Q1 2021 Dow Inc Earnings Call

April 22, 2021

[music].

Please standby we're about to begin.

Good day and welcome to Dallas first quarter 2021 earnings call you May signal to ask a question by pressing star one at any time. During today's presentation. Also today's call is being recorded I would now like to turn the call over to Paul Gosh Gupta. Please go ahead Sir.

Good morning, Thank you for joining balance fourth quarter earnings call. This call is available via webcast and we have prepared slides to supplement our comments today, we have posted on the Investor Relations section on <unk> website and through the link to our webcast I am Pankaj Gupta Investor Relations Vice President.

For now and joining me on the call today are Jim Farley, <unk>, Chairman and Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer.

Please read the forward looking statement disclaimer contained in the earnings news release and slides during our call. We will make forward looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially.

Really from our forward looking statements those forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.

Unless otherwise specified all financials, where applicable exclude significant items. We will also refer to non-GAAP measures a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release in the slides that supplement our comments today and on the Dow website.

On slide two you will see on agenda for the call Jim will begin with the first quarter highlights and will discuss the Companys operating segment performance Howard will provide our modeling guidance and our latest benchmarking performance and then Jim will close with an update on our plastics on collateral roadmap and market outlook following that we will.

Take your questions with that I will turn the call over to Jim.

Thank you Paul cottage, and thanks to everyone for joining us today before we begin I'd like to recognize and thank Colleen Kay who announced her retirement from Dow after over 31 years of outstanding service and also to welcome back PON cash Gupta, who many of you already know starting on slide three our results for the first quarter.

Once again demonstrated the focus and agility of team Dow, which enabled us to quickly recover from the impact of winter storm right on the U S Gulf Coast.

This event had a far reaching impact across our industry and broader market. Our colleagues quickly and safely got our units back online some of which began coming up within a week of the storm all impacted Dow units are back online and we reached pre storm operating rates by the end of March ahead of plan.

Our team's efforts combined with improving demand and tight industry supply conditions drove results higher than the updated guidance. We shared last month at the Jpmorgan Investor Conference at the company level Dow achieved double digit growth on the top and bottom line both year over year and sequentially a few highlights in particular.

Sales were up 22% year over year with gains in all operating segments and in every region. We continued to benefit from strong price momentum with improvements in all segments businesses and regions volume was in line with the year ago period as gains in construction mobility electronics and consumer durables and Mark.

<unk> as well as higher energy demand were offset by supply constraints from the storm and we continued to improve our working capital efficiency with a net improvement of three days.

Sales were also up sequentially with growth in all segments and regions.

This top line growth and our continued focus on cost discipline led to bottom line growth and our highest EBIT quarter. Since spin, we achieved more than $700 million of EBIT growth from the year ago period, and $500 million sequentially, we delivered equity earnings improvements of more than $300 million led by the Dara earlier.

This month, so dara with help from Dow and Saudi Aramco work to bring its mixed feed cracker back on line faster than anticipated and downstream production units are also back at expected rates.

We also completed key structural changes to our U S defined benefit pension plans in the quarter, which reduced the companys pension liability cash flow from operations was more than $750 million, excluding a $1 billion elective pension contribution and Dow and Saudi Aramco and SEDAR are complete.

<unk> the joint Venture's debt re profiling, which will provide approximately $350 million cash tailwind to Dow in 2021. So Dara is now expected to be cash flow self sufficient.

In summary team Dow remained agile in an extremely dynamic business environment to deliver strong top and bottom line growth positioning Dow for greater value creation going forward.

Moving to our segment performance on slide four and the packaging and specialty plastics segment operating EBIT was $1 $2 billion up nearly $650 million versus the same quarter last year and $448 million sequentially resilient demand tight market supply disciplined price.

Volume management, and polyethylene inventory levels at five year lows and enables momentum in polyethylene earnings.

The packaging <unk> specialty plastics business achieved double digit sales gains year over year and sequentially driven by local price momentum in all regions versus the year ago period local price gains were led by improvement in industrial and consumer packaging and flexible food and beverage packaging applications move.

Going to the industrial intermediates and infrastructure segment operating EBIT was $326 million up $151 million year over year due to strong supply and demand fundamentals in polyurethane and construction chemicals and higher equity earnings led by continued improvement from <unk>.

Sequentially operating EBIT improved $30 million, despite significant impact from winter storm Ori.

Urethane and construction and chemicals business achieved a double digit net sales increased compared to the year ago period led by local price momentum and polyurethane.

Demand growth in consumer durables on appliances, and industrial end markets was more than offset by volume limitations on the U S Gulf Coast and other third party supply constraints related to the storm.

These pricing and volume dynamics also drove sequential sales growth.

The industrial solutions business delivered net sales in line with a year ago period as higher prices in all regions were offset by volume constraints, primarily due to winter storm Ori improved demand in textiles, and electronics applications was more than offset by supply limitations net sales were also.

In line sequentially due to the same drivers.

And finally, the performance materials and coatings segment reported operating EBIT of $62 million down year over year as local price gains across the portfolio and strong demand for architectural coatings in silicones applications were more than offset by the impact of the winter storm as well as planned maintenance sequentially.

Operating EBIT was up $12 million the consumer.

<unk> solutions business achieved higher net sales year over year on local price increases for style boxing and robust demand for consumer electronics and mobility applications.

These gains more than offset the impact from planned maintenance sequentially. The business delivered local price gains across all regions and achieved sequential volume gains in all regions, except Asia Pacific where strong gains in performance silicones were more than offset by planned maintenance downtime at our <unk>.

<unk> assets.

The coatings and performance monomers business delivered higher net sales year over year, driven by price gains in all regions, notably in acrylic monomers due to strong supply and demand fundamentals supply constraints from winter storm <unk> and planned maintenance at our Deer park assets more than offset continued.

<unk> strength for architectural coatings sequentially, the business achieved price gains, particularly in acrylic monomers due to increases in raw material costs.

I'll now turn it over to Howard to review modeling guidance and the results of our annual benchmarking.

Thank you Jim moving to slide five as we turn to the second quarter market demand remains robust in packaging electronics mobility architectural coatings as well as consumer durable end markets, while sectors like home care have begun to normalize we do expect additional upside on continuing economic recovery in the industrial sector.

And as travel workplace and social activities resume they will also provide a boost in demand for higher margin personal care applications as well as across our service sectors of the global economy.

These constructive market trends will continue to support top and bottom line growth across all operating segments in the second quarter.

We are entering turnaround season in the northern Hemisphere, and we expect increased spending of approximately $125 million sequentially, particularly in the U S Gulf coast, including a turnaround at one of our crackers in Louisiana.

We also expect an additional $100 million from outages, including a third party to supply disruption on the U S Gulf Coast <unk>.

Collectively robust demand tight supply low inventories and increased raw material costs are providing support for prices across many of our value chains.

We expect the constrained industry inventory levels to continue in the second quarter, preventing inventory builds until later this year as we focus on clearing the growing backlog of customer orders on.

All combined for the second quarter, we expect approximately $750 million to $800 million and higher earnings versus the prior quarter from a combination of earnings momentum in our key chains and lower sequential cost from winter storm here. This earnings growth will be partially offset by approximately $200 million to $250 million on higher <unk>.

Cost from turnarounds and the third party outage I mentioned.

Altogether, we expect second quarter to be our strongest performance since spin.

Moving to slide six we're also updating a few key items in our full year modeling guidance. The positive momentum I. Just mentioned will also benefit our joint ventures, particularly to Dara. We also expect to see slightly higher turnaround spending than previously anticipated as winter storm urea has put some upward pressure on the cost of materials and.

Labor in the U S Gulf Coast.

Finally, our decision to freeze our U S pension plan accruals and contribute $1 billion to the U S pension plan along with the subsequent Remeasurement provides an approximately $200 million tailwind to pension expense year over year.

Overall for the remainder of the year, we continue to see broad based economic momentum recovery from winter storm here and elevated consumer demand.

Moving to slide seven today, we also released our annual benchmarking update which is available on our investor website and in this earnings presentation I continue to be very proud of our team's efforts to achieve top quartile results across most of our peer comparison performance metrics.

To summarize our results at the enterprise level, our focus on cash extended dow's advantage on EBITDA to cash flow conversion and enabled free cash flow performance above peers above the industry as well as above the broader market. This supported our continued leading dividend yield and further strengthened our balance sheet even through.

