Q2 2021 Dow Inc Earnings Call

July 22, 2021

[music].

Please standby.

Good day and welcome to Dow's, 2 Q, what 'twenty 'twenty 1 earnings call you may signal to ask a question by pressing star 1 at any time. During today's presentation. Also today's call is being recorded I would now like to turn the call over to PON Cuz Gupta. Please go ahead Sir.

Good morning, Thank you for joining <unk> second 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 of Dow's website and through the link to our webcast.

Cash Gupta, Dow Investor Relations, Vice President and joining me on the call today are Jim <unk>, Chairman and Chief Executive Officer, and Howard on the lighter resident 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.

From our forward looking statements.

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 of the most directly comparable GAAP finance.

<unk> 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 2 you will see our agenda for the call Jim will begin by reviewing our second quarter highlights and operating segment performance Hollywood share modeling guidance and outlook going forward and then Jim will close with an update on our earnings drivers. Following that we will take your questions now let me turn the call to Jim. Thank you Ponca Jin.

Thanks to everyone for joining us today, starting on slide 3 Dow continue to capture strong demand across our value chains. During the second quarter team Dow has focused on execution cost discipline and balanced capital allocation enabled us to deliver our strongest quarterly earnings performance in the company's history.

Both pre and post spin with substantial growth in net sales and earnings year over year and sequentially.

We achieved double digit sales gains in all operating segments and businesses are 66% increase in sales relative to the year ago period was led by local price improvement of 53% combined with a 9% volume increase.

Robust demand and the recovery of the global economy continues from the onset of the COVID-19 pandemic sales increased 17% sequentially underpinned by tight supply and demand fundamentals across all of our value chain, we delivered higher operating EBIT of $2.8 billion year over year and <unk>.

$1.3 billion sequentially with improvements in all segments and businesses.

These gains were fueled by strong topline growth and margin expansion. We also benefited from increased equity earnings up more than $370 million year over year led by higher margins Thats, the Dara and the Kuwait Joint ventures sequentially equity earnings were up $54 million, primarily from the <unk>.

<unk> joint Venture's cash flow from operations was $2 billion and free cash flow was $1.7 billion significantly both year over year and sequentially. This enabled our balanced execution of our capital allocation priorities.

We continued our proactive liability management actions by reducing gross debt by more than $1 billion in the quarter and reducing our annual interest expense by $35 million today Dow has no substantial long term debt maturities due until the end of 2025, we also returned more than 700.

To shareholders in the quarter through our industry, leading dividend and we resumed our share buyback program to cover dilution.

Finally, we continued to advance dow's ESG priorities by releasing our consolidated ESG report intersections, which provides enhanced transparency on our environmental social and governance priorities. The interactive digital report can be found at the top of our corporate.

Website.

In summary team Dow maintained a relentless focus on meeting increasing customer demand despite lingering supply impacts across many value chains and marking a strong rebound from winter storm <unk>, we continue to execute on our operational and financial playbook delivering another strong quarter.

And a solid first half performance.

Turning to our segment performance on slide 4 and the packaging and specialty plastics segment operating EBIT was $2 billion up nearly $1.7 billion year over year and more than $780 million sequentially.

Price gains in both businesses and in all regions led to integrated margin improvement and increased equity earnings on a sequential basis. This segment expanded operating EBIT margins by 810 basis points on continued local price gains in olefins and in packaging applications.

The packaging <unk> specialty plastics business reported sales gains year over year, driven by improvement in packaging applications for industrial and consumer packaging and flexible food and beverage packaging end markets volumes.

<unk> declined year over year and sequentially due to lower polyethylene supply from the lingering effects of winter storm Murray and our own planned maintenance turnarounds compared to the prior quarter the business delivered local price gains in all regions moving.

Moving to the industrial intermediates <unk> infrastructure segment operating EBIT was nearly $650 million up more than $860 million year over year, primarily due to the pandemic recovery combined with tight supply and strong demand in both businesses sequentially operating EBIT was up 320 million.

And operating EBIT margins expanded by 640 basis points, driven by margin improvement and offset somewhat by continued supply constraints from winter storm Ori.

<unk> <unk> construction chemicals business increased net sales compared to the year ago period on strong local price and all value chains demand recovery in durable goods and appliances and construction end markets and currency tailwind. This.

Despite the industry supply chain challenges across a number of end markets, including mobility. The business delivered sequential sales growth on increased local price and volumes.

The industrial solutions business delivered a net sales improvement compared to the year ago period, as a result of local price gains and offerings for coatings industrial and electronics end markets across all regions.

Improved demand for materials used in industrial manufacturing coatings and infrastructure were more than offset by planned maintenance turnarounds and some third party supply limitations net sales also increased sequentially on local price gains in all regions and finally, the performance materials and coatings.

Segment reported operating EBIT of $225 million up nearly $200 million from the year ago period operating EBIT margins increased 760 basis points on price gains and strong consumer and industrial demand recovery sequentially operating EBIT was up more than $160 million.

Due to price momentum and lower planned maintenance costs for consumer solutions business achieved higher net sales year over year as demand recovery for silicones products led to local price and volume gains in all regions sequentially. The business achieved broad based volume growth due to lower planned maintenance.

<unk> and strong demand in silicones applications, including personal care as certain geographies, we began to experience an increase in travel and a return to workplace and social activity with notable improvements in China.

The coatings <unk> performance monomers business delivered higher net sales year over year, driven by price gains in all regions increased demand for coatings applications was offset by lingering raw material and logistical constraints from winter storm Murray sequentially, the business achieved local price gains on tight supply and strong demand.

Rentals and increased raw material costs as well as increased volume from strong seasonal demand for industrial and architectural coatings now I'll turn it over to Howard to review our outlook.

Thank you Jim and good morning, everyone moving to our third quarter modeling guidance on slide 5 strong consumer demand trends continue and retail housing in the manufacturing sectors and inventory levels remain low across most of our value chains. We expect these dynamics to continue to support price strength in the third quarter as the industry continues to <unk>.

Work to fulfill pent up demand.

And our packaging and specialty plastics segment downstream converter and brand owner inventories remain at all time lows with balances very tight.

Recent small increases in producer inventories are due to a heavy turnaround season for the industry and yet industry days demand and inventory actually declined nearly 8% month over month and tight supply coupled with increased domestic and export demand. This data includes Dow where we expect an approximately 150 million.

<unk> increased in the third quarter turnaround spending sequentially for planned maintenance at our crackers in Canada and in Spain, as well as a $100 million lower earnings from non recurring license activity, which occurred in the second quarter.

ATT data indicates domestic demand for packaging applications reached its strongest level in history in June and we expect to continuation of these positive demand trends as customers are reporting 45 to 60 day backlogs.

Moving to industrial intermediates and infrastructure strong consumer demand for durable goods continues underpinned by order strength throughout the value chain housing and construction markets, particularly in the U S continue to support robust demand for polyurethane applications industrial and oil related end markets are expected to continue to see gradual recovery sequentially.

<unk>, providing additional support for solvents and other industrial solutions.

We also expect $30 million of additional planned maintenance turnaround spending at our joint ventures in the quarter.

And in performance materials and coatings, we expect a continuation of strong demand for electronics mobility and infrastructure silicone solutions, we expect to benefit as social activity increases on easing pandemic related restrictions, including sequential improvement for personal care applications.

These trends are supporting price momentum across the silicone value chain and we anticipate increased turnaround spending of approximately $30 million and our consumer solutions business in the quarter, including a turnaround at our siloxane pillar plant and Barry <unk>.

Demand for do it yourself architectural coatings remains robust and we expect to see an increase in contractor related demand as new home builds increase in consumer and home social engagements begin to resume.

Altogether with robust demand expected to continue our advantaged portfolio is positioned to capture significant value moving forward. We've updated a few full year items, which can be found in the appendix of the slide presentation, notably we are expecting higher equity earnings and with the improved earnings profile at SEDAR, We now anticipate approximately 50 million.

A cash inflow to Dow in 2021.

Turning to slide 6 around the world increasingly positive trends indicate we remain in the early stages of economic recovery with an extended runway for growth while industrial production is up nearly 20% over the year ago low. It's still has not reached pre pandemic levels retail inventory to sales is at its lowest.

And more than 3 decades, and strong demand continues to counter near term potential restocking efforts.

U S housing starts increased again in May and are projected to continue rising supported by limited supply of single family homes due to a decade of under building.

And the proposed U S infrastructure Bill has the potential for further elevate the already strong GDP estimates projected around the world.

As vaccination rates increase around the world and economies continue to reopen pent up consumer demand and increased personal savings built over the past year should also provide an additional boost to the global economy.

<unk> confidence continues to climb on conviction that economic conditions will continue to improve supporting continued purchases of homes automobiles and other durable goods.

Business travel sentiment continued to improve in may with more than half of U S company is planning to resume domestic business travel within the next 3 months the.

For personal care market, which has been 1 of the slowest to recover began to see a rebound in the second quarter net increases in U S cosmetics and beauty products sales on rising consumer demand.

And as borders reopen recreational activities and international travel should also boost economic activity, while we're mindful that there will absolutely be some regional variations in the timing and the pace of the recovery.

