Q3 2021 Dow Inc Earnings Call

Please standby we're about to begin.

Good day, everyone welcome to Dallas third quarter 2021 earnings call you may signal to ask a question anytime by pressing star one during today's presentation also today's call is being recorded.

At this time I would like to turn the call over to Mr. Prakash Gupta. Please go ahead Sir.

Good morning, Thank you for.

Our third quarter earnings call. This call is available via webcast and we have prepared slides to supplement our comments today. They are posted on the Investor Relations section of Dow's website and through the link to our webcast I am Pankaj Gupta dollar Investor Relations Vice President and joining me on the call today are Jim federally Dow's Chairman.

Joining me Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer.

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.

Chairman and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward looking statements Dow's forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.

Unless otherwise specified all financials.

<unk>, where applicable exclude significant items, we will also refer to non-GAAP measures.

Reconciliation of the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release in the slides that supplement our comments today and on the Dow website on.

On slide.

Two you will see our agenda for the call Jim will begin by reviewing our third quarter highlights and operating segment performance Howard will share our modeling guidance and outlook and then Jim will recap our strategy for disciplined value growth that we outlined at our Investor day earlier this month and why Dow continues to be a compelling investment.

Okay.

Following that we will take your questions now, let me turn the call to Jim.

Thank you Pam cards, and thanks, everyone for joining us today.

On slide three in the third quarter, Dow achieved top and bottom line growth both year over year and sequentially.

I'm incredibly proud.

<unk> team for delivering these results and doing so safely despite industry supply disruptions from hurricanes on the U S. Gulf Coast are.

Our proactive storm preparations enabled us to maintain the safety of our team and community and recover quickly.

We delivered a 53% sales increase year over.

The depth with double digit gains in every segment business and region. We also recorded a 7% increase in sales over the prior quarter.

We captured strong price momentum driven by tight supply demand balances across our key value chains, and we achieved volume growth of 2% both year over year.

Per year and sequentially.

Supported by continued strong end market demand, despite supply and logistics constraints.

We increased operating EBIT by more than $2 $1 billion year over year with improvements in all segments and businesses and $58 million higher sequentially.

Year. He contributors included year over year margin expansion of 1100, 70 basis points, driven by price momentum and demand growth.

And increased equity earnings up $189 million for margin expansion at our <unk> and Kuwait joint ventures.

Our continued focus on.

Cash generation and our balanced disciplined capital allocation enabled us to deliver cash flow from operations of $2 7 billion up $958 million year over year, driven by margin expansion from price momentum in key value chains.

We returned a total of $918 million.

Shareholders through our industry, leading dividend of $518 million plus $400 million in share repurchases and we also reduced gross debt by more than $1 1 billion in the quarter, our proactive liability management actions to tender existing notes have resulted in no long term debt maturities.

Tissue until 2026, and we have reduced annual interest expense by more than $60 million.

Overall Dow continues to deliver on its priorities and we see further strength ahead as we benefit from a favorable macro backdrop and execute our disciplined strategy to decarbonize our.

He is doing and grow earnings driving significant value for all stakeholders.

Moving to our segment performance on slide four.

In the packaging and specialty plastics segment operating EBIT was $2 billion.

Compared to $647 million in the year ago period.

Sequentially op.

Footprint EBIT was down $60 million.

Price gains in both businesses and in all regions led to margin improvement in the core business and increased equity earnings.

On a sequential basis operating EBIT margins declined by 300 basis points on higher feedstock and energy costs.

Operating the packaging <unk> specialty plastics business reported a net sales increase year over year led by local price gains in industrial and consumer packaging and flexible food and beverage packaging applications.

Volumes declined year over year due to lower polyethylene supply as a result of planned maintenance.

Maintenance turnarounds and weather related outages in the quarter.

Impaired to the prior quarter, the business delivered price and volume gains on strong demand in industrial and consumer packaging applications, which were partly offset by a hurricane related outages.

Moving to the industrial intermediates and.

Segment operating EBIT was $713 million up $609 million year over year, primarily due to continued tight supply and demand in both businesses.

Sequentially operating EBIT was up $65 million in operating EBIT margins expanded by 50 basis points.

Infrastructure volume and price gains in both businesses.

The polyurethane and construction and chemicals business increased net sales compared to the year ago period with price gains in all regions on tight supply demand balances.

Volume declines year over year, primarily reflected the planned transition of a low margin.

<unk> co producer contracts as well as weather related outages and third party supply constraints.

Sequentially the business delivered sales growth due to increased local price and volume from additional supply availability to meet resilient demand.

The industrial solutions business delivered a net.

<unk> <unk> improvement compared to the year ago period with local price gains in all regions.

Volume increased year over year on strong demand for materials, and industrial manufacturing and energy applications.

Net sales also increased sequentially driven by volume growth, primarily in coatings and industrial applications.

Locations from increased supply and local price gains in all regions.

And finally, the performance materials and coatings segment reported operating EBIT of $284 million up $209 million versus the same quarter last year as margins increased 750 basis points due to.