The pandemic.

We also maintained our top quartile cost management and margin performance.

On a segment level packaging and specialty plastics outperformed the peer median across adjusted operating EBITDA margin free cash conversion and SG&A and R&D spend.

And that was operating EBITDA per pound of polyolefin capacity continues to outperform peers expanding further in 2020.

Both industrial intermediates and infrastructure as well as performance materials and coatings outperformed the peer median on cash conversion as well as on SG&A and R&D spend.

We do see near term opportunities to improve adjusted operating EBITDA growth by continuing to implement our faster payback higher ROIC expansions. This includes our ethylene cracker expansion in Canada, or SDH retrofit, our polyglot cause expansion and our downstream silicones expansions as well and projects like.

South China specialties hub will enable us to capture higher value polyurethane systems and <unk> demand in the fast growing Asia Pacific market.

Looking ahead, we are well positioned to grow earnings and maintain our track record of cash generation, our differentiated consumer led portfolio with leading positions across most of the markets. We serve enables us to capture growth in our key value chains and ongoing market recovery on automotive and personal care.

For example, in the mobility global Megatrend alone electric vehicles use three to four times more Dow silicone products and traditional vehicles.

Together, our strong operational financial and commercial playbook supported by the broadening economic recovery positioned us well for future earnings and cash flow growth with that I'll turn it back to Jim.

Thank you Howard moving to slide eight before discussing the market outlook I want to reinforce how sustainability continues to be another growth driver for Dow.

Last quarter, we shared our roadmap to achieving our 2030 carbon reduction targets and this past week Columbia University, and the nature Conservancy announced our partnership to better account for the role of the materials and sustainable applications play in achieving emissions reduction including plastics.

<unk> have a lower carbon footprint than traditional materials, and we are leading the way to a circular economy for plastics through our stopped the waste and close the loop targets, we're enabling 1 million metric tons of plastics to be collected we used a recycled by 2030 and targeting 100% of our products sold into <unk>.

Good day and applications to be reusable or recyclable by 2035.

These targets require innovation and collaboration and mechanical and advanced recycling as well as in designing for Recyclability.

Net and through collaboration across the value chain with Dallas Pack Studios, we're working to accelerate sustainable packaging solutions tailor made for those customers and consumer brand owners, many of which have set targets to incorporate 25% or more post consumer recycled material in their products.

We're helping consumer brands design their packaging to be fully recyclable, our collaborations to develop fully formulated recyclable packaging solutions include developments with Kellogg's Kashi and bear naked Granola Reckitt Benckiser finished dishwashing detergent and China's leading.

Laundry brand Levi.

Each enable a larger addressable market and sales of higher value Dow materials.

We sell products containing mechanically recycled materials in every geography and now we're beginning to scale a family of products that can be used in either flexible or rigid packaging applications.

Dow is also developing advanced recycling technologies that convert use plastics into their feedstocks. We continue to scale up these capabilities with our partner Phoenix packaging group and today, we announced a partnership with Nero technology to convert plastics back into the oil and chemicals from which they were made for you.

Using new Virgin equivalent plastic products. This revolutionary advanced recycling technology can convert all forms of plastic into feedstock, including many considered to be on recyclable.

We're also actively engaged as a founder of the alliance to end plastic waste and with key stakeholders around the world to help solve critical challenges to plastics recycling for.

For example, through our collaboration with circulate capital Dow is bringing materials science capabilities to loop CRO plasma cycle and Mariko limited one of India's leading consumer brands to enable sustainable flexible film packaging with recycled content.

Our actions to advance plastics circularity are value accretive to Dow and our differentiated product slate downstream knowledge intimacy with consumer brands and strategic partnerships give us a leading edge to capture this growth.

Turning to slide nine as Howard mentioned, Dow remains well positioned to benefit from improving industry and market conditions, we see several positive leading indicators, including momentum in job growth consumer spending a return to air travel and expanding manufacturing and industrial activity.

Our global manufacturing PMI has hit a 15 year high in March. These trends are further supported by government stimulus measures and accelerating vaccine rollouts globally.

Spending elements of the U S infrastructure plan, if past will further support growth in our downstream markets. Similarly.

Similarly, and incentives aligned to more sustainable energy solutions should be beneficial to our business and to attaining our own sustainability targets.

These programs are not currently included in our assumptions, but could drive additional growth if enacted in a manner that supports manufacturing competitiveness.

These macro trends translate into a one to two times GDP growth across key end markets, including packaging infrastructure mobility, consumer durables, and industrials and home and personal care.

Given this backdrop, we see demand in our key value chains, continuing to outpace supply throughout 2021 and stay balanced in the near term across ethylene polyethylene and polyurethane acrylics and silicones chains.

Some industry views call for softening conditions in the near term largely based on their view of planned capacity additions. However, these views do not account for industry project delays or cancellations, nor do they account for the maintenance activity, our reliability impact from weather related events like the winter storm.

Industry delays and cancellations of planned capacity additions along with elevated demand growth as the global economy continues to reopen will likely lead to tighter than predicted and market conditions. All of which will result in continued earnings margin and cash flow growth for our core businesses and joint ventures.

In the near term and while we capture these improved earnings over the next several years on our core businesses. Our current slate of lower capital faster payback and higher return capacity expansions will add nearly $1 billion of accretive earnings to our bottom line.

Balance points of distinction continue to raise our earnings and cash flow potential relative to peers. The market growth. We expect on our business combined with our industry, leading feedstock flexibility global scale and advantaged cost positions are top quartile cash generation and our innovation and leadership in high growth end.

<unk> enabled Dow to continue to deliver value for our owners through 2021 and over the foreseeable future with that I'll turn it back to upon cash to open the Q&A.

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.

Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please press star followed by the digit one if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We ask that you. Please limit your questions to one only once again star one.

Yes.

And we'll move to our first question from David Begleiter with Deutsche Bank.

Thank you good morning.

Jim and Howard in plastics, how are you thinking about sequential earnings improvement here given.

Given the price and margin.

Growth Foreseeing can you get to 2 billion of EBITDA in Q2 is that possible.

Good morning, David.

As you noted obviously, we continue to see strong demand growth in plastics and if you look at our sales.

We're looking at 3% to 7% higher sales in the quarter.

And obviously on operating rates there should be much improved given that we won't have the impact of winter storm already we do have some turnarounds as Howard mentioned.

So we have a Louisiana crackers, it's down.

<unk> said that.

It looks like supply is going to be greater than demand for the foreseeable future I don't anticipate we will be looking at any kind of an inventory build until probably the fourth quarter and so with that.

Kind of a year that feels like 13 months of demand and 11 months of supply.

It looks like costs.

Raw material costs continue to remain low.

Okay.

And next we'll move to Bob Court with Goldman Sachs.

Thanks, Good morning.

I appreciate the benchmarking information that was helpful. I'm curious.

You'd go to already a pretty considerable cash flow yield and that's before the ramp in earnings. Thank.

Thank you outlined a couple of projects handful there that would get you maybe an incremental $1 billion of EBITDA.

Can you give us a sense of the cost and cadence of debt incremental earnings growth and then.

How are you going to deploy the excess cash you have given those industry outlook slide on.

First on page nine.

Pretty darn good for quite a while so are you going to change your capital deployment strategy here.

What are your plans there.

Thanks, Bob for the question and in a lot in that question and I feel good given that we had about.

About a $400 million impact from winter storm early in the quarter, we delivered $750 million of cash from operations. Obviously, we took on elective.

Pension contribution in the quarter, but our cash flow generation continues to remain strong we stepped up capex this year to a little over $1 6 billion to get our <unk>.

Both capex coming back up and all of that is on.

On faster payback types of projects. So for example, we started up a polyethylene glycol facility in the first quarter down on the Gulf Coast, which will be accretive.

This year, we also.

<unk> brought on another furnace in Fort Saskatchewan. The furnace part is active so about half of the benefits of that start now.

We will do some work on the backend of the cracker toward the end of the year and bring on the other half of that capacity.

You think about the incremental projects that we have to deliver that $1 billion.

I feel like we can be increasing capital towards depreciation and still be able to deliver that $1 billion.

EBITDA growth.