Along with these trends, we anticipate the strong demand we experienced in the second quarter across our polyethylene and polyurethane acrylic and silicone change to extend through the second half of 2021.

Polyethylene demand growth for example is projected to outpace supply additions in the near term with pricing strength and resilient margins on a sustained and favorable oil to gas ratio with the majority of industry capacity adds coming in the higher end of the cost curve.

Altogether, we expect these strong market dynamics tight supply demand fundamentals and ongoing economic expansion across our key chains to continue to drive earnings and cash flow growth with that I'll turn it back to Jim.

Turning to slide 7.

As consumer driven portfolio is uniquely positioned to benefit from the demand trends that Howard outlined a moment ago, which continue to translate into an attractive $650 billion addressable market with approximately 1.3 to 1.5 times GDP growth across our packaging infrastructure mobility.

And consumer care and markets these demand trends and our fast growing markets are underpinned by an accelerated transition towards more sustainable materials, providing ample opportunities for Dow to continue to innovate with our customers and brand owners to enhance the sustainability of our products and value chains, while advancing our.

Net zero carbon and circular economy targets for.

For example, as the mobility sector continues its transition to more sustainable solutions electric and autonomous vehicles offer upside of approximately 50% more revenue across multiple Dow chemistries versus traditional internal combustion engine vehicles, including high value polyurethane.

Silicones and silicone hybrid based adhesives and engineering sealants widely used in battery assembly noise and vibration reduction drivetrain comfort and heat management applications, our new Dow sales silicone technologies for electric and hybrid vehicle applications help Oems to meet the <unk>.

All the needs of automotive electrification, while advancing vehicle performance reliability and sustainability and we recently introduced spec flex C. A new polyurethane solutions sourced from recycled raw materials to help automotive Oems meet demands for more circular products and their sustainability.

<unk>.

We also continue to align our growth capex to address this growing market demand for sustainable materials.

This quarter, we outlined our roadmap to reduce cotwo emissions by more than 40% by 2030 from our manufacturing operations and for news in the Netherlands.

And Dow and shell demonstrated progress on our joint technology to electrically heat steam cracker furnaces, receiving partial funding from the Dutch government and together we are evaluating construction of a multi megawatt pilot plant with startup in 2025.

We plan to share more detail on our strategic and financial priorities to continue creating long term value for all our stakeholders at our upcoming 2021 Investor day on October 6 which will be hosted both virtually and in person in New York City stay tuned for more details we look forward to engage.

<unk> with you.

On slide 8 as we shared last quarter, we continue to see demand across our ethylene polyethylene and polyurethane acrylics and silicones value chain outpacing supply through 2021, and staying balanced in the near term. These.

These market dynamics will be further supported through 2022 and beyond by the GDP fueled market growth trends, we just discussed.

Some industry views call for softening conditions, largely based on their view of announced capacity additions. However, they do not account for industry delays and cancellations and when coupled with elevated demand growth from continued reopening of the global economy will likely lead to tighter than forecasted market conditions.

All of which will result in continued earnings margin and cash flow growth for Dow in the near term.

And while we capture these improved earnings in our core businesses, our current slate of lower capital faster payback and higher return capacity expansions will generate an additional $1 billion of accretive earnings over the next several years with many projects delivering earnings already this year, such as our ethylene derivatives.

At the Thai joint ventures polyethylene for high performance packaging applications at our Alberta operations and surfactants for leading brand owners laundry and home care end markets and notably in the second quarter, we progressed, our polyethylene glycol incremental expansion completing customer.

Qualification ahead of schedule and beginning shipments of our industry, leading carbo WAC century polyethylene glycol active pharmaceutical ingredients.

And with favorable supply and demand fundamentals. These projects further enable dow to continue to deliver significant value for our owners over the foreseeable future we.

We will close on slide 9 our steadfast execution of the operational and financial playbook that we outlined at spend combined with our agile response to market conditions over the past year have enabled us to deliver strong performance and enhanced value to our shareholders. We are uniquely positioned to continue building on that strong found.

Asian today, our value proposition starts with our differentiated portfolio and an asset base that is characterized by first our feedstock flexibility and position, which supports our low cost position and enables us to drive a higher asset utilization and maximize cash margins as we quickly balance are free.

<unk> stock and product mix to supply and demand dynamics and second our leading scale global footprint and differentiated portfolio provide us with access to high growth end markets in all major regions.

We have achieved strong performance in this early part of the economic recovery and remain advantaged through our participation in higher margin functional polymers silicones and formulated systems.

We continue to develop innovative solutions to address our customers' needs and capture the opportunities arising from critical market trends are high value adhesives, and innovative packaging solutions support the rapidly growing e-commerce sector.

Through our mobility science platform, we are targeting low carbon, enabling mobility electric and autonomous vehicle opportunities more broadly across our portfolio. We are enhancing the sustainability of our solutions and the value chain. They serve for example, deploying lower carbon energy solutions.

And gas trading carbon capture and concentrated solar power at our operations.

And through value chain collaboration we are increasing post consumer recycled content in our products and enabling the design of fully recyclable packaging today more than 80% of Dow products for packaging applications are reusable or recyclable and our research and technical teams are working actively.

On the remainder to achieve that same goal.

Beyond the strength of our portfolio and our innovation investments our deliberate focus on operating discipline and balanced capital allocation approach are critical elements of our value creation playbook.

We have achieved top quartile cost structure and cash conversion and our restructuring efforts will yield an additional $300 million in earnings all while maintaining a best owner mindset. We also delivered a return on invested capital of greater than 14% on a trailing 12 month basis at the same time.

We have prioritized investments in our downstream higher margin faster payback opportunities in upstream investments that expand our leading ESG profile, while increasing our capital expenditures by $350 million this year.

We reduced net debt by approximately $5 million since the end of 2018.

Dow strong operational and financial performance. This year resulted in a credit rating upgrade by S&P and an upgraded outlook by Fitch supporting our strong investment grade balance sheet, and we continue to return significant cash to shareholders through our industry, leading dividend and.

In closing Dow is uniquely advantaged to continue delivering value through our best in class consumer led portfolio, our leadership and innovation in sustainability and our strong operating and financial discipline with that I'll turn it back to <unk> 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 if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to lighter signals from each of our equipment.

That is star 1 to ask a question. Our first question comes from P. J <unk> with Citi.

Yeah. Good morning, you know Jim the arbitrage is between the U S prices for polyethylene and other commodities, what's it for Asia are growing.

And this was evident in your pricing where pricing was to ex that of that in Asia.

So how much.

Yeah.

Yeah. Thank you Vince.

The salon chains business hasn't seen a lot of recent capacity and obviously, we've been working on reliability and doing some turnaround work and our own assets.

A lot of it is really and market driven and the positive side on the demand for downstream silicones is that you've got a tremendous draw as you move into things like electric vehicles.

We're still seeing strong growth and housing and also in large building projects around the world. So I think that's going to continue.

My other.

Todd is that our sustainable portfolio from our standpoint, when you look at the sourcing of our silicon metals.

Is going to allow us to be able to meet some of our brand owners sustainability demands and that's going to be positive for Dow.

And you've got some older assets out there you've got to keep an eye on that about 4% to 5% of the industry capacity.

And as older high cost and it has a pretty high at <unk> footprint and so we're keeping an eye on that.

Yeah.

We'll take our next question with Jeff Zekauskas with J P. Morgan.

Thanks very much.

Also on slide 8 you talk about the Canada Cracker expansion.

And the old days, you used to talk about expanding P. E by 600000 tons, a year, which was supposed to happen and the second half of 2022 is that what that is or is that something different and when you did previously talk about a 600000.

And is that still going through.

And then secondly on slide 14, you said your turnarounds this year for 500 million higher than last year.

Is that a normal number whats your normal turnaround costs.

And in a year.

Yeah.

No. Thanks, Jeff 2 good questions and Canada that expansion is an addition of another furnace.

And some work on the Debottlenecking of the backend of the Cracker up there and we have the available capacity in Canada to convert that polyethylene.

So that added probably about half of that 600, K T that youre talking about in terms of available pounds. There was the project that we had slated to build and the U S. Gulf Coast 600 K T.

And when Covid hit we pushed out and we.

We're dusting that off right now and we're going to make a decision on that sometime this year.

So we are continuing to look at expanding and the plastics portfolio downstream and with the work we've done on reliability, we've got the ethylene within our portfolio to be able to fuel that and make that happen.

On turnarounds.

And again with cash flow.

And being tight last year, we pushed some into this year, maybe Howard you can comment on what is a more normal number going forward.

Yes.

Jeff last year as Jim says, we pushed a lot of turnaround. So so 2020 versus 2019 was down about $200 million. We expect this year as you said to be up about $500 million. It really does depend I mean, we've got out and we got cracker assets around the world as you know and I would say and the typical year.

Do between 1 and 3 and so if you wanted to say on average it's 2 a year.

That would tell you that the average turnarounds probably in the range of $1 billion, plus or minus and this year, it's going to be a little bit above that above trend line because of the.

Push out from last year.

Our next question comes from Duffy Fischer with Barclays.

Yes, good morning.

Just wanted to triangulate if I could.

Pricing for polyethylene is up about 6% as we exited the quarter versus the average for Q2.