That same price momentum and robust demand recovery for silicones, and industrial coatings offerings sequentially operating EBIT was up $59 million on price gains leading to margin expansion of 210 basis points the consumer.

Solutions business achieved higher net sales year over year.

<unk> with price gains in all regions volume increased over the prior year on stronger consumer demand for personal care mobility and electronics offerings sequentially sales were down as price increases in all regions were more than offset by volume declines as a result of planned maintenance.

And third party supply and logistics constraints.

Coatings and performance monitors business delivered increased net sales year over year as higher raw material costs and tight supply demand balances led to price gains in all regions Volte.

Volumes were down year over year as demand recovery for.

Just real coatings was more than offset by weather related outages and third party supply and logistics constraints.

Sequentially the business delivered local price gains in all regions supported by increased volume due to continued strong demand for acrylic monomers and architectural coatings and increased <unk>.

Availability.

Now, let me turn it over to Howard to review the modeling guidance.

Thank you Jim and good morning, everyone turning to slide five in the fourth quarter, we see a continuation of robust demand growth across our packaging infrastructure consumer and mobility end markets.

<unk> our inventory levels.

Remained low and as a result, we anticipate higher seasonal demand continuing into the holiday season. This year.

In packaging and specialty plastics, we continue to see resilient demand for packaging applications and for our differentiated functional polymers.

Global polyethylene supply remains constrained as the industry completes higher turn.

Around activity and supply chain to recover from weather events in the U S Gulf Coast.

We exited the third quarter experiencing higher raw material and energy costs, which we anticipate will likely persist through the fourth quarter. We expect these costs to be approximately $350 million headwind sequentially.

<unk> will continue.

And to utilize our broad geographic footprint and best in class feedstock flexibility to help mitigate these impacts.

We also anticipate a $175 million tailwind from turnarounds in the quarter as we completed our planned maintenance at our cracker in Canada.

In industrial intermediates <unk> infrastructure continued consumer demand for furniture.

Appliances pharma and homecare are expected to keep supply tight in our key value chains due.

Due to the weather related outages in the third quarter. Some of our planned turnaround activity was moved to the fourth quarter. So Dara will also start a turnaround in its isocyanate facility in the fourth quarter as well altogether, we anticipate 100 million.

Setting and this segment from turnaround impacts.

Short term increased energy cost in the U S Gulf Coast, and Europe are expected to be an additional $100 million headwind in the quarter.

We continue to see sequential recovery in industrial activity, particularly for energy applications. We anticipate this recovery will continue at least through the fourth quarter as industrial.

Industrial production continues to ramp up from very low inventory levels to meet demand and.

In performance materials, and coatings demand for electronics mobility building and construction continues to outpace supply.

Demand for architectural coatings is also expected to remain elevated due to persistently low inventory levels across the value chain.

Global production for Silicones has been impacted by the recent don't control policy enforcement actions in China with silicon metal prices almost three times their previous highs.

We intend to pull forward a scheduled turnaround at our siloxane facility in <unk>, China to coincide with government actions to curtail power usage.

Current estimate for the quarter includes a $125 million from increased raw material costs and turnaround impacts.

We will continue to work on mitigating the impact of rising raw material costs through our integrated position in both businesses.

Despite higher raw material and energy costs in the fourth quarter that will continue to leverage its.

Our global footprint structural cost and feedstock advantages as well as our broad suite of differentiated products to meet growing demand.

On slide six as we look ahead, we expect robust economic growth to continue.

It was the delta variance slowing the reopening of economies around the world there remains significant pent up demand.

Advantaged globally, particularly across our industrial and consumer end markets. Many industries continue to see elevated order backlogs, coupled with low inventory levels as supply chain struggled to keep up with robust demand. The supply chain disruptions are expected to persist, which will certainly prolong the ability to restock inventories across.

<unk> most value chains.

As a result, we expect tighter than forecasted market conditions to continue <unk> strengthened by China's recent dual control policy that has impacted both coal to olefins and methanol to olefins based capacity, which represent more than 30% of China's total polyethylene production.

Demand a 'twenty two GDP growth forecasts are well above historical averages in most areas of the world as the industry's ramp up to match the robust consumer demand with further upside as global chip shortages continue to extend the recovery in manufacturing.

Collectively G seven countries have not yet fully recovered to pre pandemic.

2000, and this points to additional upside as economies return to more normalized consumption levels with degree of vaccination, increasing particularly in Asia, where levels remain low relative to the rest of the world.

Moving to slide seven at our Investor Day earlier this month, we outlined how our differentiated portfolio and our focus on.

Judy inability driven innovation will enable more than $3 billion and underlying EBITDA improvement across the cycle are.

Our restructuring program and digital investments will yield $600 million in increased EBITDA. Both are in progress on our restructuring program is on track to achieve its $300 million run rate by year end.

We also.

We have a suite of higher return lower risk and faster payback capital and operating investments that will enable an additional $2 billion in EBITDA in the near term.

And our investments to Decarbonize and grow at our Fort Saskatchewan site in Alberta, Canada are also expected to deliver approximately $1 billion in increased EBITDA and.

<unk> already shared we're executing against a favorable macro backdrop that we expect will continue to support constructive market fundamentals for our key value chains.