And then obviously, we want to continue to support the dividend and if you think about our capital allocation priorities there in order.

And reliably operate the plants.

Continue to support that industry, leading dividend.

The growth Capex I mentioned, some incremental gross deleveraging. So we've got another $1 billion of targeted gross deleveraging to get our net debt to EBITDA ratios, where we targeted them and then share buyback to cover dilution.

Right now Thats, where it will stop on share buyback.

You want to add Howard you covered it.

And next we'll move on to Jefferies, Inc. Caucus with J P. Morgan.

Thanks very much.

Are you satisfied with your returns and performance materials and coatings.

And where does that segment need to do.

Ray assets operating output.

And secondly on pension expense, you talked about a $200 million pension tailwind what exactly is your pension expense roughly in 2021.

Yeah, Let me take performance materials, and coatings and I'll have Howard talk about the pension expense.

Both businesses in performance materials, and coatings had some downtime and some maintenance costs in the first quarter. So I think when youre looking at first quarter results that isn't reflective of the market demand in the marketplace. So we had a siloxane plant in China down and we had the Deer Park facility down from maintenance and then of course.

The winter storm.

Lengthened that maintenance the demand for both of the products is improving and the pricing for <unk> sales, which has been on one of the bigger drags on consumer solutions is starting to move in the right direction and a lot of that's because automotive demand is coming back and construction is coming back and we have yet to see.

Personal care, which I think is going to come back through the year.

And on top of coding.

Coatings <unk> monomers monomers was strong in the quarter architectural coatings, and especially do it yourself continues to be strong industrial is starting to show improvement as automotive it comes back and of course as air travel begins we will start to see a big part of industrial come back as well.

On pension, yes, Jeff good morning pension expenses, when you look at pension and OPEC and its around $100 million are.

Expected expense this year, which is going to be down a couple of hundred million dollars as we talked about on your prepared remarks.

And next we'll move to P J <unk> with Citi.

Yes, Hi, good morning couple of quick questions on polyethylene.

And on the peak margins that the industry is seeing today and that $40 50 range.

For apartment.

That remains elevated could you see.

Incentive to add more supply, particularly in China, and then just on <unk>.

Sticking to polyethylene.

Jim you guys have done a great job on circular economy and.

Alaska.

Lastly on plastic waste on Bioplastics.

Small companies coming up.

Had the Pls technology down in Brazil.

Does that still exists within Dow now I know that was shut down and can you revive that if the demand picks up.

Bye Bye your polyethylene.

Good morning P J.

The margins and polyethylene I think are reflective of a couple of things improved spreads in ethylene and that obviously has been driven by the fact that.

Ethane costs remain low natural gas costs remain low and on oil has recovered from kind of an unreal scenario a year ago today.

And that's raised obviously, the naphtha pricing and that's raised the floor around the world.

The other thing that's happened, though is we had a growth in plastics and packaging.

Even through Covid and so most people were expecting businesses to be down during that time and I think they underestimated how much growth is there.

Seeing growth over 2020, and plastics, we would've seen in the first quarter without the winter storm.

And so we're going to see that continue to grow so.

I think we've got continued outlook for high earnings through the year on plastics on Bioplastics.

We're doing some work right now on bio materials to make plastics.

Really looking at Woodbine product.

Derivatives that we can use to blend in with naphtha.

We're doing some work with Phoenix equity group to bring recycled materials back in.

One of the challenges with Bioplastics.

Is.

It is not so much the degradability that everybody in the market likes but it's their thermal stability in terms of being able to form them and do what you need to do with them and then have them have the kind of durability you need for food packaging, but we're open to.

To collaborations in those areas and we're always looking for new things that we can do in that space.

And we'll move on to Frank Mitsch with Fermium research.

Hey, good morning, and good to hear your voice again part of cash.

As I look at these results are pretty impressive results and you had 14% price improvement.

First quarter versus the fourth quarter, how does April stand relative to the first quarter and just more generally what's your expectations on on price throughout 2021.

Good morning, Frank.

Got it.

Nine up for April and another five cents up from me in the U S. On the April order book is very solid.

I think thats, a strong strong profitability.

And most of our businesses beyond even plastics the order book for the first quarter is very solid a combination on some backlog that got created from the winter storm and just the normal demand by the year over year improvements, we see in construction, we stay on automotive we see them.

Consumer durables, we'd see on electronics.

My feeling is that it's constructive for the year and our outlook for raw materials costs are going to continue to remain low throughout the year.

And Steve Byrne with Bank of America will have our next question.

Yes. Thank you Jim you made a few remarks earlier about.

Yeah.

<unk> you got it.

You've got new supply coming a lot of a lot of moving parts in industry operating rates and I just wanted to.

Ask you to put that into perspective on here on this slide nine debt that has your multiyear outlook on industry operating rates for polyethylene MDI and philosophy on how <unk>.

Could you compare on those forecasts to current industry operating rates.

Yeah. Good morning, Steve. It's good question, because I think most of the third party views out there are kind of taken the worst case scenario and so that would be the bottom end of what we think the range of operating rates are.

We're going to be in the Ninety's and both ethylene and polyethylene for the quarter.

Unless there's some unplanned event and as we sit here today, there's probably about 15% of that capacity offline, which is well on it.

In excess of what we normally have we normally have probably 6% to 8% on.

Off line.

On a same same is true for polyurethane and isocyanate, you'll see the downstream demand pull is very strong and <unk>.

Pricing improvements is all driven by downstream demand improvements. So my sense is that we're going to be in strong operating rate territory for the entire year I don't think we will be building inventory until maybe possibly the end of the fourth quarter, which and that all depends on whether we have a slow fourth quarter or not.

Sure.

But there is upside on automotive there is upside and travel theres upside in construction and home.

Backlog in appliances and long lead times.

<unk> pointing in the direction of high operating rates.

And next we'll hear from Hassan Ahmed with Alembic Global.

Good morning, Howard and Jim.

And I wanted to wanted to sort of quickly ask you about the sequential guidance you guys gave.

And I thought I heard Howard correctly.

It sounds as if he is talking about it.

Sort of between the positives and negatives.

Around $600 million uptick sequentially. So so call. It 282 9 billion.

In Q2 EBITDA. So my question is debt.

If that is the guidance.

What sort of pricing is being baked into that guidance, meaning.

You guys talked about a round of April the price hikes, there seems to be another round of price hikes on the table for may so that guidance that you're giving is it capturing both April and may price hikes meaningful realization of those.

Yes.

If you look at.

IHS forward view on pricing they have.

Got about 12 cents, a pound quarter over quarter for the United States.

And in Europe.

They've actually got a reduction a slight reduction in Pacific they've got a slight reduction.

My sense is that the U S margins are going to see that and I think we're going to continue to see demand strong in China, we've seen a good rebound there.

And then in Europe, we've seen good demand it hasnt been as strong as the rest of the world.

Obviously the virus.

<unk> had a little bit more impact.

And Latin America has been similarly hit a little bit hard with the virus, but I think as the quarter progresses, I think we have the potential to see that firm up a little bit.

Hassan This is Howard the only thing I would add is your math that you articulate on your question is spot on.

And John Roberts with UBS.

Our next question.

Thanks, Good morning, guys could you talk a little bit about the <unk> restructuring.

I think gas exports from CIT Darrow was a key part of Dow's Asia growth strategy. So do you need something else no to backfill as you lose a little access here to some of the <unk> output.

Yes, I'm going to ask Howard to talk about that we can see here on the team did.

Lot of heavy lifting to get that done but on the growth side.

Where we will be looking at some incremental investments, including on the ground in China for our specialties hub to be able to convert a differentiator for you and I will <unk> for high growth in Asia Pacific and were also looking at incremental expansions that we could make in the U S to be able to supply more material over there.

Yeah, John Good morning, Yes, the SEDAR.

<unk> original filing is done as you as you know it was it took us about two years to get it all done, but we got it done within the timeframe that we committed to.

The maturity date is now extended out to 2038, there was no upfront or prepayment of any of the outstanding debt. There's a grace period until June of 2026 on any principle.

And the guarantees were significantly reduced when.

When you look at <unk> operating performance. It really was the standout I mean, all of our joint ventures did well.

In line with our core earnings growth that we reported but when you look at the three joint ventures.

<unk> actually had the best earnings growth.

