get closer to the startup of those, we can give you more details on the margins. Howard?

Operator:

We will now take the next question from P.J. Juvekar from Citi. Please go ahead.

James Fitterling:

Good morning, P.J. Thanks for the question. We have good integrated margin outlook for the United States Gulf Coast in the third quarter, similar maybe $0.01 lower than what we had in the second quarter. So I think that's very positive. And Howard mentioned the cost positions that we have in our assets that are using ethane and light cracking. In Europe, I expect it will come off a few cents from the integrated margins in the second quarter. As you mentioned, we have high energy cost today in Europe. So that's reflected in second quarter's numbers already. I think our preparation for the fourth quarter, as we get closer to winter time, you have to be thinking that the government could move into some curtailments. We feel very good about our positions in Spain and in the Netherlands because we have some flexibility there. As you know, the Netherlands has our highest percentage LPG cracking. And so that -- we expect that to be an advantage for us as we go into fourth quarter. Spain has LPG cracking as well, but I think that pocket looks pretty good right now. Germany is the place that we have to keep an eye on. We've already reduced our natural gas use in [indiscernible], which is really the biggest exposure. And so we've made a natural gas reduction there that is very significant. And I think we will continue to look at other sourcing capabilities. So we have sourcing capability around the world in low cost positions that if it was necessary, we could look at sourcing differently to supply the European demand. Germany, in and of itself, is not -- and especially [indiscernible] is not the largest footprint for us. I mentioned on the last call also that Stade, we'd worked on a project there to build long-term with a consortium a standing LNG facility, a permanent facility to be able to bring in LNG shipments to help with as much as 15% of the German government's needs. We did get the indication just recently that Stade is a site that was selected to receive one of the floating storage and regas units for LNG. So that's a big help. That will be a facility that will dock near the Stade site and bring that in. That's about 25% of the United States commitment for LNG to help out the European Union. So we feel very good about that, and I think that improves the resiliency -- energy resiliency at the Dow site in Stade. So our focus will be to get ready and look at what we need to do in [indiscernible] beyond the natural gas reductions we've already made.

Hassan Ahmed:

Good morning, Jim and Howard. Just wanted to go back to polyethylene again as it pertains to the Q3 guidance you guys have given. Seems you're guiding to an EBITDA slightly north of $2.5 billion. And Jim, if I heard your commentary correctly in response to the previous question, it seems you guys are baking in maybe like $0.01 a pound decline in the U.S. in terms of that Q3 guidance and maybe a couple of $0.01 a pound worth of sequential decline in polyethylene margins in Europe. So is that correct? And if you could also comment on what you guys are seeing in -- on the polyethylene inventory side of things in the U.S.? Thanks so much.

Operator:

The next question comes from Jeff Zekauskas from JPMorgan. Please go ahead.

James Fitterling:

Thanks, Jeff. I will tackle the first two and let Howard handle the last two. On oil price, we are still bullish oil, and we expect that these oil-to-gas spreads are going to stay in that $70 to $80 a barrel of oil equivalent in the back half. The reason I say that is there's less than 2 million barrels per day of available capacity and oil derivative demand has been very strong. And so we don't see that abating, and we don't see that the supply is picking up fast enough to close that gap. A little bit of effort and you've seen a little bit of movement in China towards coal. You've seen it in the energy industry. You've also seen it in coal to chemicals, that's probably taken a little bit off of the naphtha demand. China, Northeast Asia would be some of the largest naphtha demand that's out there. So my guess is that's why you've seen the oil naphtha correlation change a bit. MDI fundamentals, to your point, are still strong. Our operating rate outlook for MDI through 2025 and 2026 is continuing to increase year-over-year, every year. So I don't think we are going to see any issues with MDI spreads. If byproducts come off a little bit, a lot of byproduct goes into production of MDI. If oil byproducts come off a little bit from the refineries, then that could be actually positive. Howard?

Operator:

The next question comes from Laurence Alexander from Jefferies.

James Fitterling:

Yes. So the first question on electricity. Obviously, we’ve an existing purchase power agreement at Stade, and that also helps supports coal [ph] power. And so we are in a good position in terms of a forward look at what our energy cost needs are going to be, and Stade is our largest electricity user. So I think that is well in hand. I think, obviously, you have to work on what's going to happen with the weather markets in Europe, but that's hard to predict next year at this point. On sales of products containing recycled content, they are wrapping up dramatically. So our REVOLOOP product brand, for example, is up about 140% versus the first half of 2021. They're commanding about $1,500 per metric ton and $2,200 per metric ton price premiums, so $1,500 for advanced recycled materials and $2,200 for bio-based products. And that's compared to the fossil fuel and the virgin alternative. So as we see that, we're going to see that blend into our existing business. Howard mentioned 150,000 tons starting up next year in Teesside in the U.K. and then ramping up to that 600,000 tons. So I do think over time, as we get these numbers larger, we will see it have an impact. And most of that premium is there because the demand is much stronger than the supply.

David Begleiter:

Thank you. Good morning. Two things. First, Howard, on the modeling guidance, how should we think about the roughly $1 billion of lower sales sequentially in terms of applying some sort of decremental margin to that? Or it sounds like it's already embedded in that $500 million headwind. But how should you think about that? And two, Jim, overall, in Europe, in terms of the natural gas curtailments, higher costs, can you frame how much Dow will benefit or could benefit from the situation in the near and medium term? Thank you.

James Fitterling:

David, in the European market, for several years, the European market has been fairly well self-contained. It isn't -- with a few exceptions, it isn't an export market. And so the higher costs in Europe are really what's pushing the integrated margins over there. So I think we are looking at it from a standpoint of maintaining the business in Europe and trying to keep everything running in the event of a curtailment that would mean that we would have to slow something down, we would obviously look to bring in import materials from one of our other lower-cost facilities. But there's a cost to doing that as well. And I think we don't look at it as being advantaged because of a curtailment in Europe. What we really want to try to do is help Europe get some additional sources of gas supply in there, which is why we're doing what we're doing at Stade because we think that's necessary for them for the long-term. They need to have more sources of supply for a better balanced energy policy in the EU.