Turning to slide eight you'll see the detailed list of these low risk growth investments our capital investments are expected to generate $1 billion in EBITDA or incremental capacity expansion.

As we have debottlenecking and enhanced feedstock flexibility across our operating segments. We're already making good progress for example in packaging <unk> specialty plastics, our Fort Saskatchewan expansion to add ethylene capacity of 65000 metric tons per year to support growing polyethylene demand is now complete and.

We will ramp by the end of the fourth quarter.

Our <unk> pilot plant in Louisiana will startup in 2022, featuring 20% to 40% lower capex and 5% to 7% lower opex, while reducing cotwo emissions by up to 20% compared to other PTH technologies.

In industrial intermediates and infrastructure.

<unk>, our Debottlenecking project at 60000 metric tons per year of analytic will be fully online by year end and earlier. This year, we signed an Mou for a new south China hub to advanced local supply and formulating capabilities to serve the fast growing Asia Pacific market.

In performance materials and coatings, we recently completed a capacity.

Structurally expansion at one of our silicone polymer plants.

By year end, we will complete our new silicone seamless compounding unit to enable sustainable solutions for high performance building and infrastructure applications.

And we are progressing our 50 K T methyl acrylate investment on the U S Gulf Coast to support global end markets such as inks.

Pat residents in packaging materials, which is scheduled to come online in the first half of next year.

In addition, our operating investments are also expected to generate another $1 billion in EBITDA as we improve our production capabilities and shift our product mix to higher growth and higher value markets. For example, in industrial intermediates and infrastructure.

We're increasing capabilities and shifting our mix towards higher margin polyurethane systems for mobility and consumer applications or.

Our industrial solutions business, and the increasing capabilities to supply differentiated materials into the textile market are equal fast collaboration with Ralph Lauren lowers energy usage by 40%.

<unk> and water usage by 50% and the fabric dyeing process.

And by 2025, the branding to incorporate this technology in more than 80% of its solid cotton products.

In performance materials, and coatings, we're expanding our ability to formulary differentiated silicones for a number of attractive markets, including silicone adhesive.

<unk>, a foldable displays and consumer electronics thermal conductive silicone solutions for electric vehicles, and Silicon solutions for <unk>, where the market is expected to more than double over the next 10 years.

And we've recently partnered with customers on high value innovations like paper barrier coating applications that you.

Since our award winning robot Polyolefin dispersion technology, and Calloway's Super soft golf balls, which feature a new hybrid cover made with dow's paranoid impact modifier.

In packaging and specialty plastics, we are enhancing our extensive conversion and testing capabilities to commercialize residents through packaging design speed.

Use our innovation process and expanding the addressable market for higher margin and more sustainable products. For example, we're already benefiting from the nine layer blown film Extrusion line project completed this year.

We're also making investments to improve asset reliability, which will increase output and expand margins and we're using <unk>.

Speed analogy for customer trials in process automation to accelerate catalyst development for new resins and processes like <unk>, where we can typically be 100 times more efficient than conventional experimentation.

Collectively our slate of near term investments will generate an increase of approximately 2 billion.

<unk> is an underlying EBITDA and we intend to deliver this growth with a disciplined and balanced approach maintaining our top quartile performance and cash flow.

Cost structure debt reduction and shareholder remuneration with that I'll turn it back to Jim.

Thank you Howard turning to slide nine.

The strategy, we outlined at our Investor day builds on our long history of industry leadership.

Our plan enables us to capture demand from sustainability drivers achieved zero scope, one and two carbon emissions.

And deliver meaningful underlying earnings and cash flow growth for years to come.

Our path.

Carbonize, our footprint and grow earnings is a phased site by site approach that both retrofits and replaces end of life assets with low carbon emission facilities.

While also expanding our capacity.

This plan will deliver a 30% reduction in our cotwo emissions between.

In 2005, and 2030 through a disciplined approach that manages timing based on affordability macro and regulatory drivers around the world.

Our Texas nine cracker proves that we can do this and do it well Texas.

Texas nine is 60% lower carbon intensity than any app.

Asset in our fleet and Thats without any specific design for carbon capture or hydrogen.

The project was delivered with 20% better capital efficiency and 12 months faster than any other crackers built in that wave.

Overall, the project has a 65% lower conversion costs.

Is running consistently at more than 110% of nameplate capacity.

It has delivered greater than 15% return on invested capital since startup.

We will leverage key learnings from Texas nine as we plan to build the world's first ever net zero carbon emissions ethylene cracker and derivative.

Derivatives complex and Fort Saskatchewan, Alberta, delivering approximately $1 billion in EBITDA as Howard outlined earlier.

This project will more than triple our ethylene and downstream derivative capacity at the site.

While decarbonising emissions for 20% of our global ethylene capacity.

We selected this site due to the availability of carbon capture infrastructure advantaged feedstocks and supportive government policies and incentives.

On slide 10, as we capture these attractive growth opportunities.

We'll maintain our balanced and disciplined financial approach.

Ben.

We are committed to keeping capex at or below DNA, well below pre spend levels, while targeting return on invested capital above 13% across the economic cycle.