Both year on year, as well as sequentially and if they keep up this pace they likely will be paying off some additional principal still this year, which was not expected when we did the re profiling so really strong performance from Sundar.

The next day move to Laurence Alexander with Jefferies.

Good morning on the.

Sketch out for let's say it's recycling.

Do you have initial thoughts on likely capital intensity or where they will sit on the cost curve would it be competitive from naphtha.

Yes morning, Lawrence and thanks for the question. This is one of the things I think that everybody is trying to wrestle with and it's a very local.

Issue because it gets into a variety of moving parts, including what's the cost on landfill materials.

I would say that the demand pull is there from the brand owners on from the marketplace from a more recycled content and thats whats driving the investments.

To date most of the investments have been around mechanical recycling, because it's very low cost and its also low energy intensity and so the growth in those applications is great, but there's a limit to what that can do so when you get into flexible packaging and a few other areas.

You need advanced recycling in there you get into technologies like pyrolysis in gasification to make that happen and that's a little bit more expensive.

As we move forward.

I would think we're going to need to see.

<unk> related price on carbon which is being discussed and the EU and is also going to start being discussed here in the United States.

Help create that GAAP and that value that will drive that return and it's a little bit early too.

Get into huge capital numbers on return numbers on what we're doing today is piloting different technologies trying to prove out business models that work and then once we see what works and we can replicate it will come back and we'll talk more about what the investment looks like.

And Vincent Andrews with Morgan Stanley will have our next question.

Thank you and good morning, just a quick housekeeping for Howard what is what is the unfunded pension liability posted.

The $1 billion contribution and then maybe Jim just a follow up on the prior discussion you put this press release out by.

By the partnership between yourselves and Euro on our new game changing advanced recycling solution.

It's been eyeballing, it and I can't tell if you're making a financial contribution or if you're just taking the offtake and sort of what you think the timeframe is scalability evidenced but maybe you could give us a little bit more discussion of this new partnership. Thank you.

Hey, Vince Good morning. This is Howard so our underfunded status on the pension plan at the end of the quarter was $6 4 billion.

And that was a decrease or an improvement of $2 3 billion versus year end 2020, which was a combination of the voluntary contribution plus the remeasurement that we took at the end of the quarter.

Yeah on on on Europe.

It's really taking advantage of their technology to use all forms of plastic waste. Some on some of which I mentioned are on recyclable today. So.

So we will make an investment.

It's not a material investment in terms of dollars to help scale the technology, but we'll also.

Increase the amount of advanced recycled materials as feedstock for our own assets.

Pilot facility is going to be in the U K and it's a hydrothermal plastic recycling solution developed by mirror.

<unk>.

We will continue to work with them to prove that out and to help develop products that will perform in the marketplace to drive growth in that sector.

And we'll move on to John Mcnulty with BMO capital markets.

Yes. Thanks for taking my question I guess, maybe two two quick ones just on the equity line. It looks like you're guiding to $4 to $500 million for the year. You just did to just about two on a quarter and in the first quarters Theres some seasonality or some one time thing that we should be thinking about in that and then just on the on the inventory side.

I think you mentioned specialty plasma or packaging and specialty plastics is going to be really tight through into the fourth quarter. I guess can you give us some color as to what youre seeing in the performance Madison coatings area and the <unk> area. If it's equally as tight on the inventory front earth or if theres, a little bit more cushion there and maybe can be made up quicker. Thanks very much.

Yeah.

I think on when you get into polyurethane and Ini poly.

<unk> is very tight right now and I expect that to continue to be the case in isocyanate.

We'll have good operating rates through the year as this demand.

Demand in construction and also automotive continues to grow.

If you looked at the coatings I expect monomers to be tight through the year given the improvements in downstream coatings and obviously architectural has been strong if we see a boost up in the.

The do it yourself or the contract side on coatings market, then we could see another leg up in some more tightness in that sector.

And I would just say on John on the equity earnings line. Your math is right. There is some seasonality to think about <unk> I would have equate, but also there is higher turnaround expenses. So you've got a higher turnaround expenses and sundar on this year.

As well as Thailand, as well as equate so you've got it you got to subtract that extra 100 plus million dollars from the turnarounds as well.

And next we'll move to Kevin Mccarthy with vertical research partners.

Yes. Good morning, if I look at your second quarter guide it seems to imply.

For the first half that you would earn somewhere north of 5 billion in EBITDA and annualize that of course will be more than $10 billion, how would you compare.

<unk> in contrast that that sort of level versus your view of Dallas future peak earnings power. When you take into account your price margin outlook. The organic investments that you talked about in other sources of growth.

Thanks, Kevin.

I think normally when we go into the year second quarter and third quarter tend to be our peak quarters, obviously things tightened up in first quarter and so we saw a really strong first quarter results as well.

So my sense is we had gone into this year trying to get back to mid cycle earnings I think were ahead of that in some sectors and will be that way and with our spending on really these fast payback projects some of them, which have a payback less than three years.

I think that has the ability to move the top side up already on a comment on the range on what peak earnings could look like yes. Kevin went look when we came out at spin and we were looking at the capital structure.

That whole discussion, we talked about trough earnings around 6 billion last year was $5. Six so we were definitely in a trough, we got there because of the pandemic more than anything else.

<unk> earnings with the portfolio had spend was between 12 and $13 billion and now we continue to add additional incremental growth projects from there. So you pick a number but we still have a significant amount of upside as you head into a net as you head into hopefully a continued economic up cycle from.

I'm here, even with that first half annualize that you're talking about.

Okay.

And next we'll move to Arun Viswanathan with RBC capital markets.

Great. Thanks for taking my question Congrats on the strong results here.

I guess similar question when you think about the segments here.

First off with T M C.

<unk> continues to struggle.

What does it really going to take to get that business back to normal is it Mister.

Mr assumption that personal care and mobility as discussed earlier and then similarly with ini and we've seen a pretty strong move in MDI, especially in China and in Asia earlier.

Do you expect that to kind of come over to North America and Europe in the coming months.

Good morning Arun.

Look I just wanted to go back to the first quarter comment on PMC. So I don't think the first quarter is reflective of the market for PMC and I don't think the business continues to struggle.

Downstream silicones is a high margin part of silicones downstream got hit pretty hard during Covid, obviously personal care applications, but also we saw construction.

Down really last year, and that's starting to come back so right now youre starting to see strengthened siloxane youre starting to see strength in construction.

Mostly it's been residential construction, but it's moving back into high rise buildings again consumer electronics is driving it.

Industrial manufacturing is driving and mobility as Howard mentioned.

<unk> is really positive for us on a on a Dow overall standpoint, we've got about twice, 50% more content on an EV than on internal combustion engine on a silicon standpoint, we've got about three to four times more than our internal combustion engine. So we're seeing surges. There so I think youre going to see.

DMC improve as the year goes through and obviously, we had a much better quarter without the deer Park downtime and the extension of that due to the winter storm Murray. So I would say, let's let's look on PMC as the year progresses, I think youre going to see a good story coming out of that business. The other point on PMC is really.

As long as Youre Gong assets. So we have three big pillar plants that produce siloxane as around the world.

One in the U S. One in Europe, one in China, and the one in China was out for a big chunk of the first quarter. So obviously, we were unable to produce and we had all of that fixed cost that was that went unabsorbed that dropped to the bottom line.

As a negative impact as you saw.

And next we'll hear from Alex.

<unk> with Keybanc.

Thank you good morning, everyone.

Jim.

Medicine.

Capital costs could start trending towards depreciation just to clarify you mean DNA that I think youre guiding to about $2 9 billion adjusted depreciation part of it.

And also how quickly do you think you'll get there or is it something you should consider for next year already or over the next two to three years perhaps.

Yes, good question and I think we will ramp into it on a lot depends on what we see in downstream demand and if we continue to see these downstream demand pull as we're going to have to ramp into that.

This year. We've also got to look at investments that we've been talking about on sustainability as well, our depreciation levels about $2 $2 billion.

And so I think our first ramp would be to that level and then we'd have discussions here and with our investors as we get opportunities to go beyond that and obviously you have to look at the value creation of that.

Okay.

And we'll move on to Mike Sison with Wells Fargo.

Hey, good morning, nice nice quarter on outlook.