Frank Mitsch:

Hey, good morning, gentlemen. I was just curious, on Slide 5, you did a nice job of pulling together some of the macro indicators looking out over the past several months, and the direction is modestly concerning. So, I’m just curious in terms of the demand outlook that you have, how would you judge the second half order book for Dow today versus what your expectations might have been 3 months ago?

Operator:

The next question comes from Kevin McCarthy from Vertical Research Partners.

James Fitterling:

Yes. Thank you, Kevin. Look, the new range that we laid out is still intact, and we still feel good about that. 9 to 15, and that's including the expansion at Alberta, the net zero emissions facility in Alberta. If you look where we are to 2025, probably that $8 billion to $14 billion range for that 2025 window, because the Alberta expansion doesn't come in until '27 and '29 in a couple of phases there. And I would think about it this way. P&SP always -- Package & Specialty Plastics always performs well in these type of environments. We are well above mid-cycle EBITDA margins right now. And our look is for next year that we will still be above those mid-cycle numbers. So that underpins that lower part of the quarter pretty strongly. II&I, if you take a look at 2022, where we've been with historical peak type of numbers, and I think we are seeing a little bit of softness in a couple of areas there, but we've got growth in Industrial Solutions. They're still well above that within a percentage of their high EBITDA margins. And then PM&C is right at the peak on their EBITDA margins. So I feel good about the quarter. I think we proved through 2020 and what happened with COVID that we have a very good model to understand the peak and the trough. As Howard mentioned, and I mentioned on the script, we have made a lot of improvements to the balance sheet of the company and lowered our cost position with the investments we've made over the last few years. So we go into this with a much better position. And that oil-to-gas spread really underpinned it because we've got very good low-cost assets around the world.

Michael Sison:

Hey, guys. Nice quarter. In terms of the export market of China, do you think it's opened up? And if it does, does that potentially improve the outlook for integrated margins in the Gulf Coast? And then as a quick follow-up, in 2020, demand for polyethylene was up 2%, pretty tough time. If we head into a recession, which seems to be impacting everybody these days, at least sentiment wise, what do you think demand from polyethylene would do given that there is not a lot of durable goods is such in a mild recession?

Howard Ungerleider:

Yes, Michael, the only other comment that I would make to your question about what happens in an economic slowdown in terms of P&SP volumes. If you go back and look in history, we can get you some of this data, if you need, offline. But essentially, I mean, you're right, in the 2020 pandemic economic trough, you saw P&SP volumes actually increase. I would say, historically, when you go into an economic recessionary type of environment or an economic slowdown, you don't lose a lot of volume growth in P&SP. I would say it's typically maybe 2%, 3% reduction in volume. But because people move back to smaller package types, which then basically has more square inches or square meters of packaging, and that actually drives consumption of polymers up a little bit in an economic slowdown environment.

Operator:

We will now take the next question from Christopher Parkinson from Mizuho.

James Fitterling:

Yes. Thanks, Chris. Sadara should improve in the back half as they had some maintenance activity in the second quarter. So they have our first quarter, second quarter was a little bit better, and then the back half of the year, they should be running at full rates. They've also paid down some debt position. So on a relative basis, their balance sheet is in better shape than it was last year. So I feel good about what they're doing there. Kuwait JV is still generating good returns, obviously, watching for China to open up and see if that has an impact that rolls through to MEG pricing, and that's probably the biggest drag on equate right now, although the results are still good. And then the Thai JVs obviously is the most exposed with naphtha costs. And as we mentioned earlier, naphtha is actually coming down. And we will see how pricing evolves in Asia on plastic polyethylene. Functional polymers on plastics continues to be good, and the Thai JVs have a fair amount of capacity in the functional polymer space as well. So that should be positive for them.

Operator:

We will now take the next question from Alex Yefremov from KeyBanc. Please go ahead.

James Fitterling:

We obviously have to weigh that vis-à-vis our organic growth investments. So the Decarbonize and Grow strategy is very attractive for us. And with the market moving towards zero carbon and also more circular products, we’ve a lot in front of us that is really high value and high return. I think Howard and the team, we still continue to look at non-revenue generating infrastructure assets from a standpoint of the market is there to take on that infrastructure and us be able to liberate some cash from deals like that and then deploy it into organic growth strategy. We look for strategic bolt-on M&A, bolt-on, meaning millions, not billions, for gaps that are in our technology as we move forward. And as you look at things, like growth in sectors like mobility, adhesives, things that have really good drivers to them. If there were opportunities there, I think we'd take a look at it. Any other comments, Howard?

Operator:

We will now take our next question from John Roberts from Credit Suisse.

James Fitterling:

Yes. Good morning, John. Thanks for the question. No, I don't think that's what is implied in the volume numbers. Obviously, we’ve a lot of moving parts in olefins, and so byproduct sales can ebb and flow with things. I would say that functional polymers, if you take a look at margin results and price momentum, delivered a really strong margin result on that price momentum, and that drove a lot of the upside in revenues and in the beat because infrastructure really drives the demand for those functional polymers and we’ve a pretty significant sized functional polymers business there. But I think on olefins, we really try to run olefins to keep our integrated margins healthy and then try to move the byproducts into the market, and we see some byproducts that were moving off a little bit as well. So I think packaging, especially plastics packaging volume was up 5% year-over-year. And so I think those trends are still well intact, and I don't expect that those are going to change.

