Dow Inc. (NYSE:DOW) Q4 2023 Earnings Call Transcript

Dow Inc. (NYSE:DOW) Q4 2023 Earnings Call Transcript January 25, 2024

Dow Inc. beats earnings expectations. Reported EPS is $0.43, expectations were $0.4. Dow Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

Pankaj Gupta: 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 Investor Relations’ Vice President. And joining me are Jim Fitterling, Dow’s Chair and Chief Executive Officer, and Jeff Tate, Chief Financial Officer. Please note our comments contain forward-looking statements and are subject to the related cautionary statement contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We also will refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides that are posted on our website.

On Slide 2 is our agenda for today’s call. Jim will review our fourth quarter results, full year highlights and operating segment performance. Jeff will provide an update on the macroeconomic environment, our strong financial position through the cycle as well as the modeling guidance. To close, Jim will provide an update on key milestones for our long-term growth and sustainability roadmap, which will continue to drive shareholder value. Following that, we will take your questions. Now, let me turn the call over to Jim.

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.

Jeff Tate: Thank you, Jim. Before I begin, I’d like to mention how excited I am to have rejoined Dow last November. I’ve been connecting with key stakeholders, analysts and shareholders, including many of you on this call today. And I look forward to meeting with so many others in the future. After four years serving in a CFO role outside of Dow, I’m pleased to see that Dow’s culture of execution, commitment to advancing our ambition and the focus everyone has demonstrated on delivering on our financial priorities since then remains. This is an exciting time for the company. As CFO, I’m proud to carry forward Dow’s commitment to maintaining a disciplined and balanced approach to capital allocation over the economic cycle as we advance our growth strategies and deliver long-term value for shareholders.

Now, for our outlook on Slide 6. As we enter 2024, we expect near-term demand to remain pressured by elevated inflation, high interest rates and geopolitical tension, particularly in building and construction and durable goods end markets. That said, we are seeing some initial positive indicators. While inflation is still elevated compared to pre-COVID levels, the growth rate is moderating, supporting more stable economic conditions. In addition, the destocking that began in late 2022 has largely run its course, resulting in low inventory levels throughout most of our value chains. In the U.S., industrial activity continues to be moderate. In December, industrial production increased 1% year-over-year, and chemical railcar loadings are up 9.6% in January versus the prior year.

U.S. consumer spending has remained resilient with retail trade sales up 4.8% in December. We’re also encouraged by recent forecast from the American Coatings Association, which expects market demand to grow approximately 3% in 2024 following three consecutive years of declines. In Europe, while inflation has moderated, consumer demand remains weak with retail trade sales down 1.1% year-over-year in November. In December, manufacturing PMI remains in contractionary territory and new car registrations fell 3.3% year-over-year after 16 consecutive months of growth. We continue to monitor China where we see improving conditions, which could provide a source of demand recovery following the Lunar New Year. Industrial production was up 6.8% year-over-year last month, exceeding market estimates of 6.6%.

December auto sales also continue to be strong in China, supported by year-end incentives. In other regions around the world, industrial activity remains constructive. While India Manufacturing PMI remains expansionary, ASEAN Manufacturing PMI entered contractionary territory last month. In Mexico, November marked the 25th consecutive month of industrial production growth. On Slide 7, our competitive advantages, early cycle growth investments and operational discipline position us well to capitalize on a recovery and deliver growth when economic conditions improve. Our differentiated portfolio with structurally advantaged assets, global scale and strong cost positions enable us to competitively support global demand growth over the cycle. Healthy oil to gas spreads supported by growing natural gas and NGL production in U.S. favor our cost advantage and ability to capture margin momentum.

We’ve also taken actions to position the company for profitable growth, including ongoing execution of near-term investments that are expected to deliver approximately $2 billion in incremental underlying EBITDA by mid-decade. In addition, we’ve improved our cost profile, delivering $1 billion in targeted savings in 2023 that included lower plant maintenance spending and structural improvements to raw materials, logistics and utility costs. In addition, more than 90% of the 2,000 impacted roles exited by year-end. Our strong balance sheet allows us to navigate the bottom of the cycle and have the strength to capitalize on the next upside in the global economy. Turning to our outlook for the first quarter on Slide 8. In the Packaging & Specialty Plastics segment, lower feedstock and energy costs will be more than offset by lower earnings from non-recurring licensing activity from the prior quarter, resulting in a $25 million headwind.

Additionally, we expect a $50 million headwind due to higher plant maintenance activity at select energy assets in the U.S. Gulf Coast. In the Industrial Intermediates & Infrastructure segment, we expect margin expansion on higher MDI and MEG spreads as well as lower European energy costs, resulting in a $50 million tailwind. Increased season demand for deicing fluid is expected to provide a $25 million tailwind despite being partly offset by continued weakness in consumer durables demand. We also expect a headwind of $50 million due to planned maintenance activity in the quarter, primarily related to a PDH turnaround and catalyst change. In the Performance Materials & Coatings segment, downward pressure is expected to continue due to excess supply from competitive supply additions that will keep margins at depressed levels.

However, we expect higher seasonal demand in building and construction end markets to contribute $150 million tailwind for the segment. We also expect higher planned maintenance turnaround activity at our Deer Park acrylic monomers site and PDH to result in a $50 million headwind in the quarter. With all the puts and takes, we expect first quarter earnings to be approximately $25 million to $50 million above fourth quarter performance. Next, I’ll turn it back to Jim.

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.

Pankaj Gupta: 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 as well as the following Q&A. Operator, please provide the Q&A instructions.

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Q&A Session

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

Hassan Ahmed: Good morning, Jim. Jim, a couple of times through the prepared remarks you talked about inventory. It just seems that there are two camps out there in terms of the thought process with regards to what a potential restocking may look like, and I’d love to hear your views about that. On one side of the debate, people are sitting there and saying, hey, look, since the second half of 2022, the destocking was quite significant, and maybe as and when we should expect an equally impressive restock. But then on the other side of the camp, you have some of the folks sort of debating that buying cartons across the supply chain has changed quite dramatically coming out of the pandemic and maybe a restock could not look that impressive. So, I’d love to hear your views. And if you could also sort of elaborate on that within some of the main product chains, be it polyethylene, polyurethanes and the like?

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.

Operator: Your next question comes from the line of Mike Sison from Wells Fargo. Your line is open.

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?

Jim Fitterling: Yeah. Thanks, Michael. Good question. Operating rates in the advantaged regions, especially Canada, U.S., Gulf Coast, Argentina, we’re strong through the end of the year. I mentioned ethylene production record. We saw rates above 90% in those regions for the fourth quarter. And obviously we saw a little bit of an improvement in Europe. I’d say the Suez Canal situation means not as much material from the Middle East is flowing into Europe, and so that’s given Europe a little bit of a lift on operating rates as we go into the first quarter, and of course with propane being where it is, we’re cracking LPGs in Terneuzen and Tarragona, and that’s helping out a bit there. I would say I think P&SP is going to continue to see good volume growth.

That’s what our outlook is going forward. The Industrial Solutions is holding up relatively well. We have our own self-inflicted issue with Plaquemine Glycol plant, but I’m expecting that back up in second quarter. And we’re watching carefully on construction chemicals demand and durable goods to see if we see an uptick there. We saw some good movement in consumer electronics, and so that’s got me a little bit optimistic.

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

Vincent Andrews: Hi, thanks. Maybe two quick ones for me. Just on Slide 7, you have some project starts that are going from ’24 to ’26. Talk about how material some of that might be for 2024? And then also if you could just give us an update on what you did with the pension ending the year?