So the $1 billion of earnings you talked about on slide nine how much of that can hit from 'twenty, two and I know, it's a little bit early but given some of these incremental investments and your outlook relative to the industry consultants should EBITDA in 'twenty to continue to grow.

From 'twenty one.

Yes, I think when it comes to additional capacity.

The answer to that is yes, I think the demand is going to continue to grow obviously you can see the leverage that we have to the upside on margin. So I'll leave that what the.

<unk> spread for 'twenty, two it looks like out of the equation, but we've probably got $100 million, maybe a $150 million of additional accretive earnings based on these new incremental expansions in 'twenty two.

And this things that I mentioned earlier.

Polyethylene glycol is came online in first quarter.

Just.

On a month ago and the furnace at the Port is up and that's half of its rate already and it will get the other half of it's right at the end of the year.

And then we've got some other I'll constellation investments that will come on next year NII.

Got some investments and obviously silicones last year, we did.

More than 15 incremental investments this year, we've got another 15 for high margin downstream silicones materials and so those will come on and then we've got.

And miscellaneous debottlenecking going on everywhere to try to get incremental growth on.

And we'll move on to Duffy Fischer with Barclays.

Yes, good morning.

Two kind of housekeeping.

<unk> first is the <unk> marketing agreement winds down to the new terms, how visible will that be.

In your P&L and cash flow and then on the pension.

Voluntary how did you think about the return on that $1 billion and should we expect more voluntary cash to go on to the pension over the next several years.

My expectation on.

The pmla changes Duffy will be that you will see that gradual over time I think it will take a number of years.

For for our marketing to reflect our equity stake and obviously for the Aramco side to do the same.

So it won't happen overnight and I think it will happen over time, and I think you'll see it more on the revenue side than you will on the earnings side any other thoughts about that Howard, yes, if anything Duffy I would say you should see on our unit margins improve because right. Now we are marketing 90 plus percent of the Sundar volume, but we obviously only owned 30.

5% of the equity so that really can we get a very we only get a very very small marketing fee on those.

On those on those volume so as that shifts more to our.

Equity ownership in the JV, our unit margins should actually increase just because of that debt dilution.

And remind me what your pension what was the specific pension question.

We might not index and then do you think you will put more voluntary cash into the pension over the next 234 years.

Yes, so I mean look with the pension smoothing.

That went in with with the last Bill we don't have really any mandatory pension payments that we need to put in in the U S plans for the next several years. So that was about on its probably about a $3 million to $400 million savings from the voluntary standpoint look I am a believer that interest rates will move up over time.

And so it doesn't take much from an interest rate perspective, and maybe one year of additional <unk> <unk> to.

To really get that plant close to fully funded so.

That said, we will be opportunistic and if it makes sense economically I mean that $1 billion of voluntary pension payment was a very good economic decision.

For the company and so we'll continue to look at that year by year from an economic perspective, and if it's value, creating we might do it but we will we will compare that to the other capital allocation priorities that Jim laid out earlier on the call.

And that will conclude today's question and answer session. At this time I would like to turn the call back over to Tom <unk> for any additional or closing remarks.

Thank you. Thank you for everyone. Thank you to everyone for joining our call. We appreciate your interest in Dow for for your reference a copy for transcript will be posted on <unk> website within 24 hours. This concludes our call. Thank you very much.

And that will conclude today's call. We thank you for your participation.

Okay.

Yes.

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Good day and welcome to Dallas first quarter 2021 earnings call you May signal to ask a question by pressing star one at any time during today's presentation all.

Today's call is being reported I would now like to turn the call over to Paul Gosh Gupta. Please go ahead Sir.

Good morning, Thank you for joining <unk> fourth quarter earnings call. This call is available via webcast and we have prepared slides to supplement our comments today.

Posted on the Investor Relations section on <unk> website and through the link to our webcast I am Pankaj Gupta Investor Relations Vice President for now and joining me on the call. Today are you feeling I was chairman and Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer vs.

Really from our forward looking statements balance forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.

Unless otherwise specified on financials, where applicable exclude significant items. We will also refer to non-GAAP measures a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release in the slides that supplement our comments today and on the Dow website.

Take your questions with that I will turn the call over to Jim.

Thank you Paul on cottage, and thanks to everyone for joining us today before we begin I'd like to recognize and thank Colleen Kay who announced her retirement from Dow after over 31 years of outstanding service and also to welcome back PON cash Gupta, who many of you already know starting on slide three our results from the first quarter.

Once again demonstrated the focus and agility of team Dow, which enabled us to quickly recover from the impact of winter storm, great on the U S Gulf Coast.

Sales were up 22% year over year with gains in all operating segments and in every region. We continued to benefit from strong price momentum with improvements in all segments businesses and regions volume was in line with a year ago period as gains in construction mobility electronics and consumer durables and Mark.

<unk> as well as higher energy demand were offset by supply constraints from the storm and we continued to improve our working capital efficiency with a net improvement of three days.

Sales were also up sequentially with growth in all segments and regions.

This month, so dara with help from Dow and Saudi Aramco work to bring its mixed feed cracker back online faster than anticipated and downstream production units are also back at expected rates.

<unk> the joint Venture's debt re profiling, which will provide approximately $350 million cash tailwind to Dow in 2021. So Dara is now expected to be cash flow self sufficient.

In summary team Dow remained agile in an extremely dynamic business environment to deliver strong top and bottom line growth positioning Dow for greater value creation going forward.

Volume management, and polyethylene inventory levels at five year lows and enables momentum in polyethylene earnings.

Operating EBIT improved $30 million, despite significant impact from winter storm Ori.

Polyurethane and construction and chemicals business achieved a double digit net sales increased compared to the year ago period led by local price momentum and polyurethane.

These pricing and volume dynamics also drove sequential sales growth.

The industrial solutions business delivered net sales in line with the year ago period as higher prices in all regions were offset by volume constraints, primarily due to winter storm Ori improved demand in textiles, and electronics applications was more than offset by supply limitations net sales were also on.

In line sequentially due to the same drivers and finally, the performance materials and coating segment reported operating EBIT of $62 million down year over year as local price gains across the portfolio and strong demand for architectural coatings and silicones applications were more than offset by the impact of the winter.

Storm as well as planned maintenance sequentially operating EBIT was up $12 million the consumer.

<unk> solutions business achieved higher net sales year over year on local price increases force dialogue, saying and robust demand for consumer electronics and mobility applications.

<unk> sales asset.

And planned maintenance at our Deer park assets more than offset continued demand strength for architectural coatings sequentially. The business achieved price gains, particularly in acrylic monomers due to increases in raw material costs.

I'll now turn it over to Howard to review modeling guidance and the results of our annual benchmarking.

Thank you Jim moving to slide five as we turn to the second quarter market demand remains robust in packaging electronics mobility architectural coatings as well as consumer durable end markets, while sectors like home care have begun to normalize we do not expect additional upside on continuing economic recovery in the industrial sector.

And as travel workplace and social activities resume they will also provide a boost in demand for higher margin personal care applications as well as across the service sectors of the global economy.

These constructive market trends will continue to support top and bottom line growth across all of our operating segments in the second quarter.

We also expect an additional $100 million from outages, including a third party to supply disruption on the U S Gulf Coast <unk>.

Collectively robust demand tight supply low inventories and increased raw material costs are providing support from prices across many of our value chains.

All combined for the second quarter, we expect approximately $750 million to $800 million and higher earnings versus the prior quarter from a combination of earnings momentum in our key chains and lower sequential cost from winter storm. During this earnings growth will be partially offset by approximately $200 million to $250 million on higher <unk>.

Cost from turnarounds and the third party outage I mentioned.

Altogether, we expect second quarter to be our strongest performance since spin.

Moving to slide six we're also updating a few key items on our full year modeling guidance. The positive momentum I. Just mentioned will also benefit our joint ventures, particularly to Dara. We also expect to see slightly higher turnaround spending than previously anticipated as winter storm urea has put some upward pressure on the cost of materials and.

Labor in the U S Gulf Coast.

Overall for the remainder of the year, we continue to see broad based economic momentum recovery from winter storm here and elevated consumer demand.

The pandemic.

We also maintained our top quartile cost management and margin performance.

On a segment level packaging and specialty plastics outperformed the peer median across adjusted operating EBITDA margin free cash conversion and SG&A and R&D spend.