But when you gave your guidance for the sales growth from Q2 to Q3 for that segment. It's.

It's flat to up 2%. So if you just flat line price and you kept the volume and the same you should be up roughly 6% can you just triangulate back that 4% is missing is that a lack of volume or do you see the price rolling over and the back part of the quarter that would get us to equal there.

Yeah, Thanks, Duffy and inventories are real tight right now and as I mentioned, we haven't been able to really build anything so with turnarounds in front of us and this quarter, we've been a bit conservative on the volume and Thats in that third quarter outlook.

Obviously, we're going to try to be able to beat that and I would say on pricing, we're still seeing some positive upward price movement on certain grades of product.

High density for example, right now is is pretty tight and so I think youre going to continue to see some.

Price movement upward there, but overall as we get through the turnarounds and the third quarter.

Youre going to see that we're going to have plenty of available volume to move and that will start to add towards the end of the quarter and into the fourth quarter.

We will take our next question from Hassan Ahmed with Alembic Global.

Good morning, Jim and Howard.

And as I thought I heard your commentary it seems obviously the fundamentals are looking very strong near to medium term at least.

Obviously, that's reflected in your strong cash flow.

And then again you made a comment about no sort of significant day.

Payments due until 2025. So my question is how are you guys thinking about share buybacks I mean.

You guys did.

Around $200 million of buybacks and Q do enough to offset dilution, but with the way the balance sheet is right now the way the fundamentals seem to be.

Are you guys thinking about it more.

Significant buyback program.

Good morning, Hasan, let me take a shot at that and I'll ask Howard to chime in as well.

As of the end of second quarter, we paid out about 88% of net income and dividends and share buybacks since the spin.

That's well above our 65% through the cycle guideline.

And we just brought back buybacks and the quarter start to cover dilution.

And what we bought was about $200 million worth of shares during the quarter. So that's our priority.

And I'd also say that remember we have organic growth in front of us and so we're going to need some money to go into incremental growth Capex. This year will be at $1.6 billion.

We need a couple more years to get up to.

Depreciation levels, which is about $2.2 billion and we have the projects and they're good projects lined up to do that or any other comments and the only other thing I would say Hassan and you saw we reinitiate and in the second quarter as you say with the $200 million I would say that for modeling purposes Thats a good.

That's a good quarterly run rate for the back half of the year and then as we get from the end of the year and Investor Day, we'll talk more about 2022.

We'll take our next question from John Mcnulty with BMO capital markets.

Yeah. Thanks for taking my question just a quick 1 with regard to the impact in PSP and <unk>.

Around the Yuri volumes can you can you give us a little clarity on how much that NICU and <unk> because I assume that's all in the rearview mirror and and we should be kind of reverse and we look to <unk> and is that right.

Good morning, John.

I think your assumption is right and they were impacted pretty hard and.

<unk> and we should see that come back and the assets are running.

Very hard right now the only caveat to that I would say is that.

There are still a couple of lines, where some raw material supply limitation and small small raw materials that are important and making those products, sometimes caused us a little bit of a backlog.

I think.

Most of that capacity was out.

During the month of April and.

And so as you think about it and go forward and Q3.

I would say Youll have 3 solid months production, where last quarter, we had 2 and.

And we and we pulled hard out of inventory and so I don't think that we're going to have a chance to rebuild inventories until maybe the end of the year and that would all depend on if the economy slows down as Howard mentioned, we have customers and most of them and those chains that have 45 to 60 day backlog. So our view is work.

Gonna be running hard through the end of the year and right and the 2022.

Our next question comes from John Roberts with UBS.

A little bit related there, Jim and Howard, but Dow and the industry had a much harder time recovering from winter storm Yuri if we had a similar situation again with the impact likely to be the same or has there been some learnings or changes that would mitigate the effect if they if we had a repeat of this.

Yeah, and that's a good question John we had.

We do like we do after a hurricane.

And we after every hurricane or weather event, we get the team together and we take a look at what worked well and what didn't work so well.

<unk> was a little bit different and it was so widespread and it was not just us, but it was everything upstream and downstream of our gas production and electricity.

Water.

The biggest damage obviously was freeze ups and so you can't winterized everything to prepare for that but you can went awry and some things.

And if you have some advance notice you can actually take some things down and protect them and so the team has gone through that and we've got and updated game plan and what we would do and the face of and situations like that again I think the whole industry is going through and I know ERCOT is going through that on the power side winterized.

<unk> is a big part of what they're doing and what they are requesting us to do as well because we are a supplier into ERCOT and so I do think there are some positive developments since winter storm Murray and the widespread nature of it as 1.

Caught everybody and has taken so long to work through.

Our next question comes from Michael Sison with Wells Fargo.

Hey, guys nice quarter.

And I think <unk> prices are at all time highs and and obviously demand is strong and supply sit below just curious though.

Do you think there's a fundamental change and demand for polyethylene and on a structural basis, yeah, maybe post the pandemic as it is.

Is it possible that we're really going to be above that 1.3 to 1.5 GDP going forward and then just just curious what you think would need to happen for prices to fall.

Yes, Michael Thanks for the question.

We have seen a change and buying behavior from customers and.

So there are some areas that that really drive a lot of packaging like e-commerce activity, which I don't think is going to go backwards.

I also think that the fact that plastic packaging is so lightweight and so strong and it has the lowest carbon footprint package out there.

And continuing to see a drive towards that.

And for most companies the shipping costs and the Cotwo footprint and the shipping cost and will drive that and so.

And just use of paper versus plastic scenario and a grocery store.

1 truckload of plastics shopping bags would take 4 to 5 truckloads of paper bags to replace and so I.

Thank you are going to see us carbon comes into the equation that it advantages plastics greatly.

I don't think there is something thats going to see it long term move above 1 and a half.

For many many decades, it's been and that 1.5 type of GDP growth rate I think that will stay there are some functional polymers that remain out of ethylene and polyethylene derivatives that are continuing to grow materials for construction.

Construction that are positive and youre going to see growth and some other applications like products that go into alternative energy solar panels for encapsulation wind blades and other types of applications.

So I think we can sustain that over a long period of time, which is positive.

We'll take our next question from Bob Court with Goldman Sachs.

Thanks, very much Jim I wanted to ask you and maybe dovetails on Mike <unk> question, but and in terms of the PE demand growth and that multiplier.

The Dow and the industry's also embracing the circular economy, just curious what effect do you think the recycling initiatives and and circular initiatives out there what that might do to Virgin demand growth rates relative to that sort of 1.5 times GDP multiplier.

Yeah. Good question, Bob we're seeing real demand pull from consumers and brand owners.

Want more post consumer recycled material and they're or they want more materials. It's made.

From either a bio source.

2 ethylene or something that is made from advanced recycling to get back to feedstock and back to the product.

I think the drivers.

Net are going to help on the Virgin side of things are obviously redesign packaging types and flexible packaging and how many packages are complicated and hard to recycle.

I think 1 of the positives of our portfolio right now has a greater than 80% of our portfolio is fully recyclable or reusable today and the research team and the Tech service team are working hard to get the rest of that to 100%.

All of the brand owners are working on Redesigns right now of different packages to move away from complex structures and to simpler structures. We use that bear naked Granola example, with Kellogg's and where that package has been redesigned this is going on across the value chain.

Same day investments and mechanical recycling and advanced recycling picked up we're seeing and the number of states.

That are approving advanced recycling projects pick up.

And I think our next big impact is going to be on infrastructure at.

And the state and local level.

To allow more collection of curbside recycling of more products and that'll be the next drive north we still have a long way to go even to catch up with Europe.

And the United States, we have a long way to go to get to that 35 per cent of recycling.

We set a target by 2030 day collect a reuse or recycle and 1 million metric tons of plastics, our own actions and partnerships and I can tell you I am pushing the team to always pull that number forward and get that done faster and.

And I think we're seeing real demand and taking recycled packaging products into.

Into <unk>.

Some things that are more durable and longer lives and building materials.

Using recycled plastics and aggregate for roadways.

Architectural decking all kinds of things that are they are upgrading the use and of life plastics. So I think over time, it's going to be a real positive.

The next question comes from Laurence Alexander with Jefferies.

Good morning.

What price of carbon do you currently use for evaluating growth projects and is it high enough.

And we're actually seeing it skew the types of projects that you're considering from what you would've considered and otherwise.

Yeah, and that's a good question.

I would say today and the price and is around $50 to 55 euros and ton.

And that's what we see today and the EU on the market.

And translate that back into dollars as well.

I would say and that is not a high and the price of carbon.

To drive.

The change that needs to be made because the lower carbon technologies are are much more expensive than that.

But it is it is enough to put pressure on us to make sure that all of our projects have lower carbon approaches to them and.

And 1 of the things, we'll talk about it and Investor day is the work we did to kind of outline the next 2030 years.

And how we would get there.

I think carbon capture.

And we talk about you know as we get beyond this infrastructure build that's in front of Congress right now and we get to the next step.

You've got to look at and advanced technologies, and carbon capture and blue hydrogen or 2 that we have to keep an eye on those are the lowest cost next step for us to get our industry to low cotwo.

But there are a lot more than 55 euros, a time to deliver that and.

