Q1 2022 Dow Inc Earnings Call
Good day, and welcome to Dow's Q1, 2022 earnings call.
You may signal to ask a question by pressing star one at any time during today's presentation.
Also today's call is being recorded I would now like to turn the call over to Mr. Pankaj Gupta.
Please go ahead Sir.
Good morning, Thank you for joining <unk> first 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, Vice President of Darwin.
Relations and joining me today on the call are Jim Farley, Dow's, Chairman and Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer.
Please read the forward looking statement disclaimer contained in the earnings news release and slides.
During our call we will make forward looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties. Our actual performance and results may differ materially from our forward looking statements Dow's forms 10-Q, and 10-K include detailed discussions of print.
The 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 financial measure and other associated disclosures is contained in the Dow earnings release and in the.
Slides that supplement our comments today as well as on the Dow website.
On slide two you will see our agenda for the call Jim will begin by reviewing our first quarter and operating segment performance Howard will share our outlook and modeling guidance as well as how those competitive advantages are driving resilient earnings and cash flow while positioning the company for value growth. Joe will then provide an update on how our.
In flight actions raise our underlying mid cycle EBITDA about pre pandemic levels, while also advancing on our path to zero carbon emissions. Following that we will take your questions now let me turn the call over to Jim.
Thank you Conchords beginning on slide three.
We entered our 125th year with global scale, a differentiated portfolio unmatched feedstock and derivative flexibility and a track record of operational excellence.
All of which enables us to continue to deliver more resilient earnings and cash flow in a variety of economic and geopolitical environments and positions us to deliver mid cycle earnings above pre pandemic levels.
This is reflected in our first quarter results came down delivered top and bottom line growth both year over year and sequentially. We capitalized on end market demand strength across the breadth of our diverse portfolio and mitigated the impact of rising raw material and energy costs.
Year over year sales growth was 28% with gains in every operating segment business and region.
Sequentially sales increased 6% driven by gains in performance materials, and coatings and packaging and specialty plastics.
Local price was up 28% year over year, reflecting gains in all operating segments businesses and our regions price was up 2% sequentially led by silicones and polyurethane.
Volume increased 3% year over year with gains in all operating segments and in the United States and Canada sequentially volume was up 5%, reflecting strong demand for silicones and packaging applications Andrew.
And we continued our digitalization drive marking an important milestone for digital sales as the first quarter as we reached the $1 billion monthly run rate.
Operating EBIT increased $865 million compared to the year ago period with gains in all operating segments.
Despite rising raw material and energy costs, we effectively leveraged our industry, leading aged stock and derivative flexibility in a very dynamic environment.
And higher operating rates compared to the impact of winter storm Yuri in the year ago period enabled us to capture better end market demand.
We continue to generate significant cash flow of $1 6 billion in the first quarter up $1 $8 billion year over year due to increased earnings and no voluntary pension contributions in the current period.
Shareholder remuneration totaled $1 1 billion in the quarter, including $513 million through our industry, leading dividend as well as $600 million and share repurchases. Additionally.
Additionally, we recently announced a new $3 billion share repurchase program.
This was a direct result of our performance and our balanced and disciplined approach to capital allocation with attractive shareholder remuneration.
Before I address our operating segment performance on behalf of the Dow team our thoughts are with the people of Ukraine and their family and friends around the world.
Dow continues to prioritize the safety and security of our colleagues in Ukraine and Russia.
Providing evacuation support financial assistance and shelter as well as humanitarian aid to refugees in the region.
From a business perspective, our presence in Ukraine, and Russia represents approximately 1% of annual sales and a much smaller percentage on the bottom line.
We fully support and our compliance with sanctions implemented against Russia and have significantly reduced our operations and stopped all investments in the country and are only supplying limited essential goods.
To help diversify Europe's energy supply. We also recently announced the Dow is taking a minority stake in the hands of the attic energy hub, which is developing a new zero carbon emissions LNG import terminal the.
The terminal will be co located on site and started Germany, and we will satisfy up to 15% of Germany's current natural gas demand, helping enable a stable cost effective and sustainable supply of energy to Europe and supported the region's economy.
Business interests, and our communities and our employees.