And that was operating EBITDA per pound of polyolefin capacity continues to outperform peers expanding further in 2020.

Both industrial intermediates and infrastructure as well as performance materials and coatings outperformed the peer median on cash conversion as well as on SG&A and R&D spend.

We do see near term opportunities to improve adjusted operating EBITDA growth by continuing to implement our faster payback higher ROIC expansion. This includes our ethylene cracker expansion in Canada, or SDH retrofit, our polyglot calls expansion and our downstream silicones expansions as well and projects like.

South China specialties hub will enable us to capture higher value polyurethane systems and <unk> demand in the fast growing Asia Pacific market.

For example, in the mobility global Megatrend alone electric vehicles use three to four times more Dow silicone products and traditional vehicles.

Together, our strong operational financial and commercial playbook supported by the broadening economic recovery position Dow well for future earnings and cash flow growth with that I'll turn it back to Jim.

Yeah.

Thank you Howard moving to slide eight before discussing the market outlook I want to reinforce how sustainability continues to be another growth driver for Dow.

<unk> have a lower carbon footprint than traditional materials, and we are leading the way to a circular economy for plastics through our stopped the waste and close the loop targets, we're enabling 1 million metric tons of plastics to be collected reused or recycled by 2030 and targeting 100% of our products sold into <unk>.

Marketing applications to be reusable or recyclable by 2035.

These targets require innovation and collaboration and mechanical and advanced recycling as well as in designing for Recyclability.

And through collaboration across the value chain with Dallas Pack Studios, we're working to accelerate sustainable packaging solutions tailor made for those customers and consumer brand owners, many of which have set targets to incorporate 25% or more post consumer recycled material in their products.

<unk> been Kaiser's finished dishwashing detergent.

And China's leading laundry brand lead by <unk>.

Each enable a larger addressable market and sales of higher value Dow materials.

Dow is also developing advanced recycling technologies that convert use plastics into their feedstocks, we continue to scale up these capabilities with our partner Phoenix packaging group.

Today, we announced a partnership with Nero technology to convert plastics back into the oils and chemicals from which they were made for using new Virgin equivalent plastic products.

This revolutionary advanced recycling technology can convert all forms of plastic into feedstock, including many considered to be on recyclable.

We're also actively engaged as a founder of the alliance to end plastic waste and with key stakeholders around the world to help solve critical challenges to plastics recycling for.

For example, through our collaboration with circulate capital Dow is bringing materials science capabilities to loot CRO plasma cycle, and Morocco limited one of India's leading consumer brands to enable sustainable flexible film packaging with recycled content.

Our global manufacturing PMI has hit a 15 year high in March. These trends are further supported by government stimulus measures and accelerating vaccine rollouts globally.

Spending on elements of the U S infrastructure plan, if past will further support growth in our downstream markets. Similarly.

Similarly on incentives aligned to more sustainable energy solutions should be beneficial to our business and to attaining our own sustainability targets.

These programs are not currently included in our assumptions, but could drive additional growth if enacted in a manner that supports manufacturing competitiveness.

These macro trends translate into a 1% to two times GDP growth across key end markets, including packaging infrastructure mobility, consumer durables, and industrials and home and personal care.

Given this backdrop, we see demand in our key value chains, continuing to outpace supply throughout 2021 and stained balanced in the near term across ethylene polyethylene and polyurethane acrylics and silicones chains.

Industry delays and cancellations of planned capacity additions along with elevated demand growth as the global economy continues to reopen will likely lead to tighter than predicted market conditions. All of which will result in continued earnings margin and cash flow growth for our core businesses and joint ventures.

<unk> enable dow to continue to deliver value for our owners through 2021 and over the foreseeable future with that I'll turn it back to PON cash to open the Q&A.

<unk>.

And we'll move to our first question from David Begleiter with Deutsche Bank.

Thank you good morning.

Jim and Howard in plastics, how are you thinking about sequential earnings improvement here, given the price and margin.

Growth Foreseeing can you get to 2 billion of EBITDA in Q2 is that possible.

Good morning, David.

As you noted obviously, we continue to see strong demand growth in plastics and if you look at our sales we're.

We're looking at 3% to 7% higher sales in the quarter.

And obviously on operating rates there should be much improved given that we won't have the impact of winter storm already we do have some turnarounds as Howard mentioned.

So we have a Louisiana crackers, it's down low.

<unk> said that.

It looks like supply is going to be greater than demand for the foreseeable future I don't anticipate we will be looking at any kind of on inventory build until probably the fourth quarter and so with that.

Kind of a year that feels like 13 months of demand and 11 months of supply.

It looks like costs.

Raw material costs are going to continue to remain low.

And next we'll move to Bob Court with Goldman Sachs.

Yes.

Thanks, Good morning.

I appreciate the benchmarking information is helpful. I'm curious.

You'd go to already a pretty considerable cash flow yield and that's before the ramp in earnings. Thank you've outlined a couple of projects handful there that would get you maybe an incremental $1 billion of EBITDA.

Can you give us a sense of the cost and cadence of that incremental earnings growth and then.

How are you going to deploy all of the excess cash.

Those industry outlook slide.

The curves on page nine.

Pretty darn good for quite a while so are you going to change your capital deployment strategy here.

What are your plans there.

Yeah. Thanks, Bob for the question in a lot in that question.

Good given that we had.

About a $400 million impact from winter storm early in the quarter, we delivered $750 million of cash from operations. Obviously, we took on elective pension.

Pension contribution in the quarter, but our cash flow generation continues to remain strong we stepped up capex this year to a little over $1 6 billion.

Our <unk>.

Growth Capex coming back up and all of that is on.

Faster payback types of projects. So for example, we started up a polyethylene glycol facility in the first quarter down on the Gulf Coast, which will be accretive.

This year, we also.

Just brought on another furnace in Fort Saskatchewan furnace part is active so about half of the benefits of that start now and we will do some work on the back end of the cracker towards the end of the year and bring on the other half of that capacity growth.

If you think about the incremental projects that we have to deliver that $1 billion.

I feel like we can be increasing capital towards depreciation and still be able to deliver that $1 billion.

Of EBITDA growth.

And then obviously, we want to continue to support the dividend and if you think about our capital allocation priorities, there and order safely and reliably operate the plants continue.

Continue to support that industry, leading dividend.

Our growth Capex I mentioned, some incremental gross deleveraging. So we've got another $1 billion of targeted gross deleveraging to get our net debt to EBITDA ratios, where we targeted them and then share buyback to cover dilution.

Right now Thats, where it will stop on share buyback.

You want to add Howard you covered it.

And next we'll move on to Jefferies, Inc. Caucus with J P. Morgan.

Thanks very much.

Are you satisfied with your returns and performance materials and coatings.

And where does that segment need to do.

Raise debt operating output.

And secondly on pension expense, you talked about a $200 million pension tailwind what exactly is your pension expense roughly in 2021.

Yes, let me take performance materials and coatings on all have Howard talk about the pension expense.

Both businesses in performance materials, and coatings had some downtime and some maintenance costs in the first quarter. So I think when youre looking at first quarter results.

Isn't reflective of the market demand in the marketplace. So we had a siloxane plant in China down and we had the Deer Park facility down from maintenance and then of course the winter storm.

Personal care, which I think is going to come back through the year.

And on top of.

Coatings <unk> monomers monomers was strong in the quarter architectural coatings, and especially do it yourself continues to be strong industrial is starting to show improvement as automotive comes back and of course as air travel begins we will start to see a big part of industrial come back as well powered on.

Pension, yes, Jeff good morning pension expenses, when you look at pension and OPEC and its around $100 million.

Our expected expense this year, which is going to be down a couple of hundred million dollars.

As we talked about on the prepared remarks.

And next we'll move to P J <unk> with Citi.

Okay.

Yes, Hi, good morning couple of quick questions on polyethylene.

The peak margins that the industry is seeing today and that $40 50 range.

Per pound.

That remains anyway could you see.

Incentive to add more supply, particularly in China and.

And then just on.

Sticking to polyethylene.

Jim you guys have done a great job on circular economy.

And.

On the Alaska and plastic waste.

Bioplastics small companies coming up you had that Pls technology down in Brazil.

Does that still exists within Dow now I know that was shut down.

Can you revive that if the demand picks up.