Arun Viswanathan:

Great. Thanks for taking my questions. Good morning. I guess I have just two quick follow ups on polyethylene and polyurethane. So in polyethylene, do you expect ethane to kind of stay in the $0.40 to $0.60 per gallon range and that kind of provides some support to pricing? Or do you expect pricing to kind of maybe decline $0.03 to $0.06 per pound over the next couple of quarters? And then similarly on PU, now that we are running slower, or running a little bit at BASF Geismar and some of the other facilities that were down, do you expect MDI prices to kind of moderate over the next couple of quarters, especially given what you said on durables demand slowing? Thanks.

Pankaj Gupta:

And thanks everyone for joining our -- yes, thanks [indiscernible]. I know we are up at time here. I know we couldn't get to all the questions. So for folks who are in queue, we will talk to you this afternoon as well. And I want to thank everyone for joining our call. We appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within approximately 24 hours or so. This concludes our call. Thank you.

Operator:

Good day, and welcome to Dow's Q1 2022 Earnings Call. [Operator Instructions]. Also today's call is being recorded. I would now like to turn the call over to Mr. Pankaj Gupta. Please go ahead, sir.

James Fitterling:

Thank you, Pankaj. Beginning on Slide 3, we entered our 125th year with global scale, a differentiated portfolio, unmatched feedstock and derivative flexibility and a track record of operational excellence, all of which enables us to continue to deliver more resilient earnings and cash flow in a variety of economic and geopolitical environments and positions us to deliver mid-cycle earnings above pre-pandemic levels. This is reflected in our first quarter results. Team Dow delivered top and bottom line growth, both year-over-year and sequentially. We capitalized on end market demand strength across the breadth of our diverse portfolio and mitigated the impacts of rising raw material and energy costs. Year-over-year sales growth was 28% with gains in every operating segment, business and region. Sequentially, sales increased 6%, driven by gains in Performance Materials & Coatings and Packaging & Specialty Plastics. Local price was up 28% year-over-year, reflecting gains in all operating segments, businesses and regions. Price was up 2% sequentially, led by silicones and polyurethanes. Volume increased 3% year-over-year with gains in all operating segments and in the United States and Canada. Sequentially, volume was up 5%, reflecting strong demand for silicones and packaging applications. And we continued our digitalization drive, marking an important milestone for digital sales in the first quarter as we reached a $1 billion monthly run rate. Operating EBIT increased $865 million compared to the year-ago period with gains in all operating segments. Despite rising raw material and energy costs, we effectively leveraged our industry-leading feedstock and derivative flexibility in a very dynamic environment. And higher operating rates compared to the impact of Winter Storm Uri in the year-ago period enabled us to capture better end market demand. We continue to generate significant cash flow of $1.6 billion in the first quarter, up $1.8 billion year-over-year due to increased earnings and no voluntary pension contributions in the current period. Shareholder remuneration totaled $1.1 billion in the quarter, including $513 million through our industry-leading dividend as well as $600 million in share repurchases. Additionally, we recently announced a new $3 billion share repurchase program. This was a direct result of our performance and our balanced and disciplined approach to capital allocation with attractive shareholder remuneration. Before I address our operating segment performance, on behalf of the Dow team, our thoughts are with the people of Ukraine and their family and friends around the world. Dow continues to prioritize the safety and security of our colleagues in Ukraine and Russia by providing evacuation support, financial assistance and shelter as well as humanitarian aid to refugees in the region. From a business perspective, our presence in Ukraine and Russia represents approximately 1% of annual sales and a much smaller percentage on the bottom line. We fully support and are complying with sanctions implemented against Russia, and have significantly reduced our operations and stopped all investments in the country and are only supplying limited essential goods. To help diversify Europe's energy supply, we also recently announced that Dow is taking a minority stake in the Hanseatic Energy Hub, which is developing a new zero carbon emissions LNG import terminal. The terminal will be colocated on Dow's site in Stade, Germany and will satisfy up to 15% of Germany's current natural gas demand, helping enable a stable, cost-effective and sustainable supply of energy to Europe in support of the region's economy, Dow's business interests and our communities and our employees. Moving now to our operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, operating EBIT was $1.2 billion, up $6 million year-over-year with operating EBIT margins down 400 basis points as price increases in the United States and Canada and Latin America were partly offset by rising raw material and energy costs in all regions. Strong end market demand drove volume up 4% year-over-year. Sequentially, operating EBIT was down $208 million and operating EBIT margins declined by 390 basis points primarily due to higher raw material and energy costs in Europe. Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT was $661 million, up $335 million year-over-year as operating EBIT margins increased 560 basis points, primarily due to strong price momentum in both businesses and volume gains of 1%. Sequentially, operating EBIT was up $66 million, and operating EBIT margins increased 150 basis points as strong prices and lower planned maintenance activity in the core business offset higher raw material and energy costs. And finally, the Performance Materials & Coatings segment reported operating EBIT of $595 million compared to $62 million in the year-ago period. Operating EBIT margins increased more than 1,600 basis points due to strong price gains and an 8% volume increase on improved supply availability and robust stand for silicones in personal care and high-performance buildings and demand for architectural coatings. Sequentially, operating EBIT improved by $300 million on price gains and lower planned maintenance activity. I'll now turn it over to Howard to review our modeling guidance for the second quarter.