So without the right tax incentive or support from government and in terms of investment and those technologies.

And a market price on carbon is much higher than that and where we are right on top of that and we're very attuned with that and that's 1 of the things that we're piloting and for news and that's a 40% reduction and I talked about by 2030 is we're looking at blue hydrogen and carbon capture and tried to make and improvement at that site.

We'll take our next question from Arun Viswanathan with RBC capital markets.

Great. Thanks for taking my question Congrats on the strong results here you'd mentioned.

Some comments on supply additions being at the high end of the cost curve.

And could you just maybe remind us what your assumptions are on how much polyethylene.

Capacity is being added and the rest of 'twenty, 1 and and where that is coming whether it be it and I got China or other regions and also for 'twenty..2 what do you expect on that side and and have you changed have you seen any changes.

As far as projects being.

Accelerated that where you have potentially pushed out during COVID-19 are returning back to the table and then longer term do you expect you know new projects to be announced at.

It sounds like the market.

And it sounds like youre, indicating the market's going to be very tight for a little while and and you don't see any let up and demand. So.

It looks like we.

We would potentially need some more capacity and in North America looks like that and.

And interesting place for that for that addition, so is that kind of within your thinking as well. Thanks.

Thanks, Arun and good question and I'll try to remember all of that and I can I can get it all out.

About 50% of the global polyethylene ads through 2025.

Our higher cost naphtha or coal to olefins and methanol to olefins.

About 35% of naphtha and up 15%, our coal to olefins and methanol to olefins.

60% of the capacity adds through 2025 are in northeast Asia.

And when you think about the Chinese projects that are in construction and startup phase.

About 50% of those will come to market around the announced dates.

And so thats and 2021% to 2023, that's about 12 million metric tons out of 24 total.

And capacity increases are going to obviously reduce some imports into China, and so that'll be domestic and we don't see China has been and ex border at those levels.

I would also say that you've got some existing crackers that are.

<unk> and unreliable.

Due to some trade risks, but it's only in the neighborhood of 2 to 3 million metric tons.

Long term right now there are supply demand and their support.

And additions that are about 31 million metric tons on the books.

And our view on delays or cancellations are in the 6% to 15 million metric tons on delays or cancellation.

Demand growth is going to be 25 million metric tons. So we're going to be balanced to short by about 9 million metric tons during that timeframe and.

And then the near term would be and GDP growth rates things are going to be tight.

So we're looking at and we're looking at growth I mentioned to Jeff's question earlier.

600, K Ta expansion on polyethylene that's in the cards incremental expansions on ethylene those around the cards. We're doing work on our own F. C D H technology, and our <unk> technology and the Gulf to try and have low carbon and moves forward.

I think 1 of the things that has to be resolved before you see a next wave of announcements as.

It's 1 of the policy is going to be and the United States around carbon carbon border adjustment mechanisms carbon tax.

Perhaps a voluntary emissions trading scheme and.

And we have to know what those are we have to know how China is going to play on the global.

Footprint and we have to see how Europe is moving forward.

All of those have to be resolved before we can see what the right places to make that next to that but we're working on projects and we're looking for the right opportunity.

Our next question comes from Alex, Yes from <unk> with Keybanc capital markets.

Thank you.

And then just just to continue on the subject you mentioned that the price of carbon and Europe is currently.

High enough to really provide incentive to implement these technologies.

Yes.

And price rises and Europe implements the.

The tax too to help domestic industry sort of absorb these higher carbon prices do you think that ultimately net to something neutral for Dow.

<unk> chemical because having capacity in Europe, you will.

Direct or indirectly benefit from these import taxes.

I think thanks, so like I say I think it can be done and.

And I've said before and I'll continue to say it.

We need to have a real constructive and open dialogue about how much it cost to do this.

I think.

Idealistically everybody's and agreement, but we want to make improvements and we want to reduce carbon emissions and we wanted to get to net zero.

But nobody's yet at a government level or any level, having the educated discussion that we need to have about the cost of doing that.

What will happen in Europe.

As Europe has a the way the emissions trading scheme works in Europe, and they have price requirement, but they also have allowances for energy for emissions emitters.

And if you're.

Under your allowances you can trade those carbon credits.

And what they will do over time as they will ratchet back the allowances and they'll start to put everybody over their allowances and that'll start to drive the prices up and that will drive the incentives to make the conversion.

So Europe is less concern right now.

And with what the cost is to everybody and more concerned with trying to drive that number up and drive that conversion.

And we're in the middle there trying to talk to them realistically about what the price is to do this and what the technologies are today and scale up the ones that we think are the most cost effective going forward blue hydrogen and carbon capture to be able to do that.

So I think as we work through that over the next 2 or 3 years.

And we will start to make some progress to that and I would say all heavy industry and power and utilities sector are taking a look at this but with eyes wide open and that it is.

Not true.

And the other thing to remember on hydrogen is as you move to a hydrogen economy.

And most effective way to make most of that hydrogen is true steam methane reforming which uses and natural gas, which means you're going to need a lot more natural gas production to make that hydrogen and.

That's 1 of the other discussions that is difficult to get on the table right now.

Our next question comes from Steve Byrne with Bank of America.

Yes. Thank you.

Junior really leading this initiative on net zero.

Clearly 1 of the few that have and net zero.

And greenhouse gas emission targets for 2015.

I'm curious to hear.

Your view as to what's driving that.

And then clearly the Theres not U S government policy driving that.

You're describing a carbon tax and Europe, that's insufficient to incentivize that is there any any opportunity that you see.

See the downstream revenue could be enhanced from it.

I'm not sure how but you.

It's clearly weighing score usage at a premium price for a.

Recycled product.

Product or.

<unk> product, but a low carbon footprint product.

There is a revenue potential that could could help.

And drive a return on that Capex or is this all really self motivated.

And good question, Steve we are starting to see consumer preference drive the brand owners.

And lower carbon and more recyclable products and clearly both the brand owners and ourselves are in spades.

We want to make investments and that area, but we want those investments to be value accretive so Andrew.

Say the policies are not are not there right now and what we're trying to work through our the right set of policies that we need to make value creating investments going forward.

I would say the consumer drive and a consumer preference on and this is gonna be the thing that makes it happen.

Other reality as.

I believe that the market.

Premiums are starting to show up and some of the plastics today when it comes to post consumer recycled materials into packaging and we're seeing a strong pool from the brand owners and we're starting to see premiums. If you go back a decade, we had not seen that.

And so you've got brand owners, who are announcing that they're allocating premiums.

For recycled materials to address circularity.

I think that's a sign that their customers want it and when you get it down to a per package basis.

It's very small.

Comes through the value chain and the cost to manufacturers and materials, but if you take it down to a per package basis on the shelf and a supermarket and might add a penny to.

And so the cost of a product that you buy it and it isn't significant at the consumer level.

Significant through the value chain.

And we'll take our next question from Kevin Mccarthy with vertical research partners.

Yes, good morning, Jim I wanted to ask you about our industrial intermediates, where your operating income more or less doubled sequentially..2 parts can you talk about the upside relative to your expectations 3 months ago, how much might've been polyurethane versus other industrial chemicals, and then given that momentum and.

And your sales forecast of flat to up 3% do you have a strong view today as to whether a third quarter could be flat up or down profit wise sequentially.

Okay.

Good and that's a good question and industrial intermediates and and infrastructure on the poly.

Urethane side.

We saw strong demand for both polyol and isocyanate and the polyurethane side and and construction chemicals for chemicals that are made from those raw materials are.

Going into not only single family homes, but also larger.

Structure and light commercial construction.

I think those demands and theyre going to continue to stay strong and the supply demand will continue to be tight you saw.

Strong pricing and both Poe as well as isocyanate theres not a lot of new capacity coming on and that space and then additionally, and ethylene oxide and and ethylene oxide derivatives and the industrial solutions business. Those end markets are continuing to grow and on top of that we had.

And several new capacity adds that are coming for things like pharmaceutical and insipience.

A product called polyethylene glycol and that we just.

And expansion on we've got some other materials coming through there and we have a host.

Low VLC solvents and that portfolio that go into the coatings sector. So around the world.

And as coatings move away from traditional organic solvents into waterborne or lower VLC solvents that benefits our portfolio and that same trend by the way helps us and cleaning chemicals.

Our cleaning products that you might use and your home and we see that both from a brand owner and and industrial side as well. So I think those those will continue.

Expectations on third quarter and those businesses are very similar to the second quarter.

Very good thank you.

Our call today, if you share the I appreciate your interest and value for your reference a copy of our transcript will be posted on our website and then 24 hours. Thank you.

And that does conclude today's conference. We thank you for your participation you may now disconnect.

[music].

Good day and welcome to Dow's, 2 Q1, 'twenty 'twenty 1 earnings call you may signal to ask a question by pressing star 1 at any time. During today's presentation. Also today's call is being reported I would now like to turn the call over to PON College Gupta. Please go ahead Sir.

And joining me on the call today are Jim for Italy, now is German and Chief Executive Officer, and Howard Underminer, 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.

These statements are based on current assumptions and factors that involve risks and uncertainties. Our actual performance and results may differ materially from our forward looking statements.

<unk> forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences and.