Bye Bye your polyethylene.

Good morning P J.

The margins and polyethylene I think are reflective of a couple of things improved spreads in ethylene and that obviously has been driven by the fact that.

Ethane costs remain low natural gas cost remained low and on oil has recovered from kind of an unreal scenario a year ago today.

And Thats raised obviously, the naphtha pricing and Thats raised the floor around the world.

The other thing that's happened, though is we had a growth in plastics and packaging.

Even through Covid and so most people were expecting businesses to be down during that time and I think they underestimated how much growth is there.

Seeing growth over 2020, and plastics, we would've seen in the first quarter without the winter storm.

And so we're going to see that continue to grow so.

I think we've got continued outlook for high earnings through the year on plastics on Bioplastics.

We're doing some work right now on bio materials to make plastics.

Really looking at Woodbine product.

Derivatives that we can use to blend in with naphtha.

We're doing some work with Phoenix equity group to bring recycled materials back in.

One of the challenges with Bioplastics.

Is is not so much the degradability that everybody in the market likes but it's their thermal stability in terms of being able to form them and do what you need to do with them and then have them have the kind of durability you need for food packaging, but we're open to.

To collaborations in those areas and we're always looking for new things that we can do on that space.

And we'll move on to Frank Mitsch with Fermium research.

Hey, good morning, and good to hear your voice again cash.

As I look at these results pretty impressive results and you had 14% price improvement.

First quarter versus the fourth quarter, how does April stand relative to the first quarter and just more generally what's your expectations on on price throughout 2021.

Good morning, Frank.

Got.

<unk> up for April and another five cents up from me in the U S on the <unk>.

April order book is very solid so I think thats a strong strong profitability.

And most of our businesses beyond even plastics the order book for the first quarter is very solid combination on some backlog that got created from the winter storm and just the normal demand by the year over year improvements we see in construction, we've seen on automotive we see in <unk>.

Consumer durables, we'd see on electronics.

My feeling is that it's constructive for the year and our outlook for raw materials costs are going to continue to remain low throughout the year.

And Steve Byrne with Bank of America will have our next question.

Yes. Thank you Jim you made a few remarks earlier about.

Outages, you got turnarounds, you've got new supply coming a lot of a lot of moving parts in industry operating rates and I just wanted to.

Ask you to put that into perspective on here on this slide nine debt that has your multiyear outlook on industry operating rates for polyethylene MDI and philosophy.

How would you compare those forecasts to current industry operating rates.

Yes. Good morning, Steve Good question, because I think most of the third party views out there are kind of taken the worst case scenario and so that would be the bottom end of what we think the range of operating rates are.

We're going to be in the Ninety's and both ethylene and polyethylene for the quarter.

Unless there's some unplanned event and as we sit here today, there is probably about 15% of that capacity.

<unk> offline, which is well on it and.

In excess of what we normally have we normally have probably 6% to 8%.

<unk> line.

On a same same is true for polyurethane and isocyanate youll see the downstream demand pull is very strong and <unk>.

Pricing improvements is all driven by downstream demand improvements. So my sense is that we're going to be in.

Strong operating rate territory for the entire year I don't think we will be building inventory until maybe possibly the end of the fourth quarter, which and that all depends on whether we have a slow fourth quarter or not.

But there is upside on automotive there is upside and travel theres upside in construction and home.

Backlog in appliances and long lead times.

<unk> pointing in the direction of high operating rates.

And next we'll hear from Hassan Ahmed with Alembic Global.

Good morning, Howard and Jim.

And I wanted to wanted to sort of quickly ask you about the sequential guidance you guys gave.

And I thought I had heard Howard correctly.

It sounds as if he is talking about.

They don't sort of between the positives or negatives.

Around $600 million uptick sequentially. So so call. It 282 9 billion.

In Q2 EBITDA. So my question is debt.

If that is the guidance.

What sort of pricing is being baked into that guidance, meaning.

Obviously, you guys talked about a round of April the price hikes, there seems to be another round of price hikes on the table for may so that guidance that youre, giving is it capturing both April and may price hike meaningful realization of those.

Yes.

If you look at.

IHS forward view on pricing they have.

Got about 12 cents, a pound quarter over quarter for the United States.

And in Europe.

They've actually got a reduction a slight reduction in Pacific and got a slight reduction.

My sense is that the U S margins are going to see that and I think we're going to continue to see demand strong in China, we've seen a good rebound there.

And then in Europe, we've seen good demand it hasnt been as strong as the rest of the world.

Obviously with the virus.

It's had a little bit more impact.

And Latin America has been similarly hit a little bit hard with the virus, but I think as the quarter progresses, I think we have the potential to see that firm up a little bit.

Hassan This is Howard the only thing I would add is your math that you articulate on your question is spot on.

And John Roberts with UBS.

Our next question.

Thanks, Good morning, guys could you talk a little bit about the <unk> restructuring.

I think gas exports from CIT Darrow was a key part of Dow's Asia growth strategy. So do you need something else Noda backfill as you lose a little access here to some of the <unk> output.

Yes, im going to ask Howard to talk about that because see here on the team did a lot of heavy lifting to get that done but on the growth side.

Where we will be looking at some incremental investments, including on the ground in China for our specialty.

To be able to convert differentiated for you and I'll <unk> for high growth in Asia Pacific and were also looking at incremental expansions that we could make in the U S to be able to supply more material over there.

Yes, John good morning.

Yes, the SEDAR re profiling is done as you as you know it was it took us about two years to get it all done, but we got it done within the timeframe that we committed to.

The maturity date is now extended out to 2038, there was no upfront or prepayment of any of the outstanding debt. There's a grace period until June of 2026 on any principle.

And the guarantees were significantly reduced when you look at SEDAR as operating performance. It really was the standout.

All of our joint ventures did well in.

In line with our core earnings growth that we reported but when you look at the three joint ventures.

<unk> actually had the best earnings growth.

And next well move to Laurence Alexander with Jefferies.

Good morning on the.

<unk>.

The percentage of sketch out for let's say it's recycling.

Can you do you have initial thoughts on likely capital intensity or where they will fit on the cost curve, whether it be competitive from naphtha.

Yes morning, Lawrence and thanks for the question. This is one of the things I think that everybody is trying to wrestle with and it's a very local issue.

Because it gets into a variety of moving parts, including what's the cost to landfill materials I would say that the demand pull is there from the brand owners and from the marketplace for more recycled content and that's what's driving the investments.

To date most of the investments have been around mechanical recycling, because it's a very low cost and its also low energy intensity and so the growth in those applications is great, but there's a limit to what that can do so when you get into flexible packaging and a few other areas.

You need advanced recycling in there you get into technologies like pyrolysis in gasification to make that happen and thats a little bit more expensive.

So as we move forward.

I would think we're going to need to see a market related price on carbon which is being discussed and the EU and its also going to start being discussed here in the United States to help create that GAAP and that value that will drive that return and it's a little bit early too.

Get into huge capital numbers on return numbers, what we're doing today is piloting different technologies trying to prove out business models that work and then once we see what works and we can replicate it will come back and we'll talk more about what the investment looks like.

And Vincent Andrews with Morgan Stanley will have our next question.

Thank you and good morning, just a quick housekeeping for Howard what is what is the unfunded pension liability post the.

The $1 billion contribution and then maybe Jim just a follow up on that.

The prior discussion you put this press release out.

About a partnership between yourselves from Euro on our new game changing advanced recycling solution.

Been eyeballing, it and I can't tell if you're making a financial contribution or if youre, just taking the offtake and sort of what you think the timeframe and scalability of it is but maybe you could give us a little bit more discussion of this new partnership. Thank you.

Hey, Vince Good morning. This is Howard so our underfunded status on the pension plan at the end of the quarter was $6 4 billion.

And that was a decrease or an improvement of $2 3 billion versus year end 2020, which was a combination of the voluntary contribution plus the remeasurement that we took at the end of the quarter.

Yeah on on on Europe.

It's really taking advantage of their technology to use all forms of plastic waste some on some of which I mentioned on our on recyclable today. So.

So we will make an investment.

It's not a material investment in terms of dollars to help scale on the technology, but we'll also.

Increase the amount of advanced recycled materials as feedstock for our own assets.

Pilot facility is going to be in the U K and it's a hydrothermal plastic recycling solutions developed by mirror.