James Fitterling:

Thank you, Howard. Now turning to Slide 7. We have a clear road map to advance our decarbonize and grow strategy, which we expect will deliver greater than $3 billion in additional run rate EBITDA, while reducing carbon emissions by 30% by 2030. This begins with our continued investment in renewable energy, asset efficiency improvements and innovative carbon-efficient technologies like electric cracking and carbon capture. Licensing our technologies will further expand our value pools, decarbonizing our assets and the industry. For example, our FCDh unit will reduce CO2 emissions by as much as 20% compared to other leading PDH technologies. And as we advance our electric cracking project in collaboration with Shell, we will incorporate even more renewable energy into our network. In Alberta, we're progressing engineering and development activities for the world's first net zero carbon emissions, ethylene and derivatives cracker complex. This year, we plan to complete our partner agreements, which will put us on track for regulatory approval and a final investment decision in 2023. We're also advancing plans to reduce CO2 emissions at sites in both Europe and in the Americas. A key part of our decision to advance profitable projects will be ensuring competitive subsidies and commercial contracts before final investment decision. These projects will provide the low to zero emission products that our customers increasingly demand to reduce their own carbon footprint. This is another demonstration of Dow's leadership in the transition to a sustainable world while driving earnings growth. Turning to Slide 8. To that end, our near-term actions to decarbonize, grow the company and continue to improve our return on capital are well underway. In 2022, our in-flight growth programs remain on track to deliver a run rate of more than $300 million in underlying EBITDA with a focus on targeting downstream and sustainability-led applications across all operating segments that will generate strong returns. In Packaging & Specialty Plastics, our FCDh unit in Louisiana is on track to start up in the fourth quarter of this year and will contribute more than $75 million in run rate EBITDA with a return on invested capital greater than 15%, giving us the key proof point to accelerate the licensing of our technology. In Industrial Intermediates & Infrastructure, our alkoxylates capacity and other efficiency investments are also on track to start up this year and in total, are expected to generate more than $50 million in run rate EBITDA with returns greater than 20%. In order to support the accelerating demand growth across pharma, cleaning and energy sectors, today, we're proud to announce another series of alkoxylate investments in the United States and Europe. These expansions maintain our current carbon emissions levels and are backed by supply agreements with leading consumer brands across fast-growing end markets. All combined, these investments represent a 70% increase in our industry-leading downstream alkoxylates capacity over the next several years, targeting high-value applications where we're delivering 10% to 15% annual growth rates. Lastly, in Performance Materials & Coatings, we're also executing a series of incremental downstream debottlenecking projects with more than 20 projects expected to be completed this year, collectively contributing approximately $100 million in run rate EBITDA with return on invested capital of more than 20%. All in all, by 2025, we're projecting a cumulative underlying EBITDA improvement of approximately $2 billion, driven by projects like incremental high-margin polyethylene and functional polymers capacity to serve growing demand for flexible packaging, debottlenecking projects to enhance our mix toward polyurethane systems serving mobility and consumer applications, and new capabilities to formulate differentiated silicones, including silicone adhesives for next-gen electronics, mobility and infrastructure applications. At the same time, we continue to decarbonize and deliver on our sustainability commitments by increasing our use of renewable energy, optimizing our assets to be more carbon efficient and driving continuous emissions reductions throughout our global asset base. Just one example, we will reduce our CO2 emissions by more than 350,000 tons, which is more than 15% of our 2025 emissions reduction target when we replace end-of-life steam and gas turbines at our Plaquemine, Louisiana site, with less capital intensive, higher efficiency and lower operating cost systems. Overall, we expect these near-term actions to deliver $2 billion in additional underlying earnings while reducing carbon emissions by approximately 2 million metric tons by the year 2025. And importantly, we'll do this while maintaining CapEx within D&A and continuing to target a return on capital of greater than 13% across the economic cycle as we invest in higher-return, lower-risk projects across the enterprise. Turning to Slide 9. Dow has unique and resilient competitive advantages, a clear strategy to decarbonize and grow earnings, cash flow and return on capital combined with top quartile operational and financial performance. Our annual benchmarking update is published in the appendix of this presentation and demonstrates once again that we continue to deliver better results relative to our peers across many key financial performance metrics, including top quartile EBITDA margins, return on capital, free cash flow yield, shareholder remuneration and debt reduction. Our commitment to industry-leading cash generation and shareholder remuneration have resulted in an attractive free cash flow and dividend yield above both our benchmarking peers as well as the broader S&P 500. Furthermore, strong execution against our higher return growth projects over the past several years has resulted in 3-year EBITDA growth and return on invested capital that is well above the peer median. And as we've outlined, our in-flight growth investments will deliver additional incremental earnings and cash flow upside with high-quality return on invested capital across the economic cycle. To close on Slide 10, Dow continues to be well positioned to deliver higher mid-cycle earnings and cash flow above pre-pandemic levels in both the near term and over the economic cycle. With our flexible and advantaged operating model, we're also able to effectively manage in a wide range of macro environments. We continue to deploy our industry-leading cash flow in a disciplined and balanced way to maximize long-term value creation. Case in point, our new share repurchase program reflects the strength of our performance and confidence in our ability to continue delivering industry-leading cash flow. We're making good progress on our decarbonized growth strategy, delivering incremental earnings by capitalizing on fast-growing demand for more sustainable solutions. Our in-flight actions are elevating our underlying mid-cycle EBITDA above pre-pandemic levels, all as we advance our return on capital. Over the past 125 years, Dow has transformed from a small science start-up to the company that we are today, an industry leader with global scale, a differentiated portfolio and sustainable solutions that enable us to tackle some of the world's greatest challenges. Our ambition, purpose and capabilities continue to make Dow a great place to work for PhDs, engineers, chemists and leading talent from many different disciplines. For the second year in a row, Dow has been recognized as the only material science company on the Great Place to Work and Fortune 100 Best Companies to Work For list. These advantages enable us to capture value growth while continuing to focus on delivering for our customers advancing our ambition and creating value for all stakeholders. With that, I'll turn it over to Pankaj to open the Q&A.

Operator:

[Operator Instructions]. We will now take our first question from Hassan Ahmed from Alembic Global.

