Dow Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Pankaj Gupta, Dow's outgoing Investor Relations Vice President. Leading today's call are Jim Fitterling, Dow's Chair and Chief Executive Officer; and Jeff Tate, Chief Financial Officer. Also joining is our new Investor Relations Vice President, Andrew Riker, who you may remember, was a member of our IR team a few years ago.
Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow delivered sequential volume growth and margin expansion. We strategically increased operating rates to capture improving demand, we maintained pricing and we benefited from lower feedstock and energy costs. These results reflect the strength of our advantaged portfolio, including our participation in diverse end markets and our cost advantage positions around the world. Net sales were $10.8 billion, down 9% versus the year ago period but up 1% sequentially, driven by gains in Performance Materials & Coatings and Industrial Intermediates & Infrastructure. Volume increased 1% year-over-year. And excluding Hydrocarbons & Energy, volume increased 5%, with gains in all regions. This marks the second consecutive quarter of year-over-year volume growth. Sequentially, volume increased 1% and excluding Hydrocarbons & Energy, was up 3%, led by gains in Performance Materials and Coatings.
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.
Thank you, Jim and good morning to everyone joining our call today. Turning to our outlook on Slide 5. We are seeing signs of improving macroeconomic conditions in several regions, which gives us cautious optimism heading into what is typically a seasonally strong quarter. That said, we are keeping a close eye on inflation, interest rates and geopolitical tensions. The U.S. is benefiting from improving industrial activity with manufacturing PMI in expansionary territory every month thus far this year. In fact, manufacturing production expanded at its fastest rate in 22 months in March. Average chemical railcar shipments were also up 4.3% year-to-date compared to last year through mid-April. And while high interest rates continue to improve building and construction activity in the U.S., building permits were 1.5% higher in March year-over-year, while existing home sales declined 3.7% in March.
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.
Thank you, Jim. Now let's move on to your questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.
[Operator Instructions] And your first question comes from the line of Hassan Ahmed at Alembic Global.
Jim, a quick question around global ethylene and polyethylene supply-demand fundamentals. On the surface, as I sort of take a look at global utilization rates, they seem relatively slack. But then as one sort of thinks through marginal producer economics, I mean, they seem pretty weak right now and we're obviously hearing more and more announcements of capacity closures, out in Europe. So how do you see utilization rates pan out in '24 and beyond?
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.
Your next question comes from the line of David Begleiter from Deutsche Bank.
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?
David, I think with the first quarter results and the $200 million that Jeff mentioned on the call, we're right on track. I would add that, as you go into third quarter, now that we'll have another $100 million from the restart of Glycol 2 in Plaquemine, so $100 million third quarter, $100 million fourth quarter kind of numbers. So we're starting to see that run rate and that run rate right in line with what we need to deliver that $6.4 billion.
Your next question comes from the line of Vincent Andrews from Morgan Stanley.
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?
Yes. Vincent, thank you. And it's mostly a step-up in integrated margins. I think we're looking at about $0.03 a pound globally in integrated margin increase. North America -- Europe may be a little bit more than [ 3 ], rest of the world is pretty flat. We've got, obviously, kind of a one-time improvement. We had Bahía Blanca down, as mentioned, in the first quarter -- for part of first quarter to the -- beginning of it because of the storm they had in December. But it's back. And so you'll see a $25 million improvement there. So those 2 positives are $175 million.
Your next question comes from Frank Mitsch from Fermium Research.
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.
Sure. Yes, happy to do that, Frank. I'd say globally, at a high level, we were at about 6% which is up quarter-over-quarter. It's -- higher demand obviously drove that, lower energy costs in Europe were a big driver of that as well. The United States Gulf Coast, Argentina, Canada have been running at well north of 80%, some as high as 90% kind of rates. Europe saw the biggest individual step-up, as I mentioned previously but all regions saw a step up in rates. And so I'm optimistic that, that's just a sign of underlying demand coming. So you'd probably think -- I think I mentioned like about 10 percentage points up. That's good ballpark for the whole global number with North America, Latin America being -- continue to be strong and high rates and Europe being a big part of that step up.
Your next question comes from the line of Steve Byrne from Bank of America.
I wanted to ask a question about the hydrogen-fueled cracker you're building in Alberta. And then you also have the investments with the Mura pyrolysis feedstock. For those investments, how would you expect the unit costs of those downstream crackers to compare to, say, Texas-9 on a unit cost? And to drive the return on those projects, do you have sales agreements for the product at a premium price?
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 .
Your next question comes from the line of Josh Spector from UBS.
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?
Jeff, do you want to walk through what you think the free cash flow outlook is for the year? And I would just say, Josh, the one thing we have to remember, as we're turning the corner here, December was the low point from a pricing standpoint and we've seen successive improvements January, February, March. So we go from a use of cash -- a source of cash in the fourth quarter to use of cash in the first quarter. But as we make that turn and earnings improve, we'll start generating the free cash flow out of higher earnings.
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.
Your next question comes from the line of Mike Sison from Wells Fargo.
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?
Sure. I think on Hydrocarbons & Energy, I would say, as we went into first quarter because we had -- obviously Bahía had been impacted by the storm and because we had the arbitrage, obviously, to China and wanted to move more product. We elected not to move materials into the broader market and just focus on higher operating rates. So sometimes byproduct sales are not as high off the crackers, especially for cracking light like we were in Europe and in North America. And so that leads to less volume of byproducts to sell. And sometimes, it's running the derivatives harder.