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

Dow website on slide 2 you will see our agenda protocol and Jim will begin by reviewing our second quarter highlights and operating segment performance Hollywood share modeling guidance and outlook going forward and then Jim will close with and updates on our earnings drivers. Following that we will take your questions now let me turn the call to Jim.

Thank you, Paul and college, and thanks to everyone for joining us today, starting on slide 3 Dow continue to capture strong demand across our value change during the second quarter team down and focus on execution and cost discipline and balanced capital allocation enabled us to deliver our strongest quarterly earnings performance.

And the company's history, both pre and post spin with substantial growth and net sales and earnings year over year and sequentially. We.

We achieved double digit sales gains and all operating segments and businesses and 66% increase and sales relative to the year ago period was led by local price improvement and 53% combined with a 9% volume increase.

And $3 billion sequentially with improvements in all segments and businesses.

These gains were fueled by strong topline growth and margin expansion. We also benefited from increased equity earnings up more than $370 million year over year led by higher margins and so Dara and the Kuwait joint ventures sequentially equity earnings were up $54 million, primarily from the <unk>.

And joint ventures, and cash flow from operations was $2 billion and free cash flow was $1.7 billion Cigna.

Significantly both year over year and sequentially. This enabled our balanced execution of our capital allocation priorities.

We continued our proactive liability management actions by reducing gross debt by more than $1 billion and the quarter and reducing our annual interest expense by $35 million today Dow has no substantial long term debt maturities due until the end of 2025, we also returned more than 700.

To shareholders and the quarter through our industry, leading dividend and we resumed our share buyback program to cover dilution.

Finally, we continued to advance dow's ESG priorities by re leasing our consolidated ESG report intersections, which provides enhanced transparency on our environmental social and governance priorities. The interactive digital report can be found at the top of our corporate.

Website.

In summary came Dow maintained a relentless focus on meeting increasing customer demand despite lingering supply impacts across many value chains and marking a strong rebound from winter storm <unk>, we continue to execute on our operational and financial playbook delivering another strong quarter.

And a solid first half performance.

Price gains and both businesses and in all regions led to integrated margin improvement and increased equity earnings on a sequential basis. This segment expanded operating EBIT margins by 810 basis points on continued local price gains and olefins and and packaging applications.

The packaging and specialty plastics business reported sales gains year over year, driven by improvement and packaging applications for industrial and consumer packaging and flexible food and beverage packaging and markets volumes declined year over year and sequentially due to lower polyethylene supply from the lingering.

And effects of winter storm brewery, and our own planned maintenance turnarounds compared to the prior quarter the business delivered local price gains and all regions.

Moving to the industrial intermediates and infrastructure segment operating EBIT was nearly $650 million up more than $860 million year over year, primarily due to the pandemic recovery combined with tight supply and strong demand and both businesses sequentially operating EBIT was up $320 million.

And operating EBIT margins expanded by 640 basis points, driven by margin improvement and offset somewhat by continued supply constraints from winter storm alright.

The polyurethane and construction chemicals business increased net sales compared to the year ago period on strong local price and all value chains.

And recovery and durable goods and appliances, and construction end markets and currency <unk>.

Despite the industry supply chain challenges across a number of end markets, including mobility. The business delivered sequential sales growth on increased local price and volumes.

The industrial solutions business delivered a net sales improvement compared to the year ago period, as a result of local price gains and offerings for coatings, and industrial and electronics end markets across all regions and.

Improved demand from materials used in industrial and manufacturing coatings and infrastructure were more than offset by planned maintenance turnarounds and some third party supply and limitations.

Net sales also increased sequentially on local price gains in all regions.

And finally, the performance materials and coating segment reported operating EBIT of $225 million up nearly $200 million from the year ago period operating EBIT margins increased 760 basis points on price gains and strong consumer and industrial demand recovery sequentially operating EBIT was.

More than $160 million due to price momentum and lower planned maintenance costs. The consumer solutions business achieved higher net sales year over year as demand recovery for silicones products led to local price and volume gains and all regions sequentially. The business achieved broad based volume growth.

<unk> due to lower planned maintenance activity and strong demand and silicones applications, including personal care as certain geographies and began to experience an increase and travel and a return to workplace and social activity with notable improvements in China.

The coatings and performance monomers business delivered higher net sales year over year, driven by price gains and all regions increased demand for coatings applications was offset by lingering raw material and logistical constraints from winter storm Murray sequentially, the business achieved local price gains on tight supply and strong demand.

<unk> and increased raw material costs as well as increased volume from strong seasonal demand for industrial and architectural coatings now I'll turn it over to Howard to review our outlook.

Thank you Jim and good morning, everyone moving to our third quarter modeling guidance on slide 5 strong consumer demand trends continue and retail housing and the manufacturing sectors and inventory levels remain low across most of our value chains. We expect these dynamics to continue to support price strength and the third quarter as the industry continues to.

Work to fulfill pent up demand.

And our packaging and specialty plastics segment downstream converter and brand owner inventories remain at all time lows with balances very tight recent small increases and producer inventories are due to a heavy turnaround season for the industry and yet industry days demand and inventory actually declined nearly 8% month over month and tight.

Supply coupled with increased domestic and export demand. This data includes Dow, where we expect and approximately $150 million increase and the third quarter and turnaround spending sequentially from planned maintenance at our crackers, and Canada and in Spain, as well as $100 million lower earnings from nonrecurring licensing activity.

Which occurred in the second quarter.

<unk> data indicates domestic demand for packaging applications reached its strongest level and history in June and we expect to continuation of these positive demand trends as customers are reporting 45 to 60 day backlogs.

Moving to industrial intermediates and infrastructure strong consumer demand for durable goods continues underpinned by order strength throughout the value chain housing and construction markets, particularly in the U S continue to support robust demand from polyurethane applications industrial and oil related end markets are expected to continue to see gradual recovery.

Sequentially, providing additional support for solvents and other industrial solutions. We also expect $30 million of additional planned maintenance turnaround spending and our joint ventures and the quarter.

And in performance materials and coatings, we expect a continuation of the strong demand for electronics mobility and infrastructure silicone solutions, we expect to benefit and social activity increases on easing pandemic related restrictions, including sequential improvement for personal care applications.

These trends are supporting price momentum across the silicone value chain, and we anticipate increased turnaround spending of approximately $30 million and our consumer solutions business and the quarter, including a turnaround and our siloxane pillar plant and Barry.

Demand for do it yourself architectural coatings remains robust and we expect to see an increase and contractor related demand as new home builds increase and consumer and home social engagements begin to resume.

Of cash inflow to Dow in 2021.

Turning to slide 6 around the world increasingly positive trends indicate we remain and the early stages of economic recovery with an extended runway for growth while industrial production is up nearly 20% over the year ago low. It still has not reached pre pandemic levels retail inventory to sales is at its lowest.

And more than 3 decades, and strong demand continues to counter near term potential restocking efforts.

U S housing starts increased again in May and are projected to continue rising supported by limited supply of single family homes due to a decade of under building.

And the proposed U S infrastructure Bill has the potential to further elevate the already strong GDP estimates projected around the world.

<unk> confidence continues to climb on conviction and economic conditions will continue to improve supporting continued purchases of homes automobiles and other durable goods.

Business travel sentiment continued to improve and may with more than half of U S company is planning to resume domestic business travel within the next 3 months.

The personal care market, which has been 1 of the slowest to recover began to see a rebound and the second quarter and the increases in U S cosmetics and beauty product sales on rising consumer demand.

Along with these trends, we anticipate the strong demand, we experienced and the second quarter across our polyethylene and polyurethane acrylic and silicone change to extend through the second half of 2021.

Polyethylene demand growth for example is projected to outpace supply additions and the near term with pricing strength and resilient margins on a sustained and favorable oil to gas ratio with the majority of industry capacity adds coming in the higher end of the cost curve.

Altogether, we expect these strong market dynamics tight supply demand fundamentals and ongoing economic expansion across our key change to continue to drive earnings and cash flow growth with that I'll turn it back to Jim.

Turning to slide 7.

And as consumer driven portfolio is uniquely positioned to benefit from the demand trends that Howard outlined a moment ago, which continued to translate into an attractive $650 billion addressable market with approximately 1.3 to 1.5 times GDP growth across our packaging infrastructure mobility.

And consumer care and markets these demand trends and our fast growing markets are underpinned by and accelerated transition towards more sustainable materials, providing ample opportunities for Dow to continue to innovate with our customers and brand owners to enhance the sustainability of our products and value chains, while advancing our.

Net zero carbon and circular economy targets for example, as the mobility sector continues its transition to more sustainable solutions electric and autonomous vehicles offer upside of approximately 50% more revenue across multiple Dow chemistries versus traditional internal combustion.

And engine vehicles, including high value polyurethane, silicones, and silicone hybrid based adhesives, and engineering and sealants widely used and battery assembly noise and vibration reduction drivetrain comfort and heat management applications, and our new Dow sales silicone technologies for <unk>.

Electric and hybrid vehicle applications help Oems to meet the evolving needs of automotive electrification, while advancing vehicle performance reliability and sustainability and we recently introduced specs like see a new polyurethane solutions sourced from recycled raw materials to help automotive OEM.