James Fitterling:

I'll have Howard walk through the guidance. On polyethylene, our expectation is we'll see about $0.04 to $0.05 coming through here in the near term. For the Americas, we've got $0.07 out there in April and $0.07 out there in May. A little bit less in Europe and Asia Pacific. So we are expecting to see prices continue to move up in Packaging & Specialty Plastics through the quarter. With that, Howard, maybe walk through the guidance for second quarter?

Operator:

We will now take our next question from P.J. Juvekar from Citi.

James Fitterling:

Thanks, P.J. Great question. I think, obviously, there were questions about Europe's competitiveness at different times in history and what's happened with Russia entering Ukraine and what that's caused has created more concerns on Europe's ability to, one, decouple from Russia and to compete longer term. That's one of the reasons we made the announcement about the project in Stade, to basically host that LNG import terminal to help that happen. I would say the crackers right now are operating well. We're able to still have margin in Europe under these circumstances. Obviously, have to pass a lot of that along. But the thing we have to work on is longer term, getting them to a more competitive feedstock and energy cost position. Europe has been higher energy cost than the United States for quite some time, and we've been able to be profitable there. We did announce some expansions there in alkoxylates for some of our brand owners. We've made expansions there in Spain previously. This will be in Terneuzen. And as you know, we're going to convert Terneuzen to be a net zero ethylene facility over time. So I do think there will be a chemical industry in Europe, but I think we have to continue to look at how it evolves and how we're going to continue to make Europe more energy competitive to support that industry longer term.

David Begleiter:

Jim, Howard, can you talk about PMC, a little bit about the doubling of earnings sequentially? And how sustainable is this pricing realizing right now in the silicones business?

Operator:

We will now take our next question from Jeff Zekauskas from JPMorgan.

James Fitterling:

Jeff, good questions. I would say volume, year-over-year, up 1% consolidated basis is one way to look at it. I would say also sequentially, remember, we were up about 5%. We had a very strong operating rate in hydrocarbons and energy in the first quarter. And so we took advantage of the spreads between oil and natural gas, and that was a big underlying support for all the businesses. Some of the businesses that are the big volume generators had a pretty strong first quarter last year, and more of their impact from the freeze happened in the second quarter. We were able to manage first quarter last year by selling out of inventory, but second quarter really saw the stronger volume impact from Winter Storm Uri. In terms of shareholder return. First 3 years post spin, we were faced with quite a few issues. Right after spin, we were moving into really a declining market, which led into COVID and all the issues we had to deal with. And so our focus during that time frame was to make sure that we navigated that, protected that dividend and made sure that we came out with the best balance sheet in the industry when we came out of the pandemic. I believe we did all those things. A great company is not always a great stock. The actions we took on share buyback were meant to reflect that we think we are undervalued and there's better total shareholder return ahead. And I think we're starting to see that show through in the marketplace.

Chris Parkinson:

Just very quickly on the free cash flow side, buyback activity is obviously robust to say the least, including the recent addition. Can you just give us a real quick update on your thoughts for uses for cash, '22 perhaps through 2024, just anything on CapEx, some of the growth investments you've been looking at, just anything else investors should really be considering?

Howard Ungerleider:

Yes. Look, in terms of our capital allocation framework, safely and reliably operate our plants is number one. So to do that, we have about $1.3 billion of turnaround expenses this year. Our CapEx is going to be around $2.2 billion to $2.3 billion this year from an organic investment. That's up from $1.5 billion, $1.6 billion last year. We're continuing to work on the 65% shareholder remuneration as a percentage of our operating net income. That's across the economic cycle. But as you rightly point out, Chris, our share buyback continues to ramp. We did $400 million in the fourth quarter. We did $600 million in Q1, and of course, the new stock buyback announcement of $3 billion. We have about $700 million left on the current program, that will be done by midyear. And so then we'll have a significant amount of firepower left with that full $3 billion program on a go-forward basis. And then we'll continue to look at incremental net debt. We still want to 2 to 2.5 rating agency adjusted net debt to EBITDA. So we still are looking at between maybe a $500 million and $1 billion net debt reduction before the end of the year. We'll see how the cash flow goes. And I would say on the -- don't forget about the cash tailwinds. As Jim talked about in the prepared remarks, our cash flow yield is significantly above our peer group 50%, 5-0 percent above our peer group. It is 20% better than our next closest peer. And one of the reasons is everybody in Team Dow now has not just a P&L statement, but a balance sheet and a cash flow statement. We're actively working on working capital improvements. Our working capital was improved by 3 to 4 days, depending on whether you're looking at same quarter last year or prior quarter. And then the unique-to-Dow tailwinds that we continue to work on. We've got more than $1 billion of unique-to-Dow cash tailwinds that we're working on still this year that haven't come through that should come through over the next 3 quarters.

Vincent Andrews:

Just first, can we just clarify the comments you made on the polyethylene prices? I think you said you're expecting a $0.04 to $0.05 increase for 2Q. I just couldn't tell whether that was a global comment or how that compared versus the $0.14 that you have out for the next 2 months in the U.S? And then my actual question is for Howard, just to talk about the pension. Just given if -- rates have already gone up a lot year-to-date and what with most expectations for what the Feds are going to do for the rest of the year, what does that do in terms of your pension? And what opportunities could that present for you to materially reduce that liability?

Howard Ungerleider:

The second question was around pension. I can take that, if you want? So when you look at our underfunded pension, we ended the year last year -- that number has come down dramatically. It's come down $6 billion total since year-end 2020. At the end of last year was at $6 billion, that's pension plus OPEB all in. And just with the rate moves we've seen year-to-date, that $6 billion number is now lower by $2 billion. So our total pension OPEB underfunding is $4 billion. It really only takes another maybe 75 basis points of rate increases and 1 more year of EROA for us to fully fund that gap. What we're doing is we have a methodical plan that as rates continue to move and as each pension plan gets to fully funded status, we are working to immunize each plan individually with the goal of not putting additional cash in to immunize. So that will depend on each country's rules and regulations. And obviously, the EROA and -- of each individual pension plan. But over the next, I would say, 3 years, plus or minus, depending on how rates move from here and obviously, how the EROA does, we should be able to fully fund and fully immunize that plan. That's the path that we're working toward today.