Your next question comes from the line of Jeff Zekauskas from JPMorgan.
In your Industrial Intermediates & Infrastructure forecast, you have sales going up sequentially 1% or 2% and you've got your EBITDA flat sequentially. And normally, there's seasonal strength in the various construction markets. Why is your forecast so conservative? And then secondly for Jeff, how many shares will be issued? Or what's the amount of options and shares issued that will affect the share count in 2024?
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?
Jeff, in terms of the issuances for the full year and this then captures options, deferred stock, 401(k) plan as well as Dow employee stock purchase plans. We're looking at approximately 11 million shares on a full year basis.
Your next question comes from the line of Kevin McCarthy from Vertical Research Partners.
Jim, I'd like to ask you about your thoughts on the likely pace of capacity rationalization across the global ethylene chain. You mentioned the cash negative margins in China today. Obviously, we've seen some of your competitors announce rationalizations in Europe in recent weeks. So my question would be, relative to prior cycles, do you think we're likely to see more supply come out of the equation this cycle, based on a combination of the current energy regime in Europe and obviously a powerful drive to decarbonize?
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.
Your next question comes from the line of Laurence Alexander from Jefferies.
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.
No, I haven't seen big signs of restocking in Europe. I would say on construction trends, we are starting to see some positive things happening. When you take a look at existing home sales, even though some of the year-over-year trends are down, we're starting to see some marginal improvements, building permits are starting to tick up, which is good. So new homes -- there's a need for new homes in North America for sure. And so you're going to start to see that demand.
Your next question comes from the line of Duffy Fischer from Goldman Sachs.
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?
Yes, Duffy. I don't think there's any overshipping or stocking going on there. I think, obviously, some customers are more exposed to the contractor business and that's very much driven by new homes and new construction. And then there's the DIY segment. And we're pretty heavily impacted by the DIY segment, so painting existing homes or when existing homes are sold. And so we tend to see that -- that bottom tends to help us. I think, obviously, we had a very strong fourth quarter. We had some turnaround activity in first quarter and still had pretty good numbers. So I think we're well positioned for the peak of the season and second and third quarter. And also some of the monomers demand from time to time can be an added positive on that. And so it doesn't all necessarily mean it's downstream coatings. Some of the monomers going into other markets could help us out a little bit, too.
Your next question comes from the line of John Roberts from Mizuho.
And congrats as well to both Pankaj and Andrew on the new roles. Jim, there were some reports about European warehouses and ports being jammed again with your customers' products. Do you think there's supply chain inventory building again downstream in Europe?
Any particular products, John, that you're thinking of?
Just the economic magazines are talking about because of the Red Sea issues, just a lot of safety stock, I guess, being built up again across some supply chains.
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.
Your next question comes from the line of Patrick Cunningham from Citigroup.
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?
Yes. Functional Polymers is going to primarily be driven by infrastructure markets. You think wire and cable is big, automotive is big, golf balls is a big part of it. Footwear sales are improved. So all those areas are very robust. I'd say the power demand, electric -- you hear about it, AI, data centers but just beyond that, the energy transition, electric grids, installations of new, it could be wind, it could be offshore wind, it could be a solar farm, it could be a telecom center, it could be a data center, it could be replacement of wiring in the existing grid.
Your next question comes from the line of Chris Parkinson from Wolfe Research.
So Jim, there's been a lot of back and forth in the buy and the sell side communities about the $0.03 increase for April and then obviously some preliminary ideas for May. Just, where we stand right here, right now, given the U.S. macro, given where you anticipate USGC operating rates to be on a sequential basis, what's Dow's view of this? We all know what the consensus view is but what's your view in terms of how things play out during the second quarter and how that ultimately sets the tone for the second half?
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.
Your next question comes from the line of Mike Leithead from Barclays.
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?
Mike, yes, we are actually looking at it still being a use of cash on a full year basis as we work our way through, again, the recovery for a number of the dynamics that I mentioned earlier in relation to Josh's question here. But again, as we see the earnings improve based on the volume improvements that we're anticipating, right, we will start to turn that corner. But coming from where we're coming from on our working capital today, it will be a use of cash on a full year basis.
Your next question comes from the line of Aleksey Yefremov from RBC Capital -- sorry, KeyBanc Capital Markets.
I want to come back to silicones. Was the improvement that you saw more on the upstream silicone side or downstream? And as a follow-up, where are your downstream silicones margins relative to your mid-cycle expectations? And therefore, what's the sort of optionality for downstream silicones improvement?
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.
Your next question comes from the line of Arun Viswanathan from RBC Capital Markets.
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?
Yes, Arun, I think you're right on top of the run rate. So no comments there. I do think mid-cycle -- I mean, our view of mid-cycle is probably closer to $9 billion. And so to get to that mid-cycle run rate, obviously, we have to have another couple of step-ups to get there. Volume is a big part of it. So as I mentioned, all the projects, on the call that some that we've already put in place that equal $800 million of the step-up and the rest that we're in flight right now, that's another $1.2 billion of step-up. So that $2 billion of improved margins is all volume.
That concludes our question-and-answer session. I will now turn the conference back over to Pankaj Gupta for closing remarks.
Thank you, Christa and 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 Dow's website within 48 hours. This concludes our call. Thanks once again.
This concludes today's conference call. Thank you for your participation and you may now disconnect.