We will continue to align our capital spend to the macroeconomic environment our affordable.

Portability and return targets.

Our investments aligned to three categories first we will maintain our foundation and maximize the return of our existing assets, while ensuring safe and reliable operations.

We will execute our pipeline of faster.

Mr Payback lower risk incremental growth projects for downstream and sustainability driven applications growing faster than GDP.

And we will invest approximately $1 billion per year to decarbonize, our footprint and grow earnings. These.

These investments enable us to capture increasing demand.

And for low carbon footprint products, while de risking the enterprise with lower emissions assets.

In closing on slide 11.

<unk> is well positioned to deliver significant long term value for shareholders.

We have actions in place to both Decarbonize, our footprint and grow the enterprise.

As we achieve an additional $3 billion and underlying EBITDA maintain industry, leading cash flow generation and drive towards zero scope, one and two carbon emissions are.

Our balanced capital allocation approach targets more than 13% return on invested capital.

Keeping capex within DNA and returned 65% of net income to shareholders across the economic cycle.

All of this is underpinned by our industry, leading portfolio cost position and strong track record of innovation that enables us to deliver differentiated products and.

And solutions for our customers and a more sustainable world with that I'll turn it back to <unk> to open the Q&A.

Thank you Jim let's move on to your questions I would like to remind you that our forward looking statements apply to both of our prepared remarks and the following Q&A operator, please provide the Q&A.

Sections.

Thank you, Sir if you'd like to ask a question at this time. Please signal by pressing star one on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment.

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

Good morning, Jim.

Jim as I take a look at your guidance.

Sequentially, you seem to be guiding to a $500 million downtick in EBITDA. So $3 6 billion comes down to three one but just reading through the guidance you don't breakout the impact of Ida.

So is it fair to assume that you guys are guiding to sort of north of $3 1 billion and EBITDA for Q4.

Thanks Hassan that's a great question the impact the total impact of either was about $100 million split third quarter fourth.

Fourth quarter.

So that's how you should look at that most of the rest of the guide was just impact on feedstock cost or raw material costs that we expect to see going into the fourth quarter.

Having said that.

I think demand is going to continue to be strong.

And I expected our operating.

Rates will be stronger than they were in the third quarter because of the impact of either.

And I don't expect that we're going to have a chance to build much inventory, but our intent is to run hard through the end of the year, because our customers need the demand.

And we need to get out in front of this a little bit.

And next we'll go to Vincent Andrews with Morgan Stanley.

Thanks, Good morning, everyone, maybe just a little more color within the packaging and specialty plastics sales guidance in particular, what youre expecting for volume sequentially.

And then is there any sort of impact on the topline from some feedstocks are.

Carbons you can.

Obviously tell I'm trying to back out your your polyethylene price assumptions.

Good morning, Vince.

You know I expect our volumes will be better we had St. Charles obviously out in the month of September.

And it came back out here earlier in October.

So I expect the fourth quarter will have a strong run in and remember we had the turnaround in the Ford that was happening in the third quarter as well and we're out of that so the port will be back we will see some additional ethylene out of the fourth because of the back half of that expansion started up.

And I think.

You'll see higher volumes for the year, you know, we're looking at volume increases or plastics like.

Eight 9% for the industry.

I think for fourth quarter, we managed 2% in the quarter.

And third quarter, I think for fourth quarter, it'll be higher than that.

I do expect prices will moderate at some point I don't know exactly when that's going to be because right now inventories are low, but I don't think it's going to fall as a precipitous Lee at some of the forecast estimate.

The next question will come from P. J <unk> with.

With Citi.

Can you talk about say lock sense industrial silicon demand.

What's happening in the silos and merchant market.

And how does this change impacted by raw materials, I think Jimmy you said silicon cost.

You know it came up in China, So you shut down some.

Shut down a plant can you expand on that and and finally.

What happens to the new sidewalks and capacity that was announced in China with these recent dual control policies. Thank you.

Yeah P J good question.

I'm going to walk through.

Several things I would say in the near term the impact on silicon metal.

He has been in China due to the restrictions from dual control and as you know that was driven by the higher coal prices.

Really pushing up the cost for the electricity producers.

Lucerne and the electricity producers our cap on their electricity prices. So some of them didn't run and that forced the industry curtailment.

Typically as you're going into cold weather months industry takes a hit.

<unk> homeowners and consumers, who try to keep people warm.

And so that hit silicon metals.

For that reason things became tight we've moved some silicon metals from Brazil over to China to offset that and will run through the fourth quarter, but we decided to pull a turnaround in <unk> into the fourth quarter. We had originally planned it for first quarter, we decided to do.

Do it now that takes a little pressure off the dual control situation.

That turnaround will cost us so I think on slide five it's in their $75 million in the fourth quarter.

I expect we're going to see about a $50 million higher cost.

It's both downstream G III silicones demand.

Demand and sidewalks into demand are very strong and so I think prices have gone up significantly.

So I think we're gonna be in that situation for all of the fourth quarter and I would expect into the first quarter as well.

Alright next question will come from Jeff Zekauskas with J P. Morgan.