Stephen Richardson:

Jim, I was wondering if you could talk a little bit about your outlook for U.S. natural gas. I appreciate all the discussion on feedstock and all the flexibility that Dow enjoys. We have seen a big move in the back of the forward curve, talk about accelerating LNG exports, some more global linkages at least seasonally. So curious, does that make you want to expand some of your joint ventures and some of your access further upstream? Or how is your outlook kind of changing as a big downstream consumer of domestic natural gas?

Operator:

We will now take our next question from Kevin McCarthy from Vertical Research Partners.

James Fitterling:

Sure. We've got quite a bit of downstream silicone capacity coming on. A fair amount of it is in China. It's in a wide range of markets. It's in construction markets, in electronics and mobility, it's in personal care markets. Silicones is used in such a wide variety of applications. And those markets are all growing substantially. EVs use 2 to 3x more silicones than a traditional internal combustion engine vehicles and EVs' growth rates right now are relative. Year-over-year growth rates are super strong. So I think both return of internal combustion vehicle sales as the semiconductor chip issue is alleviated and the EV growth is going to really drive a lot of demand there. Autonomous vehicles, 5G capabilities, all require more silicones. We have to eliminate the crosstalk in all those areas. And you've got to put up a lot more infrastructure in cities for 5G to support absolute continuous coverage in those areas. And that's really, really strong. There are about 20 debottlenecking projects that are in those total projects. They're anything from new vulcanized products, lower viscosity fluids for personal care applications, all kinds of gels for EVs, electronics, mobile optics for automotive lighting. So think about the headlamps in a vehicle, not being polycarbonate anymore but being moldable optical silicone. Those are some of the biggest growth areas in that sector.

Michael Sison:

Nice start to the year. Just curious, if you do happen to get sort of this $0.09 increase in the second quarter, yes, I think polyethylene prices will be back to October's peak. Where would integrated margins be if that was achieved? I understand energy costs clearly are higher now versus they were in October. So would you be close to the past peak margins? Or would you need to get more price increases to get there? And could you bifurcate that between North America and Europe?

Operator:

We will now take our next question from Frank Mitsch from Fermium Research.

James Fitterling:

Demand has been relatively stable. I would say, we don't have as much of a footprint in plastics in China as we do in Performance Materials & Coatings, and we do in silicones, and we do in Industrial Solutions. And so for plastics, a lot of what we would move in would be from the U.S. Gulf Coast or obviously from our partners in the Middle East. Having said that, our demand was still pretty strong year-over-year going into China. We're seeing a lot of accelerated turnaround activity right now in China. So you're seeing crackers not just in China, but in Southeast Asia and North Asia, lowering operating rates, you're seeing them take turnaround time now instead of just slowing rates and continuing to operate. We've seen a lot of pressure on coal to olefins and methanol to olefins. And so I think that will continue. And obviously, I do believe that China is seeing some advantage of being able to buy feedstocks probably from Russian sources at discounted rates. So that may be helping a little bit, but it certainly isn't making them positive cash margins. And I think we're going to be in that kind of environment for the next couple of quarters.

Stephen Byrne:

I have a couple of energy-related questions for you. In Europe, do you have gas hedged? And any hedges that roll off to note here? And with respect to what Germany is mulling over, whether they cut off Russian gas and/or need to pay in rubles, how do you manage that risk? Is it a concern for you? And then maybe one other energy-related question for you, Jim. You talked through the ambitious decarbonization targets and one of the projects is to try to develop these e-crackers. My question for you on that is, are you seeing some demand pull for greener sources of polyethylene that might enable you to sell those products at a higher price, i.e., do you think you can get a return on such projects like that?

Operator:

We will now take our next question from Josh Spector from UBS.

James Fitterling:

Yes, that's a good question. About 25% of our product mix is in the functional polymers when you look at P&SP downstream. Typically, the way you would think about functional polymers is they would typically hold their price through the cycle. They typically have less price dynamic movement compared to the commodity side of the business. But they're up quite a bit this quarter, and I would say that's because demand has been strong on the downstream for them and there hasn't been a lot of new capacity added there. So just a tighter supply/demand balance on some of those functional polymers than we've seen. And I think some of that will continue because some of the markets that they go into are infrastructure-related. They can go into wiring cable markets, they can go into things like geomembranes and roofing for commercial buildings. And so as you see more infrastructure-related projects, I think you're going to see that strong demand last longer here for functional polymers and that will probably keep the prices of those materials up. Also some higher input costs for some of the monomers to make functional polymers is going to have to pass through as well.

Arun Viswanathan:

So I guess, two questions real quickly. So could you just give us a quick outlook on MDI? And then also maybe if you could discuss the certain situation that you see as far as inventories in polyethylene. We know that there's some tied up in supply chain, but do you see that alleviating over the next couple of months?

Operator:

We will now take our next question from Aleksey Yefremov from KeyBanc.