<unk> meet demand from our circular products and their sustainability goals.

We also continue to align our growth capex to address this growing market demand for sustainable materials. This quarter, we outlined our roadmap to reduce cotwo emissions by more than 40% by 2030 from our manufacturing operations and for news and the Netherlands.

And financial priority to continue creating long term value for all our stakeholders at our upcoming 2021 Investor day on October 6 which will be hosted both virtually and in person and New York City stay tuned for more details we look forward to engaging with you.

On slide 8 as we shared last quarter, we continue to see demand across our ethylene and polyethylene and polyurethane acrylics and silicone value chain outpacing supply through 2021, and staying balanced and the near term. These.

These market dynamics will be further supported through 2022 and beyond by the GDP fueled market growth trends, we just discussed.

And all of which will result in continued earnings margin and cash flow growth per DAU and the near term.

And while we capture these improved earnings and our core businesses, our current slate of lower capital faster payback and higher returning capacity expansions will generate an additional $1 billion of accretive earnings over the next several years with many projects delivering earnings already this year, such as our ethylene derivatives.

And at the Thai Joint ventures polyethylene for high performance packaging applications at our Alberta operations, and surfactants for leading brand owners laundry and home care and markets and notably and the second quarter, we progressed, our polyethylene glycol incremental expansion completing customer.

Qualification and ahead of schedule and beginning shipments of our industry, leading carbon wax century polyethylene glycol active pharmaceutical ingredients.

And with favorable supply and demand fundamentals. These projects further enable dow to continue to deliver significant value for our owners over this poor seeable future.

Close on slide 9 our steadfast execution of the operational and financial playbook that we outlined at spend combined with our agile response to market conditions over the past year have enabled us to deliver strong performance and enhanced value to our shareholders. We are uniquely positioned to continue building on that strong foundation.

<unk> today, our value proposition starts with our differentiated portfolio and and asset base that is characterized by first our feedstock flexibility and position, which supports our low cost position and enables us to drive a higher asset utilization and maximize cash margins as we quickly balance our feet.

Stock and product mix to supply and demand dynamics and second our leading scale global footprint and differentiated portfolio provides us with access to high growth and markets and all major regions. We have achieved strong performance in this early part of the economic recovery and remain and.

Vantage and through our participation and higher margin functional polymers silicones and formulated systems. We continue to develop innovative solutions to address our customers' needs and capture the opportunities arising from critical market trends.

Our high value adhesives, and and innovative packaging solutions support the rapidly growing e-commerce sector.

Through our mobility science platform, we are targeting and low carbon enabling mobility electric and autonomous vehicle opportunities more broadly across our portfolio. We are enhancing the sustainability of our solutions and the value change. They serve for example, deploying lower carbon energy solutions.

And gas treating carbon capture and concentrated solar power at our operations.

And through value chain and collaboration we are increasing post consumer recycled content and our products and enabling the design of fully recyclable packaging today more than 80% of Dow products for packaging applications are reusable or recyclable and our research and technical teams are working actively.

And on the remainder to achieve that same goal.

We have achieved top quartile cost structure and cash conversion and our restructuring efforts will yield an additional $300 million and earnings all while maintaining a best owner mindset. We also delivered a return on invested capital of greater than 14% on a trailing 12 month basis at the same time.

We have prioritized investments and our downstream higher margin faster payback opportunities and upstream investments that expand our leading ESG profile, while increasing our capital expenditures by $350 million this year.

We reduced net debt by approximately $5 million since the end of 2018.

Dow strong operational and financial performance. This year resulted in a credit rating upgrade by S&P and and upgraded outlook by Fitch and supporting our strong investment grade balance sheet and we continue to day returned significant cash to shareholders through our industry, leading dividend and closing.

Dow is uniquely advantaged to continue delivering value through our best in class consumer led portfolio, our leadership and innovation and sustainability and our strong operating and financial discipline with that I'll turn it back to <unk> to open the Q&A open the queue.

Thank you if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star 1 to ask a question. Our first question comes from P. J <unk> with Citi.

Yeah good morning.

You know Jim the arbitrage is between U S prices for polyethylene and other commodities, what south Asia are growing.

And this was evident in your pricing were to U S pricing was still works that of.

And Asia.

So how much of this is driven by this shipping tightness and is this shipping tightness or logistical challenges impacting your business. Thank you.

Good morning, and P. J. Thanks for the question, obviously days sales and inventory and North America went down and I think what you saw was our.

Ourselves and most producers actually exported and lapse into China.

That was part of it.

Also you've had a big rise and the cash flow part of the cost curve. So.

Even though the arbitrage is or where they are most of the producers and China are running and our cash flow breakeven.

So our outlook is that.

Demand here and around the world continues to be strong.

I don't think Youll see a chance for us to build any inventory through the third quarters. There is still a fair number of planned turnarounds and.

Our view is with these GDP growth rates over 6% for this year.

And currently forecasted at 4 and a half maybe 5% for next year.

And theres going to be quite a demand for polyethylene.

We'll take our next question from David Begleiter with Deutsche Bank.

Thank you and good morning.

Jim consultants are calling July to be the peak for integrated ethylene and polyethylene margins and then and then erosion through the rest of the year.

What's your view on these margin and the cadence of declines and the back half of the year.

Thanks, David and good morning.

Right now the July order book is stronger than we saw through the second quarter.

And I expect it will continue to stay that way through the quarter.

And some views, we probably had our highest raw material prices in the second quarter.

And Frac spreads went up fairly dramatically.

And do expect we'll see some of that soften as we move forward.

I think long term, we expect natural gas prices to be between $2.75, and $3 a million btu, So that's positive and.

With these oil to gas ratios I think we're going to see that.

Continue.

1 of the things that happened with oil obviously as everybody looks at the oil supply coming on but I think they failed to look at demand for oil and as the economy reopens theres going to be another step up and demand. So I think some of that supply is just necessary to get ready for the increase in demand and that's coming.

We'll take our next question from Frank Mitsch with Fermium research.

Good morning folks and congrats.

Jim and Howard you guys have previously spoken that peak EBITDA at Dow would be $12 billion or greater and as I look at the first half of the year. We're essentially at that run rate. So question is are we at peak and if so how sustainable is it or would you like to take this opportunity and and offer a offer and.

And there.

Good morning, Greg and thanks.

We're at a pretty good run rate right now our expectation for third quarter is fairly similar.

We really only have a couple of items that are and negative on third quarter just a.

A couple of more turnarounds and some onetime and catalyst sales that don't repeat.

But given that that looks good and in addition, I talked a little bit about incremental growth projects those projects some of which are already starting up this year.

US the ability to add another $1 billion of EBITDA because those numbers. So I think we're I think we're showing was it works and we've done on the balance sheet with the work that we've done on reliability and the incremental expansions that we're making.

As these other geographies come out of the pandemic like India, Brazil, and Southeast Asia.

And we'd see personal care, plus the industrial and service markets come back.

I think there is a potential for more.

Frank This is Howard and I would just add to that that there is also self help.

So we've got the restructuring from last year, and that's going to continue to be a tailwind for us this year and into next year, that's a $300 million tailwind and total over the 2 year period, and then the investments, we're making and digital we expect will be at least another $300 million. So if you had that Jim's numbers youre talking about more than $1.6 billion of organic <unk>.

And our self help.

<unk> on the macros, but the macros as Jim talked about earlier are very very strong and we don't see that abating in the near term.

We'll take our next question from Vincent Andrews with Morgan Stanley.

Thank you and good morning, everyone just looking at slide 8.

MDI and sidewalks and.

F&B and utilization rates.

And the 3 utilization rate range is that you have and just look at philosophy and that seems very narrow the range of outcomes on SMB and 22 and it gets wider.

As you get out to 'twenty 6 whereas.

It looks like it's the opposite for P and MDI. So so what is it about sidewalks and that creates more of an uncertain.

Medium term outlook from and F&B and capacity utilization perspective.

Yeah. Thank you Vince.

The <unk> business hasn't seen a lot of recent capacity adds obviously, we've been working on reliability and doing some turnaround work and our own assets.

A lot of it is really and market driven and the positive side on the demand for downstream silicones is that you've got a tremendous draw as you move into things like electric vehicles.

We're still seeing strong growth and housing and also and large building projects around the world. So I think that's going to continue.

And my other thought is that our sustainable portfolio from our standpoint, when you look at the sourcing of our silicon metals.

It's going to allow us to be able to meet some of our brand owners sustainability demands and that's going to be positive for Dow.

You've got some older assets out there you've got to keep an eye on that about 4% to 5% of the industry capacity.

As older high cost and has a pretty high at <unk> footprint and so we're keeping an eye on that.

Okay.

We'll take our next question with Jeff Zekauskas with J P. Morgan.

Okay.

Thanks very much.

Also on slide 8 you talk about the Canada Cracker expansion.

And the old days, you used to talk about expanding p/e by 600000 tons per year, which was supposed to happen and the second half of 2022 is that what that is or is that something different and when you did previously talk about a 600000 tonnes.

And is that still going through.

And then secondly on slide 14, you said your turnarounds this year for $500 million higher than last year.

Is that a normal number and what's your normal turnaround costs.

And the year.