Hi, Good morning, I have a two part question.

The first part has to do with your expansion in Alberta in the late decade.

That seems to be a sole large ethylene polyethylene expansion.

But by my calculation what that means is that over the next 10 years or so your capacity will expand and 1% to 2% per year.

And presumably the industry grows faster than that and so is this approach. An example of your.

Disciplined capital approach.

Where you really only want to have high return projects and what you'll do is you'll sacrifice volume growth in service of that higher return.

Second part is for Howard.

The net debt to EBITDA.

You say well go to two to two and a half times that makes a.

Because if your EBITDA is 10 billion, that's a $5 billion difference. So it was a two or two and a half.

And are you going to get there quickly or are you going to dawdle.

Because if what youre going to do is lever up by another I don't know nine or $10 billion to buy back stock or increase dividends.

A different quickly or are you going to get there, so 2022 or 25 or somewhere in between.

Thanks.

Good morning, Jeff.

The first part of the Alberta expansion comes on in 2007.

And that brings on.

Most of the new cracker.

How capacity in the cracker will be expandable.

It also brings on the derivatives.

And then we retrofit the existing cracker. So we can tie the backend into the auto thermal reformer and that will come on in 2009.

So that will be the largest.

Mega project that we do we do have.

<unk> investments in the near term on Debottlenecking existing assets that will help us.

Between now and 2007, and we have the ethylene capacity.

To add some downstream capacity as well so there will be there'll be a little bit more than 1% to 2% growth.

But.

I guess on Alberta is obviously to take advantage of the situation there.

Carbonize.

And have a good carbon capture location and pick that whole site to net zero Howard do you want to get our net debt to EBITDA, yes, sure good morning, Jeff.

Your point about disciplined and balanced on the capital allocation side.

It it it goes to the debt as well I mean, when you think about what we did in the third quarter. It was very balanced it was more than $500 million of dividends. It was doing another $400 million of stock buyback and then we took out $1 1 billion of debt to your point on the two to two and a half ratio I would say some of.

<unk> had a.

1% swing.

The low and the high so we're already giving you a better than peer view.

You were saying our range is only a half a turn but if you'd like me to narrow that.

Further I would say use the midpoint. So our long term average is two to two and a half I would say.

Through the economic cycle, if you want to use to two five that's a reasonable proxy for where we want to be but we have the corridor there to recognize that it's a long term target punctually today using the rating agency methodologies through the end of the third quarter were probably around 2425. So we have about a quarter of a turn left.

Of our peer to hit that midpoint of the two to two and a half.

Alright next question will come from the line of Bob Court with Goldman Sachs.

Yes. Good morning, this is Mike actually sitting in for Bob.

Just wondering if you guys made a couple of comments about inventories still being tight and I guess.

Polyethylene perspective could you, perhaps maybe quantify what you're seeing in terms of ease of inventory and how perhaps that may compare to what you would consider more normal.

Yeah.

Yeah industry, Mike Good morning industry inventory and DTI fell.

Industry.

Industry inventory in September fell about 120 million pounds.

And so days in inventory had dropped demand is obviously strong.

And in export demand exceeded domestic and export exceeded the production, obviously storms had an impact on that as well.

We.

Inventory declines in high density and linear low.

A little bit of inventory build and low density, but it isn't.

A significant number.

So when you look at the five year trends and I think what we put in the slide deck. You show. Your earlier is that the order backlog is up.

About 30% above normal and the inventory to sales ratio was down about 10%.

I think that's gonna stay in that band for the most of the fourth quarter and as the capacity comes back from the Hurricanes, we have still.

On logistics issues. So there are bottlenecks everywhere, especially when it relates to marine pack cargo for export and as it relates to product being shipped by truck.

It's it's a little hand to hand combat right now.

The truck driver doesn't show up shipment gets delayed so I think we're going to be.

In that situation for the rest of the year and into first quarter.

We're just giving you some down numbers arent DSI was down seven days in the third quarter versus a year ago and our overall cash conversion cycle was better by a day sequentially. So.

Tightly managing our working capital.

Next we'll go to David Begleiter with Deutsche Bank.

Thank you good morning.

Jim the consultants have a pretty sharp decline in ethylene chain margins through February.

Do you agree with that or are they being a little too bearish given the tightness right now in the marketplace.

Hey, good morning, David.

A little bit bearish here the way I would categorize it I think they are underestimating the demand that's going to be there because there's still a significant inventory restock and continued strong demand that we see coming and I think they are overestimating, how much supply is coming in and if I go back to the China situation.

I think remember.

Remember that about.

Half of the CTO MTO capacity is out of the money right now.

60% of all the new capacity coming on in the World is in northeast Asia, which will still be a net importer for a long time, and it's all naphtha or higher cost base.

And so I think those things are going to soften that I do expect prices to moderate a bit but I think we could see a pretty strong 2022 with higher volumes, yet slightly lower prices operating rates were always going to be in the high eighty's to low ninety's for them.

Four years, so I don't I don't see a change there and remember that the U S and structural advantage the Canadian structural advantage our position in Argentina, our positions in the middle East are still going to remain strong.