James Fitterling:

Well, that's a good question. I think it's unlikely that we get into it just to monetize it. Our contribution -- and remember, our equity interest here is relatively low. We stepped in and made a contribution of land and access to our infrastructure services for the site in Stade. And those of you who are not familiar, Stade is about 40 minutes upstream from Hamburg on the Elbe River. And we've got the capability. We've got our own port there, and we've got the capability to have a birth for an LNG ship to land in there. And so by contributing that land, we take an equity position in that Hanseatic Energy Hub. They've got plans to build the new terminal by 2026. They're going through the approvals right now. If they can get that done, that will satisfy 15% of Germany's natural gas demand. And so that will really help Germany have a second source of supply to the Russians. And that's very strategic, and I think that's important for the country. So that's the reason we got into it to make it happen. We're not far enough along yet to get into what the offtake agreements are, but we will provide utilities. We'll provide cooling and other things to be able to help them make that a zero carbon emissions hub. And I'm glad we were in a position to be able to do it. There's been some talk about building an LNG import facility in Germany for some time, but we were at the point where we were not sure whether Stade would still be on the table. And this came together relatively quickly after the Russia-Ukraine situation. And I'm really happy that the team was able to move in fast and put a stake in the ground on this.

Pankaj Gupta:

Thank you, Emma, and thanks, everyone, for joining our call. We appreciate your interest in Dow. And for your reference, a copy of our transcript will be posted on Dow's website within approximately 24 hours or so. This concludes our call. Thank you very much.

Operator:

Good day, and welcome to Dow's Fourth Quarter 2021 Earnings Call. [Operator Instructions] Also, today's call is being recorded. I would now like to hand the call over to Pankaj Gupta. Please go ahead, sir.

Jim Fitterling:

Thank you, Pankaj. Beginning with slide 3, in the fourth quarter, Dow once again delivered top and bottom line growth year-over-year with sales growth and margin expansion in every operating segment. Our results reflect the strength and resilience of our advantaged portfolio and the incredible efforts of the Dow team as we continue to ensure well-being and safety of our team and our communities. We delivered year-over-year sales growth of 34%, with gains in every operating segment, business and region. While volume declined 4% year-over-year due to supply constraints from several factors, including our own maintenance, lingering effects of weather-related outages and global logistics challenges, we continue to see robust underlying demand across our end markets, particularly for higher-margin downstream and sustainability-led applications. Prices were up 39% year-over-year, reflecting gains in all operating segments, businesses and regions. Our discipline and agility enabled us to navigate the supply constraints and logistics challenges I just mentioned, dual control actions in China and rising energy costs. We delivered operating EBIT growth of $1.2 billion year-over-year, with margin expansion in every operating segment. Equity earnings were also up year-over-year with margin expansion at our joint ventures in Saudi Arabia, Thailand and Kuwait. These results translated into significant cash generation for the quarter, with cash flow from operations of $2.6 billion, up $901 million year-over-year and cash flow conversion of 88%. And we returned $912 million to shareholders in the quarter, including $512 million through our industry-leading dividend and $400 million in share repurchases. Our performance in the fourth quarter capped a record year for Dow, which you will see highlighted on slide 4. In 2021, Team Dow capitalized on the economic recovery, achieving record sales and earnings performance despite pandemic-driven uncertainty and industry-wide weather-related challenges. Our focus on cash flow and disciplined capital allocation enabled us to continue to deliver on our financial priorities. We achieved $7.1 billion of cash flow from operations, bringing our total cash flow from operations since spin to $18 billion. We enhanced our balance sheet by reducing gross debt by another $2.4 billion in the year, bringing down gross debt by more than $5 billion since spin. We have also no substantive debt maturities until 2026. We proactively funded our U.S. pension plan, and successfully executed Sadara's debt reprofiling, lowering Dow's guarantees by more than $2 billion. Dow has returned a total of $7.3 billion to shareholders since spin through our dividend and share repurchases, including $3.1 billion in 2021. And we kept CapEx well within DNA as we continued to invest in our higher return and faster payback growth investments. In 2021, we achieved a return on invested capital of greater than 22% on strong earnings growth. As we turn the corner on the pandemic, we do so with a strong balance sheet and a deliberate and disciplined strategy to decarbonize and grow. We achieved this record financial performance in 2021 while advancing our ESG leadership. Importantly, we announced our disciplined strategy to decarbonize our assets, while improving underlying EBITDA by more than $3 billion as we capitalize on our participation in attractive, high-growth end markets and sustainability-driven solutions. Our ESG efforts continue to be recognized externally as we were recently recognized by JUST Capital for the third year. Dow earns a top spot in the chemicals sector overall as well as the number one position in the workers and stakeholders in governance categories in the industry. I'm extremely proud of Team Down's dedication to deliver for our customers and drive value for all of our stakeholders. We will build on these achievements in 2022 as we advance our ambition. Moving to our operating segment performance for the fourth quarter on slide 5. In the Packaging & Specialty Plastics segment, Operating EBIT was $1.4 billion, up $662 million year-over-year, primarily due to margin improvement and partly offset by lower supply volumes. Sequentially, operating EBIT was down $512 million and operating EBIT margins declined by 520 basis points on lower olefin and co-product pricing combined with higher raw material costs and energy costs. The Packaging & Specialty Plastics business reported higher net sales year-over-year, driven by price gains in all regions as well as in key applications such as flexible food, industrial and consumer packaging. Volume declined year-over-year, primarily in Asia Pacific due to supply constraints. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $595 million, up $299 million year-over-year, primarily due to continued price strength. Sequentially, operating EBIT was down $118 million and operating EBIT margins declined 280 basis points, primarily driven by higher energy costs in Europe and our planned maintenance turnaround activity. The Polyurethanes & Construction Chemicals business increased net sales compared to the year ago period on broad-based price gains in all regions. Volume declines were primarily due to a planned transition away from a low-margin coproducer contract and our planned maintenance turnaround activity. The Industrial Solutions business delivered a net sales improvement compared to the year ago period with local price gains in all regions. Volume was flat year-over-year as higher volume from a renewable energy contract was offset by fewer licensing and catalyst sales. And finally, the Performance Materials & Coatings segment reported operating EBIT of $295 million compared to $50 million in the year ago period, as margins increased 900 basis points due to strong price momentum for silicones and coatings offerings. Sequentially, operating EBIT improved $11 million as price gains were partly offset by our planned maintenance turnaround activity. The Consumer Solutions business achieved higher net sales year-over-year with local price gains in all regions and across end market applications. Volume declined as strong demand, particularly for industrial, electronics and personal care applications, was offset by lower supply availability due to our own decision to pull forward maintenance activity to coincide with dual-control actions in China. The Coatings & Performance Monomers business achieved increased net sales year-over-year as higher raw material costs and strong industry demand led to price gains in all regions. Volume declined as stronger demand for architectural coatings and industrial coatings, primarily in the U.S. and Canada was more than offset by lower merchant sales of acrylic monomers partly due to Dow's own higher captive use. I'll now turn it over to Howard to review our outlook and modeling guidance.