Thanks, Jeff good questions and Canada that expansion is an addition of another furnace.

And some work on the Debottlenecking of the backend of the Cracker up there and we have the available capacity and candidate to convert that to polyethylene.

So that added probably about half of that 600, K T that youre talking about in terms of available pounds. There was a project that we had slated to build and the U S. Gulf Coast 600 K T.

And when Covid hit we pushed out and we're dusting that off right now and we're going to make a decision on that sometime this year.

On turnarounds.

And again with cash flow being.

And being tight last year, we pushed some end of this year, maybe Howard you can comment on what is a more normal number going forward.

Yes.

And Jeff last year as Jim says, we pushed a lot of turnaround. So so 2020 versus 2019 was down about $200 million. We expect this year as you said to be up about $500 million. It really does depend I mean, we've gone out and we've got cracker assets around the world as you know and I would say and the typical year.

Do between 1 and 3 and so if you wanted to say on average it's 2 a year.

That would tell you that the average turnarounds probably in the range of $1 billion, plus or minus and this year, it's going to be a little bit above that above trend line because of the.

And I push out from last year.

Our next question comes from Duffy Fischer with Barclays.

Yes, good morning.

Just wanted to triangulate if I could.

Pricing for polyethylene is up about 6% as we exited the quarter versus the average for Q2.

But when you gave your guidance for the sales growth from Q2 to Q3 for that segment from its flu.

To up 2%. So if you just flat line price and you kept the volume the same you should be up roughly 6% can you just triangulate back that 4% is missing is that a lack of volume or do you see the price rolling over and the back part of the quarter that would get us to equal there.

Yes, Thanks Duffy.

Inventories are real tight right now and as I mentioned, we haven't been able to really build anything so with turnarounds and front of us and this quarter, we've been a bit conservative on the volume that's in that third quarter outlook, obviously, we're going to try to be able to beat that and then.

I would say on pricing, we're still seeing some positive upward price movement on certain grades of product.

High density for example, right now is pretty tight and so I think youre going to continue to see some per.

<unk> movement upward there, but overall.

As we get through the turnarounds and the third quarter.

I think youre going to see that we're going to have plenty of available volume to move and that will start to add towards the end of the quarter and into the fourth quarter.

We'll take our next question from Hassan Ahmed with Alembic Global.

Good morning, Jim and Howard.

As I thought I heard your commentary it seems obviously the fundamentals are looking very strong near to medium term at least.

Obviously, that's reflected in our strong cash flow.

And then again you made a comment about no sort of significant debt payments due until 2025. So my question is how are you guys thinking about share buybacks I mean.

You guys did.

Around $200 million of buybacks and Q do enough to offset dilution, but with the way the balance sheet is right now the way the fundamentals seem to be.

Are you guys thinking about it more.

Significant buyback program.

Good morning, Hasan, let me take a shot at that and I'll ask Howard to chime in as well.

As of the end of the second quarter, we paid out about 88% of net income and dividends and share buybacks since its spin.

And thats, well above our 65% through the cycle guideline.

And we just brought back buybacks and the quarter to start to cover dilution.

And what we bought was about 200 million.

Whereas of shares during the quarter. So that's our priority I would also say that remember we have organic growth in front of us and so we're going to need some money to go into incremental growth Capex. This year will be at $1.6 billion.

We need a couple more years to get up to.

Depreciation levels, which is about $2.2 billion and we have the projects and they are good projects lined up to do that or any other comments, yes. The only other thing I would say Hassan and you saw we re initiated in the second quarter as you say with the $200 million I would say that for modeling purposes. That's a good that's a good quarterly run rate for the back half of.

The year and then as we get from the end of the year and Investor Day, we'll talk more about 2022.

We'll take our next question from John Mcnulty with BMO capital markets.

Yes. Thanks for taking my question just a quick 1 with regard to the impact in PSP and <unk>.

Around the Yuri volumes can you can you give us a little clarity on how much that Nick <unk> and <unk> because I assume that's all in the rearview mirror and we should be kind of reverse we look to <unk> and <unk>.

Is that right.

John I think your assumption is right.

They were impacted pretty hard into Q, and we should see that come back and assets are running.

Very hard right now the only caveat to that I would say is that.

There are still a couple of lines, where some raw materials supply limitation and small small raw materials that are important and making those products, sometimes caused us a little bit of a backlog.

And I think.

Most of that capacity was out.

During the month of April and so as you think about it and go forward and Q3.

I would say youll have 3 solid months production, where last quarter, we had 2.

<unk> is we're going to be running hard through the end of the year and right and the 2022.

Our next question comes from John Roberts with UBS.

Little bit related there, Jim and Howard, but Dow and the industry had a much harder time recovering from winter storm Yuri if we had a similar situation again with the impact likely be the same or has there been some learnings or changes that would mitigate the effect if they if we had a repeat of this.

Yeah, and that's a good question John we had.

We do like we do after a hurricane.

After every hurricane or weather event will.

And yet the team together and we take a look at what worked well and what didn't work so well.

<unk> was a little bit different and it was so widespread and it was not just us, but it was everything upstream and downstream of us gas production and electricity water.

Biggest damage, obviously was freeze ups and so you can't winterized everything to prepare for that but you can winter and some things and.

And if you have some advance notice you can actually take some things down and protect and so the team has gone through that and we've got and updated game plan and what we would do and the face of and situations like that again I think the whole industry is going through and I know ERCOT is going through that on the power side.

Caught everybody and has taken so long to work through.

Our next question comes from Michael Sison with Wells Fargo.

Hey, guys nice quarter.

I think day prices are at all time highs and and obviously demand is strong and supply suite below which it just curious though.

And you think there's a fundamental change and demand for polyethylene and on a structural basis and maybe post the pandemic as it is.

Is it possible that we're really going to be above that 1.3 to 1.5 GDP going forward and then just just curious what you think would need to happen for prices to fall.

Yes, Michael Thanks for the question.

We have seen a change and buying behavior from customers and so.

So there are some areas that that really drive a lot of packaging like e-commerce activity, which I don't think it is going to go backwards.

And I also think that the fact that plastic packaging is so lightweight and so strong and it has the lowest carbon footprint package out there.

Youre going to continue to see a drive towards that.

For most companies the shipping cost and and the Cotwo footprint and the shipping cost will drive that and so.

Just use of paper versus plastic scenario and a grocery store.

<unk> truckload of plastics shopping bags would take 4 to 5 truckloads of paper bags to replace it.

Youre going to see is carbon comes into the equation that it advantages plastics greatly.

I don't think there is something thats going to see it long term move above 1.5.

For many many decades, it's been and that 1.5 type of GDP growth rate I think that will stay there are some functional polymers that are made out of ethylene and polyethylene derivatives that are continuing to grow materials for construction.

Construction that are positive you're going to see growth and some other applications like products that go into alternative energy, both solar panels for encapsulation wind blades and other types of applications.

So I think we can sustain that over a long period of time, which is positive.

We'll take our next question from Bob Court with Goldman Sachs.

Thanks, very much Jim I wanted to ask you and maybe it dovetails on Mike <unk> question, but in terms of the PE demand growth and that multiplier.

The Dow and the industry's also embracing the circular economy, just curious what effect do you think the recycling initiatives and circular initiatives out there what that might do to Virgin demand growth rates relative to that sort of 1.5 times GDP multiplier.

Yeah. Good question, Bob we're seeing real demand pull from consumers and brand owners.

And 1 more post consumer recycled material and they're or they want more materials Thats made.

From either a vital source.

2 ethylene or something that is made from advanced recycling to get back to feedstock and back to a product.

I think the drivers.

Net are going to help on the Virgin side of things are obviously redesign of packaging types and <unk>.

<unk> packaging and many packages are complicated and hard to recycle.

And 1 of the positives of our portfolio right now is greater than 80% of our portfolio is fully recyclable or reusable today and the research team and the Tech service team are working hard to get the rest of that to 100%.

All the brand owners are working on Redesigns right now of different packages to move away from complex structures into simpler structures, we use that bear naked Granola example.

Kellogg's.

And that package has been redesigned this is going on across the value chain, we're seeing the investments and mechanical recycling and advanced recycling picked up we're seeing and the number of states.

And our improving advanced recycling projects pick up.

And I think our next big impact is going to be on infrastructure at the state and local level to allow more collection of curbside recycling of more products and that'll be the next drive north we still have a long way to go even to catch up with Europe and.

And the United States, we have a long way to go to get to that 35% of recycling.

We set a target by 2030 day collector reuse or recycle 1 million metric tons of plastics, our own actions and partnerships and I can tell you I am pushing the team to always pull that number forward and get that done faster.

And I think we're seeing real demand and taking recycled packaging products Inc.

To some things that are more durable and longer lives and building materials using recycled plastics and aggregate for roadways.

Architectural decking.

And all kinds of things that are they're upgrading the use and plastics.

Think over time, it's going to be a real positive.

The next question comes from Laurence Alexander with Jefferies.

Good morning.

Price of carbon do you currently use for evaluating growth projects and is it high enough that you are actually seeing it skew.

So projects that you are considering from what you would've considered and otherwise.

Yes, that's a good question.

I would say today the price is around $50 to 55 euros a tonne.

And that's what we see today and the EU on the market.