Thank you.

And next we'll go to Frank Mitsch with Fermium research.

Hey, good morning, and a nice results you did a sequentially pick up your buybacks here to that 400 million level in the third quarter, how should investors think about the pace of buybacks in <unk> and 2022.

Howard you want to take that yeah. Thanks, Frank good morning, So the guidance.

<unk>, we gave for the fourth quarter is 745 million shares outstanding. So if you look at where we ended the third quarter was the average for the third quarter. That's about a 5 million share reduction, which would equate to another $400 million plus or minus on stock buybacks. So essentially keeping pace with the third quarter with that said look we continue to be disciplined.

Balancing the capital allocation and we will continue to be opportunistic.

We're staying true to our 65% of our net income going back to shareholders long term, 45% of the earnings growth will in the net income will go in the form of dividends and.

And then we'll use stock buyback to top that up to 65%.

Alright next question, we'll go to John Roberts with UBS.

Yeah.

Thank you.

We see all the container ships out and the harbors and all the container stacked up on the docks in the warehouses are full with drivers waiting to take product to the final customers. Your earlier comment was about.

Polyethylene producer inventories do you worry about contained product downstream, where it would seem like there's a lot of inventory in the channel downstream of.

The converters.

Hey, good morning, John.

The visibility is hard to track right now I do.

Think that some of the moves.

Government made recently to get the big ports.

24, seven operation is going to help the backlog what happens is typically when those ports to get backlog it spills over into other ports, we don't use long beach as much but.

When traffic.

It was over in other ports it hits us.

I would say that almost every value chain has some impact from that.

And where we see the biggest impact is being able it's kind of blocking.

Materials getting out and so we're starting to see some congestion and.

Some competing demand product coming in.

Sometimes it's faster to reload and empty container to get it back to China, and so that competes with other materials going out we don't see that in every port, but certainly on the west coast, we're seeing that right now.

I would say almost every value.

<unk> can we have every application we have is short product.

And I don't think there's enough material tied up and all of that floating inventory or in the warehouses that that is going to alleviate the demand.

Fill the demand that's out there right now I still think the consumer is strong and we still.

Still got other economies that are coming back from Covid that are going to add to that demand.

And next we'll go to Michael Sison with Wells Fargo.

Hey, guys good morning nice quarter.

Just curious when you think about 'twenty two and.

You change tend to have that nice little market fundamentals are for for your three based segments and just curious.

I know you think demand is strong, but any thoughts on you know natural gas pricing feedstock costs.

Oil has gone up just curious how you are baking in those type of inflationary numbers in that outlook.

Yeah, So we're starting to see.

Some improvement in production.

Drilling and completion of wells were going to bring more Ngls as we move out of the winter season.

I believe what we're seeing short term here as a knock on effect.

Coal really ratcheted much.

Much higher in China.

The first fuel that you go to that could replace coal in the in the fuels grid is natural gas and LNG, obviously went right up.

After coal and then the next fuel is oil and oil came right up and so that took us up.

At $80 a barrel.

I think we're going to see things will stabilize a little bit.

As we go into winter inventories are a little light of the five year average going into winter.

You've seen prices on line, a little bit and the forward market by about $1 1 million.

Btu because weather.

Plays a significant factor so if you have a warmer fall.

That's going to take a little bit of staying out of the natural gas prices.

Even with them.

The oil to gas ratio, but more importantly, the oil to gas spreads are good and so I think that's going to continue.

<unk> and if we get through winter without a really really cold snap.

And then I think youre going to see prices to moderate <unk>.

Long term or medium term I would say $2 50 to $4 50 for U S production.

And long term about $2 75 million Btu for natural gas.

Your next question will come from Duffy Fischer with Barclays.

Great. Thanks. Good morning, this is Mike Liza on for Duffy.

I heard your response correctly it sounds like you still want to pay down slightly more debt from here and second.

If we stay in this call at $6 billion or so of annualized operating cash flow range from the past say 24 months or so we roughly know of Capex will be next year and it seems like there should still be a decent amount of excess.

Cash I know you stress the balanced approach, but just how should we think about the priority of that excess cash.

That's the gold bar in your chart, but our buybacks a flywheel here. Thanks.

Yes.

Two to two and a half.

Our debt to EBITDA ratio and that is a rating agency adjusted.

Net debt to EBITDA target. So that's overall over a long term typically the rating agencies will look at two years back current year, and then come up with it.

Two year forecast so when we think about that two to two and a half range or as I targeted the mid point in answering to Jeff's questions up to two five that's over a five to.

Here period.

Period, So as Mike mentioned and Jeff were slightly were at the higher end of that range. They are you will you should expect.

Over the next several years will continue to titrate that number down to the mid point to 2.25 and <unk>.

Pending on how things go we might go to the lower end of that range, we will see in terms of the cap.

Penetration priorities.

We intend to continue what you've seen from us, which is disciplined and balanced approach. The number one priority for us is to safely and reliably operate our plants.

And then the next is organic investments, where we have low risk high return fast payback projects that helps us continue.

Capital.

Through the cycle average return on capital of the enterprise to 13% or more we will do that.