Jim Fitterling:

Thank you, Howard. Turning to slide 10. At our Investor Day in October, we laid out our disciplined strategy to decarbonize and grow the Company, supported by a series of in-flight earnings growth programs that will drive over $3 billion in underlying EBITDA growth. In 2022, our capital and operating investments are on track to deliver $200 million to $300 million in run rate EBITDA and will serve higher-margin, differentiated applications where demand is accelerating as customers work to reduce their own carbon footprint. In Packaging & Specialty Plastics, our Fort Saskatchewan expansion completed last year will deliver a full year of earnings growth to support increasing polyethylene demand. And our FCDh pilot plant in Louisiana will start up this year to produce propylene for coatings, electronics and durables end markets. Notably, the technology enables lower CapEx, OpEx and CO2 emissions compared to conventional PDH technologies. These projects serve faster growing, more sustainable market segments such as renewables to drive lower carbon emissions for our customers. For example, our endurance compounds for cable systems support next-generation, longer life, and lower carbon emissions infrastructure, including on and offshore wind farms by reducing the cable manufacturing carbon emissions footprint by 80%. And our ENGAGE elastomers deliver 35% improved performance and efficiency for solar photovoltaic applications. In Industrial Intermediates & Infrastructure, our alkoxylates and PU systems expansion projects are closely linked with brand owner demand for higher value, differentiated downstream applications across home and consumer care, agricultural and infrastructure end markets. For example, our surfactants offer an improved environmental profile for leading brand owner laundry and home care products. And our polyurethane system PASCAL technology enables up to 10% greater energy efficiency and appliances without raising manufacturing costs. In Performance Materials & Coatings, we're expanding capacity in formulated solutions for coatings and silicones through incremental debottlenecking projects. Our products enable higher performing, more sustainable solutions, targeting mobility, consumer and infrastructure end markets. For example, FASTRACK coatings enable autonomous mobility infrastructure and have approximately 45% lower greenhouse gas emissions. And our DOWSIL technology enables higher density, lower-cost battery packs for the fast-growing electric vehicle market. Finally, as Howard mentioned, our restructuring program and digital investment will continue to support our low-cost operating model and top quartile cost structure. Turning to slide 11, the increasing demand for sustainable products represents a significant growth opportunity for Dow with attractive pricing that will support longer term higher quality earnings. Our customers are looking for opportunities to enhance their sustainability, and we are meeting those needs with lower carbon emissions solutions beginning with our own operations. Our Alberta project will decarbonize approximately 20% of Dow's global ethylene capacity while growing our global polyethylene supply by about 15%. We are also working with our suppliers to reduce our scope 3 carbon emissions. To date, we have more than 150 supplier agreements in place and have adopted third-party frameworks like CDP, together for sustainability and EcoVadis to drive tangible improvements in environmental performance along the value chain. We continue to advance a circular economy for plastics and see a consistent trend across our brand owner customer base toward redesigning packages to be recyclable and incorporating 30% post-consumer recycled content in their packaging by 2030. Six of our largest sites have now received International Sustainability and Carbon Certification Plus recognition for tracking the use of sustainable feedstocks. We're advancing our partnership with Mura technology to scale advanced recycling solutions and secure circular product supply. Mura broke ground on the new plant with an expected startup around the end of the year. Earlier this month, we announced an investment in Mr. Green Africa, the first recycling company in Africa to be a certified B Corporation, which includes socially responsible waste collection and plans to codevelop new flexible plastic packaging that will enable more sustainable packaging solutions. A first of its kind investment for Dow in Africa, this business model will be scaled to other developing regions around the world. We continue to grow our recyclable offerings, recently doubling sales with Chinese laundry brand, Liby, and increasing our addressable market opportunities. And like the partnerships, Dow recently announced to source pyrolysis oil from Gunvor and New Hope Energy. These investments in circularity are examples of our progress and solid foundation as we grow and scale circular solutions. To close on slide 12, 2021 was an outstanding year for Team Dow. We delivered record financial performance and continued our disciplined execution of our strategic priorities. Building on this foundation, we're focused on advancing our plan to decarbonize our assets and grow earnings. Our competitive advantage enables us to meet the increasing needs of our customers and consumers who are demanding more circular and sustainable products while we work to achieve zero carbon emissions in our own operations. And as we look ahead, our priorities remain consistent. Our focus on profitable growth, while maintaining a low-cost position and best owner mindset, will enable us to deliver on our earnings growth levers. We'll continue to maintain our balanced and disciplined approach to capital allocation, driving higher returns for the Company and our shareholders while retaining the financial flexibility that has served us well. And we'll continue to advance our leadership in ESG with a clear path to achieve our zero carbon circularity and sustainability targets. The world and our customers are demanding a more sustainable future. As we execute our ambition, I am confident that we will create significant long-term value for all of our stakeholders. With that, I'll turn it over to Pankaj to open up the Q&A.

Operator:

[Operator Instructions] We'll take our first question from David Begleiter of Deutsche Bank.