<unk>.

We will continue to work with them to prove that out and to help develop products that will perform in the marketplace to drive growth in that sector.

And we will move on to John Mcnulty with BMO capital markets.

Yeah. Thanks for taking my question I guess, maybe two two quick ones just on the equity line it looks like Youre guiding to 4% to $500 million for the year. You just did to just about two on a quarter and in the first quarter is there some seasonality or some one time thing that we should be thinking about in that and then just on the on the inventory side.

I think you mentioned specialty plasma or packaging and specialty plastics is going be really tight through into the fourth quarter. I guess can you give us some color as to what youre seeing in the performance match on coatings area and the <unk> area, if it's equally as tight on the inventory front.

There's a little bit more cushion there and maybe can be made up quicker. Thanks very much.

I think on when you get into polyurethane and Ini poly.

<unk> is very tight right now and I expect that to continue to be the case on Isis <unk>.

Have good operating rates through the year.

As this demand in construction and also automotive continues to grow.

You looked at the coatings.

I expect monomers to be tight through the year given the improvements in downstream coatings and obviously architectural has been strong if we see a boost up in the.

The do it yourself or the contract side on coatings market, then we could see another leg up in some more tightness in that sector.

And I would just say on John on the equity earnings line. Your math is right. There is some seasonality to think about GE out of equate, but also there is higher turnaround expenses. So you've got a higher turnaround expenses and <unk> of this year.

As well as Thailand, as well as equates so you've got it you got to subtract that extra 100 plus million dollars from the turnarounds as well.

And next we'll move to Kevin Mccarthy with vertical research partners.

Yes, good morning.

Look at your second quarter guide it seems to imply.

For the first half that you would earn somewhere north of 5 billion in EBITDA on an annualized side of course will be more than $10 billion. How would you compare and contrast that that sort of level versus your view of Dallas future Peak earnings power. When you take into account your price margin outlook the.

<unk> investments that you talked about in other sources of growth.

Thanks, Kevin.

And I think normally we.

Go into the year second quarter, and third quarter tend to be our peak quarters.

Obviously things tightened up in first quarter and so we saw a really strong first quarter results as well.

On my sense is we had going into this year trying to get back to mid cycle earnings I think were ahead of that in some sectors and will be that way and with our spending on really these fast payback projects some of them, which have a payback less than three years.

Think that has the ability to move the top side up already on a comment on the range on what peak earnings could look like yeah. Kevin look when we came out of it spend we were looking at the capital structure.

That whole discussion, we talked about trough earnings around $6 billion last year was five six so we were definitely on the trough, we got there because of the pandemic more than anything else.

Annualize that you're talking about.

And next we'll move to Arun Viswanathan with RBC capital markets.

Great. Thanks for taking my question Congrats on the strong results here.

I guess similar question when you think about the segments here.

First off with PMC, obviously continues to struggle what does it really going to take to get that business back to normal is it.

Mr Assumption Thats personal care and mobility as you discussed earlier and then similarly with ini, we've seen a pretty strong move in MDI, especially in China and in Asia earlier.

Do you expect that to kind of come over to North America and Europe in the coming months.

Good morning Arun.

Look I just want to go back to the first quarter comment on PMC. So I don't think the first quarter is reflective of the market for PMC and I don't think the business continues to struggle.

Downstream silicones, the high margin part of Silicones balance stream got hit pretty hard during Covid, obviously personal care applications, but also we saw construction.

Down really last year, and that's starting to come back so right now youre starting to see strength in siloxane youre starting to see strength in construction.

Mostly it's been residential construction, but it's moving back into high rise buildings again consumer electronics is driving it.

Industrial manufacturing is driving and mobility as Howard mentioned.

<unk> is really positive for us on a on a Dow overall standpoint, we've got about twice, 50% more content on on Evs in an internal combustion engine on a silicon standpoint, we've got about three to four times more than our internal combustion engine. So we're seeing surges. There so I think youre going to see.

PMC improve as the year goes through and obviously, we had a much better quarter without the deer Park downtime and the extension of that due to the winter storm already so I would say, let's let's Luca PMC as the year progresses, I think youre going to see a good story coming out of that business. The other point on PMC is really.

And as long as Youre Gong assets. So we have three big pillar plants that produce siloxane as around the world.

One in the U S. One in Europe, one in China, and the one in China was out for a big chunk of the first quarter. So obviously, we were unable to produce and we had all that fixed cost. It was net went unabsorbed debt dropped to the bottom line as.

And the negative impact as you saw.

And next we'll hear from Alex Yeah from <unk> with Keybanc.

Thank you good morning, everyone Jim.

Medicine.

Capital cost.

Start trending towards depreciation just to clarify you mean DNA that I think youre guiding to about $2 9 billion adjusted depreciation part of it and also how quickly do you think you'll get there or is it something you should consider for next year already or over the next two or three years, perhaps.

Yes, good question and I think we will ramp into it and a lot depends on what we see in downstream demand and if we continue to see these.

Downstream demand pulls were going to have to ramp into that.

Post this year. We've also got to look at investments that we've been talking about on sustainability as well, our depreciation levels about $2 $2 billion I'm.

So I think our first ramp would be to that level and then we'd have discussions here and with our investors as we get opportunities to go beyond that and obviously you have to look at the value creation of that.

And we'll move on to Mike Sison with Wells Fargo.

Hey, good morning, nice nice quarter on outlook.

From 'twenty one.

I think when it comes to additional capacity I think the answer to that is yes, I think the demand is going to continue to grow obviously you can see the leverage that we have to the upside on margins. So I'll leave that what the margin spread for 'twenty two.

It looks like out of the equation, but we've probably got $100 million, maybe $150 million of additional accretive earnings based on these new incremental expansions in 'twenty two.

On the things that I mentioned earlier.

Polyethylene glycol is came online in first quarter.

Just on.

On a month ago.

And the furnace at the Port is up and Thats half of its rate already and it will get the other half of it's right at the end of the year and then we've got some other I'll constellation investments that will come on next year NII.

We've got some investments and obviously silicones last year, we did.

More than 15 incremental investments this year, we've got another 15 for high margin downstream silicones materials.

Those will come on and then we've got.

Miscellaneous debottlenecking going on everywhere to try to get incremental growth on.

And we'll move on to Duffy Fisher with Barclays.

Yes, good morning.

Two kind of housekeeping questions first is the sundar on marketing agreement winds down to the new terms, how visible will that be in your P&L and cash flow and then on the pension.

Voluntary how would you think about the return on that $1 billion and should we expect more voluntary cash to blow into the pension over the next several years.

My expectation on.

The pmla changes Duffy will be that youll see that gradual overtime I think it will take a number of years.

For for our marketing to reflect our equity stake and obviously for the Aramco side to do the same.

So it won't happen overnight and I think it will happen over time.

Youll see it more on the revenue side than you will on the earnings side any other thoughts about that Howard if anything Duffy I would say you should see on our unit margins improve because right. Now we are marketing 90 plus percent of the Sundar volume, but we obviously only own 35% on the equity so that really can we get a very we only get it.

Very very small marketing fee on those.

On those on those volume so as that shifts more to our.

Equity ownership in the JV, our unit margins should actually increase just because of that debt.

Dilution.

<unk>.

And remind me what your pension what was the specific pension question.

We might not Terry index.

And then do you think you will put more voluntary cash into the pension over the next 234 years.

Yes, so I mean look with the pension smoothing.

And so it doesn't take much from an interest rate perspective than maybe one year of additional <unk> <unk> to.

To really get that plant close to fully funded so.

That said, we will be opportunistic and if it makes sense economically I mean that $1 billion of voluntary pension payment was on very good economic decision.

For the company and so we'll continue to look at that year by year from an economic perspective, and if it's value, creating we might do it but we'll we'll compare that to the other capital allocation priorities that Jim laid out earlier on the call.

And that will conclude today's question and answer session. At this time I would like to turn the call back over to Tom for any additional or closing remarks.

Thank you. Thank you for everyone. Thank you to everyone for joining our call. We appreciate your interest in Dow for for your reference a copy of our transcript will be posted on <unk> website within 24 hours.

This concludes our call. Thank you very much.

And that will conclude today's call. We thank you for your participation.

Q1 2021 Dow Inc Earnings Call

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