Dividends would be next so as the net income increases.

Dividends should increase in line with a 45% of net income over the cycle and then share repurchases.

Like I said earlier will you issue.

<unk>.

At least cover dilution, but then we will also be opportunistic and compare this opportunistic share buyback to any other use of cash and over the long run our goal is to do the.

Value maximizing thing.

Next we'll go to John Mcnulty.

<unk> capital markets.

Yeah.

Hi, Good morning, again to hit about basketball John a question on your equity earnings from the JV. It looks like each of your <unk> and PSP segment is on track to deliver around half a billion dollars of politics.

Now quite a few unique regional dynamics.

He was the feedstock betting I think Duane correct me here, but broadly could you discuss where these businesses are in the cycle and perhaps any color on where do you see the earnings of these businesses for the next year. Thanks.

Yeah. Good question on <unk> polyurethane I do believe that the demand.

And the operating rates rise the finance will continue to stay strong into next year.

Maybe a little bit lower operating rates on polyol.

The key demand drivers and value drivers are going to be those systems and solutions that are going into things like mobility like construct.

Man Shannon.

Like appliances.

And some extent furniture embedding in things that are driven by consumer.

Growth and that will continue to remain strong.

The only.

Thing that we've got coming that would be a detractor from those earnings would.

We've got a turnaround in this quarter on isocyanate zadora, but that's been planned.

And they'll manage that they've been running very well I expect to see them in good shape next year and as you know.

There are fixed costs are quite low.

And so I think there'll be a very good source.

<unk> for us to fulfill that demand.

So just one point on maybe on the cash flow side on the equity earnings. If you recall that our dividend is usually come from the prior year earnings. So with this year's equity earnings up as you pointed out and that will drive our cash flow tailwind for US next year, probably in the range of at least.

$2 million to $300 million as we sit here today, possibly more.

And next we'll go to Laurence Alexander with Jefferies.

Good morning, two questions in the period with a sort of a tight supply constraints have you seen.

Our mix be a net positive or negative across the portfolio or in other words, how do you see things playing out when the supply constraints ease.

Secondly, with respect to the decarbonization, so long as you could see a path to hitting your return on capital hurdles.

How broadly would you consider a vertically integrated.

Racing and de Carbonization platforms.

On the mix.

I think any any time you get a tight situation like this there's a natural gravitation for the mix to move up.

Also say, though that we have been trying.

Customers.

Are in close communication and we're trying to obviously to keep everybody running.

There's a lot of juggling going on there.

There are some specialty grades where it's hard to shift the mix up because things are so tight right now.

Especially in some of our Alaska America products.

On de Carbonization.

I think it's just going to depend on the situation in the geographies that we're looking at the investments in Canada we.

We don't need to do the investment and to Sidoti capture and sequestration.

And I think there are a lot of players that are out there that have capabilities to do that.

If we can keep our investments focused on assets that generate revenue for us and generate growth for us.

Our zero carbon emitting I think there's plenty of room for third parties and others to play to help us to handle the C O two.

Thank you.

Next we'll go to Alex <unk> with Keybanc.

Thank you and good morning, everyone I have a question about slide eight where you detail.

Flight investments for one seven to $2 1 billion in EBITDA contribution.

And my.

My math implies fairly high high single digit growth versus your base EBITDA. So can you go at a high level explain why investors can have confidence in this target what are you doing differently from.

Traditional dow's growth rate here.

So anything that can sort of.

At a higher level explain why this growth is achievable.

Yes.

I'll start and I'll ask Howard to fill out a little bit, but I'm going to start with silicones, because that's an area. That's grows at <unk> GDP.

And if you look at mobility and if you look at electronics and if you look at consumer applications.

To continue to grow as well as you know we've got expansions coming for.

Silicones products into construction sealants or glass glazing form.

Thanks.

E vapor buildings, so that is.

GDP growth and that's going to continue and industrial solutions.

Not only highest value returned to ethylene, but also high value downstream growth.

Driven primarily by consumer applications.

To some extent oil and gas, which we see recovering although we have many many cases, where our oil and gas products help people.

Reduce C O two emissions in the midstream production.

And then things like Echo fast pure which is the partnership with Ralph Lauren where we just open sourced that technology to use.

That product.

Which would get textile mills that use cotton.

Switch over to a product that is used is 90% less chemicals 50.

50% less water, 50% less energy.

That's a huge driving force towards more sustainability and in areas that are tough environmental ASP.

And then you can go two.

P. M C. We've got continued growth in our downstream systems, which have been growing at greater than 11% per year.

For a long time, we'll continue those investments we've got high gross targets for our downstream coatings business.

Continued.

Keep up with the demand, especially specifically traffic demand.

Howard mentioned in paper demand for.

Paper cups, replacing others with our raw bar Dispersions and also architectural demand, which is our our growth leader.

In that space and then you get back to.

Packaging and specialty plastics.

Which is continuing to grow.

Above GDP about one four times GDP at our forward forecast it.

It's very dispersed so when we talk about $3 billion of EBITDA growth over that time period.

It's pretty evenly split.