And translate that back into dollars as well.

I would say and that is not a high and the price of carbon to drive.

The change that needs to be made because.

The lower carbon technologies are much more expensive than that.

But it is it is enough to put pressure on us to make sure that all of our projects have lower carbon approaches to them.

And 1 of the things, we'll talk about it and Investor day is the work we did to kind of outline the next 2030 years.

And how we would get there.

I think carbon capture and.

As we talk about as we get beyond this infrastructure build and that's in front of Congress right now and we get to the next step.

You got to look and advanced technologies, and carbon capture and blue hydrogen or 2 that we have to keep an eye on those are the lowest cost next step for us to get our industry to low cotwo.

But there are a lot more than 55 euros time to deliver that and.

So without the right tax incentive or support from government and terms of investment and those technologies you have.

Need a market price on carbon that is much higher than that and we're we're right on top of that we're very attuned with that and Thats..1 of the things that we're piloting and news and that's a 40% reduction and I talked about by 2030 as we're looking at blue hydrogen and carbon capture to try to make and improvement at that site.

We will take our next question from Arun Viswanathan with RBC capital markets.

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

You had mentioned.

Some comments on supply additions being at the high end of the cost curve.

And could you just maybe remind us what your assumptions are on how much polyethylene.

Capacity is being added and the rest of 'twenty 1.

And where that is coming whether it be and again.

China or other regions and also for 'twenty 2 what do you expect on that side and have you changed have you seen any changes as.

As far as projects being.

Accelerated that were potentially pushed out during COVID-19 are returning back to the table and then longer term do you expect.

And new projects to be announced.

It sounds like the market.

It sounds like Youre, indicating the markets can be very tight for a little while and you don't see any let up and demand so.

It looks like we.

Would potentially need more capacity and.

North America looks like AR.

And interesting place for that for that addition, so is that kind of within your thinking as well. Thanks.

Moving.

Thanks, Arun the good question and I'll try to remember all of that and so that I can I can get it all out of.

About 15% of the global polyethylene ads through 2025.

Our higher cost naphtha or coal to olefins and methanol to olefins.

35% or naphtha about 15% on a coal to olefins and methanol to olefins.

60% of the capacity adds through $2025 and northeast Asia.

And when you think about the Chinese projects that are in construction and startup phase.

About 50% of those will come to market around the announced dates.

And so that's and 2021% to 2023, that's about 12 million metric tons of 24 total.

Capacity increases are going to obviously reduce some imports into China, and so that'll be domestic and we don't see China has been and ex border at those levels.

I would also say that <unk> got some existing crackers that are.

Considered unreliable.

Due to some trade risk, but it's only in the neighborhood of 2 to 3 million metric tonnes.

Long term.

Now there are supply demand and their supply additions that are about 31 million metric tons on the books.

And our view on delays or cancellations are in the 6% to 15 million metric tons on delays or cancellation.

Demand growth is going to be 25 million metric tons, and so we're going to be balanced to short by about 9 million metric tons during that timeframe and then and the near term would be and GDP growth rates things are going to be tight.

So we're looking at and we're looking at growth I mentioned to Jeff's question earlier.

600, Kt expansion on polyethylene that's in the cards incremental expansions on ethylene those around the cards, we're doing work on our own <unk> technology, and our <unk> technology and the golf to try and have a low carbon moves forward.

I think 1 of the things that has to be resolved before you see a next wave of announcements is 1 of the policy is going to be and the United States around carbon and carbon border adjustment mechanisms carbon tax, perhaps a voluntary emissions trading scheme.

And we have to know what those are we have to know how China is going to play on the global.

Footprint and we have to see how Europe is moving forward.

All of those have to be resolved before we can see what the right places to make that next bet, but we're working on projects and we're looking for the right opportunity.

Our next question comes from Alex <unk> from <unk> with Keybanc capital markets.

Thank you Jim just to continue on the subject you mentioned that the price of carbon and Europe is currently.

Hi, and up to really provide incentives to implement these technologies.

Yes.

And this price rises and Europe implement.

The tax too to help domestic industry sort of absorb these higher carbon prices do you think that ultimately net to something neutral for Dow chemical because having capacity in Europe you will.

Directly and indirectly benefit from these import taxes.

Yeah.

Yes.

And we think it.

And so Alexia I think it can be done.

And I've said before and I'll continue to say it.

We need to have a real constructive and open dialogue about how much it cost to do this.

I think.

Idealistically everybody's and agreement, but we want to make improvements and we want to reduce carbon emissions and we want to get to net zero.

But nobody's, yet and our government level or any level, having the educated discussion that we need to have about the cost of doing that.

What will happen in Europe.

As Europe has a the way the emissions trading scheme works in Europe, and they have price for carbon but they also have allowances for energy for emissions emitters.

And if you are.

Under your allowances you can trade those carbon credits.

And what they will do over time as they will ratchet back the allowances and they'll start to put everybody over their allowances and that'll start to drive the price is up and that will drive the incentives to make the conversion.

So Europe is less concern right now.

With what the cost is to everybody and more concerned with trying to drive that number up and drive that conversion.

So I think as we work through that over the next 2 or 3 years.

We will start to make some progress to that and I would say all heavy industry and power and utilities sector are taking a look at this but with eyes wide open that it is.

Not tree.

And the other thing to remember on hydrogen is as you move to a hydrogen economy.

And most effective way to make most of that hydrogen is true steam methane reforming which uses natural gas, which means youre going to need a lot more natural gas production to make that hydrogen and.

And that's 1 of the other discussions that is difficult to get on the table right now.

Our next question comes from Steve Byrne with Bank of America.

Yes. Thank you.

So Jim you are really leading this initiative on net zero.

You are clearly 1 of the few that have and net zero.

And greenhouse gas emission targets for 2015.

And I'm curious to hear.

Your view as to what's driving that.

And then clearly the Theres not U S government policy driving that.

Youre, describing a carbon tax and Europe and <unk>.

Efficient to incentivize that.

Is there any any opportunity that you see.

See the downstream revenue could be enhanced from it.

I'm not sure how but.

There's clearly ways for you to just a premium price for a.

Recycled.

<unk> renewable product, but a low carbon footprint product is there a revenue potential that could could help.

Drive a return on that Capex or is this all really self motivated.

Good question, Steve we are starting to see consumer preference drive the brand owners towards lower carbon and more recyclable products and clearly both the brand owners and ourselves are and the speeds that we want to make investments and that area, but we want those investments.

To be value accretive.

And you say the policies are not are not there right now and what we're trying to work through our the right set of policies that we need to make value creating investments going forward.

I would say the consumer drive and a consumer preference on this is going to be the thing that makes it happen.

Other reality is.

I believe that the market.

Premiums are starting to show up and some of the plastics today when it comes to post consumer recycled materials into packaging and we're seeing a strong pull from the brand owners and we're starting to see premiums. If you go back a decade, we had not seen that.

And so you've got brand owners, who are announcing that they're allocating premiums.

For recycled materials to address circularity.

I think thats, a sign that their customers want it and when you get it down to a per package basis.

It's very small.

Comes through the value chain and the cost to manufacture the materials, but if you take it down to a per package basis on the shelf and a supermarket and mine and a penny to.

And so the cost of a product that you buy it and it isn't significant at the consumer level.

Significant through the value chain.

And we'll take our next question from Kevin Mccarthy with vertical research partners.

Yes, good morning, Jim I wanted to ask you about industrial intermediates, where your operating income more or less doubled sequentially..2 parts can you talk about the upside relative to your expectations 3 months ago, how much might have been polyurethane versus other industrial chemicals, and then given that momentum and.

Your sales forecast of flat to up 3% do you have a strong view today as to weather third quarter could be flat up or down profit wise sequentially.

Okay.

That's a good question and the industrial intermediates and and infrastructure on the poly.

Urethane side.

We saw strong demand from both polyol and isocyanate and the polyurethane side and and construction chemicals for chemicals that are made from those raw materials.

Going into not only single family homes, but also larger.

Structure and light commercial construction.

I think those demands and theyre going to continue to stay strong and the supply and demand will continue to be tight you saw.

Strong pricing and both Poe as well as I had some cyanides theres not a lot of new capacity coming on and that space and then additionally, and ethylene oxide and ethylene oxide derivatives and the industrial solutions business. Those end markets are continuing to grow and on top of that we have.

And several new capacity adds that are coming for things like pharmaceutical insipience.

A product called polyethylene glycol, but we just.

Made and expansion on we've got some other materials coming through there and we have a host.

Low VLC solvents and that portfolio that go into the coatings and sector so around the world.

And as coatings move away from traditional organic solvents into waterborne or lower VLC solvents that benefits our portfolio and that same trend by the way helps us and cleaning chemicals.

Our cleaning products that you might use and your home and we see that both from a brand owner and and industrial side as well. So I think those those will continue.

Expectation on third quarter and those businesses are very similar to second quarter.

Very good thank you.

Fluids, our call today, if you share the appreciated.

Appreciate your interest and value for your reference a copy of our transcript will be posted on <unk> website within 24 hours. Thank you.

And that does conclude today's conference. We thank you for your participation you may now disconnect.

Q2 2021 Dow Inc Earnings Call

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