Between all three segments and Youre going to see about two to 300 million that would come on next year and that is projects that are already completed and will be finished by the end of the year.

Alright. Your next question comes from Arun Viswanathan with RBC capital.

Okay.

Great. Thanks for taking my question Congrats on a strong quarter. So I just wanted to get back to the polyethylene discussion.

You know I guess, what we're hearing some conflicting things because.

We saw an ACC number on inventories of mid.

Mid forty's on days of supply.

<unk> 47, and then.

It appears that the September October increase on polyethylene is installed as well. So is that is that are those are correct characterizations or would you would you say that the market's really tight and you do expect further increases as we go through the year. Thanks.

I think mid Fourteens number on days of inventory as kind of an average number but remember sometimes the inventory numbers are things that are locked up and can't get shipped out and so I think that's the main delta and some of the data that I shared with you.

I would say demand.

<unk> made some production.

Think are both going to be strong in the fourth quarter. I also think some of the shipment delays are going to moderate as we get through the quarter and I think that will help but.

A 40 40 to 45 days.

The next question will be from Christopher Parkinson with Mizuho.

Yes.

Hi, This is Kevin on for Chris.

I was just wondering if you can touch a little bit between <unk> nine PM and she mentioned third party supply constraints can you just talk about what youre seeing in terms of the third party supply constrained.

<unk> strength, and whether you see them easing into the fourth quarter in the first half of next year. If that's something that you continue to expect to persist throughout 2022. Thank you.

Yeah.

They are primarily the third party supply constraints were primarily industrial gas suppliers.

They were ranked pretty hard.

Earlier in the ear from the Texas free.

And then they got hit again from the Hurricanes in Louisiana. It is improving I expect it will continue to improve through the quarter.

They're working hard I know, they're working hard.

To work on reliability and get the assets back up and.

We're working hard as well to make sure that we've got <unk>.

Redundancy and those suppliers. So we will take actions like we do after events like this and make sure that we've got redundancy in supply as well, but that was the primary impact.

Alright, and next well move on to Steve Byrne with Bank of America.

Yeah.

Sure.

Thanks, everyone.

Matt Deyoe on for Steve.

Just a question on polyurethane I think you touched a little bit on this but where do you think we are in the cycle because even earlier. This year. We had some of your peers talking about over earning I know we've had a lot of outages, but demand is still really strong.

Inventories are light.

So how does this shake out into 2022 and then.

As you push downstream into systems would you expect the margin uplift to be and how is the business may be different from like a <unk>.

SG&A intensity perspective.

I think supply and demand balances are.

Pretty favorable through 2026, because durables demand has been outpacing the supply growth and durables pool, a lot on MDI operating rates and so I think youre going to see an earnings ridge in the business that we haven't seen they have also been.

A fair number.

Delays of rationalization of capacity.

And.

We've also seen obviously margin uplift in that segment.

For polyurethane systems.

Alright, we will take our final question from the line of Matthew Bear Blair with Tudor Pickering Holt.

Hey, good morning, Thanks for squeezing me in here Howard I think you highlighted the feedstock flexibility in your crackers.

Given the volatile energy markets do you have any specific examples of the kind of changes you've been making for example are you switching away from propane.

Either in the U S or in Europe.

So if you have any thoughts.

With the recent widening of the ethane to natural gas spread they get thoughts about eight cents a gallon do you see that as kind of a short term blip or perhaps something maybe a little bit more medium term. Thanks.

No.

Looking at me, so I will take that long I would just say that it's our feedstocks.

Flexibility is really a key enabler of our consistent outperformance versus our peers as you've seen in the last several years of our annual benchmarking.

It includes what I would say is unmatched feedstock flexibility for most of our feet. So we've got the ability to Max ethane on the U S. Gulf Coast. We also have propane we can do minimum.

On if we need to in Europe. We also have the ability to do match LPG.

To your point I mean propane is not necessarily in the slate right now so youre not youre not doing that in Europe.

Then you also look at the point that Jim made earlier, which is we've got our Canadian advantage we've got.

Naphtha attack flexibility in U S. Gulf Coast, we've got the Argentinean advantaged and we also have the middle East and I also think when you talked a lot of people talk about feedstock flexibility, but most of the time what that means is they have three furnaces that can crack. This feed two furnaces that can crack newsfeed, when we talk feedstock flexibility in furnace.

The flexibility so we have the ability to switch within the furnace and we can do it you know frankly, we can do it day by day typically we do it.

Every week do you have any.

Yeah, I would only add two things it isn't always linear equation when you switch from cracking ethane propane at these propane prices sunlight expected.

<unk> was out of the crack slate and actually we've been cracking a fair amount of propane because we're generating a lot more byproducts out of that and we need them all and so it has been in the slate more than you might expect and I think as the natural gas prices moderate going into the year, we're going to see that ethane and propane advantages.

Vantage in the U S Gulf coast is going to be there.

Very good I think that's all the time, we have for Q&A. Thank you everyone for joining our call.

We share your interest in Dow for your reference a copy of our transcript will be posted in dollars up site within the next 24 hours. This concludes our call. Thank you.

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

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