Moving now to our operating segment performance on slide four in the packaging and specialty plastics segment operating EBIT was $1 $2 billion up $6 million year over year with operating EBIT margin down 400 basis points as price increases in the United States, and Canada and <unk>.
Latin America were partly offset by rising raw material and energy costs in all regions.
Strong end market demand drove volume up 4% year over year.
Sequentially operating EBIT was down $208 million and operating EBIT margins declined by 390 basis points, primarily due to higher raw material and energy costs in Europe .
Moving to the industrial intermediates <unk> infrastructure segment operating EBIT was $661 million up $335 million year over year as operating EBIT margins increased 560 basis points, primarily due to strong price momentum in both businesses and volume gains of one.
Percent.
Sequentially operating EBIT was up 66 million and operating EBIT margins increased 150 basis points as strong prices and lower planned maintenance activity in the core business.
Offset higher raw material and energy costs.
And finally, the performance materials and coatings segment reported operating EBIT of $595 million compared to $62 million in the year ago period.
Operating EBIT margins increased more than 600 basis points due to strong price gains and an 8% volume increase on improved supply availability and robust demand for silicones and personal care and high performance buildings and demand for architectural coatings.
<unk> operating EBIT improved by $300 million on price gains and lower planned maintenance activity.
I'll now turn it over to Howard to review, our modeling guidance for the second quarter.
Thanks, Jim turning to slide five.
In the second quarter, we expect ongoing underlying demand strength across both consumer and industrial end markets. Despite elevated inflation consumer spending continues to grow and balance sheets remain healthy with household debt service levels at some of the lowest levels in the last 30 years.
Industrial activity also remains robust with global manufacturing PMI continuing to point toward expansion.
We continue to monitor dynamics impacting the operating environment, including geopolitical activity inflation, COVID-19 and the pace in which global supply chain constraints are easing.
Our talented team and advantaged operating model continue to position us well to navigate these impacts by leveraging our global footprint scale and differentiated portfolio combined with our cost advantaged and superior feedstock and derivative flexibility.
In packaging and specialty plastics, our order book remains strong and we expect continued demand strength for packaging applications.
Elevated feedstock costs, particularly for naphtha as well as tighter supply as we enter another turnaround season for the industry in the U S Gulf Coast and Europe should continue to support prices globally.
I will begin a turnaround at our cracker in aromatics facilities in Louisiana, which are anticipated to be $125 million headwind in the quarter.
We will continue to leverage our advantaged shale positions in the Americas, and our leading feedstock flexibility in Europe to help mitigate these costs.
In industrial intermediates <unk> infrastructure, we expect strong demand in industrial and energy end markets, coupled with the seasonal increase in construction and infrastructure activity in the quarter.
Higher raw material and energy costs and tight supply and demand balances are expected to provide additional price momentum across our key value chains.
We're also beginning turnarounds at our startup entered isn't facilities, which are anticipated to be $100 million headwind sequentially.
In performance materials, and coatings, we're seeing robust consumer demand strength across our major end markets, including home and personal care infrastructure and electronic applications. We continue to monitor the recent pandemic related lockdowns in China and will remain agile to proactively manage the near term impacts, particularly on low.
Supply chains.
In the coatings sector value chain inventories remain tight and we anticipate strong seasonal uplift in architectural demand as the northern hemisphere enters paint season.
All in we expect the second quarter to be in line with the prior quarter, excluding the totaled $225 million impact from turnarounds.
We have also provided updated full year modeling input in the appendix in this presentation, most notably and supported by our recent buyback announcement, we have lowered our year end share count assumption to approximately 715 million shares as we remain committed to delivering attractive shareholder remuneration.
Moving to slide six our first quarter results once again demonstrate our competitive advantages, which have enabled teams out to navigate the dynamic macro environment capture and market growth and continued to elevate our earnings potential.
Our broad global reach with local presence, which includes the diversified manufacturing footprint is structurally advantaged and enables low cost positions in each region.
About 65% of our production capacity is based in the Americas, where we have a cost advantage from abundant shale based feedstocks. We also have industry, leading propane flexibility in Europe .
And natural gasoline advantages from our joint venture partners in the Middle East and global sourcing capability to support Asia with ethane advantage supply.
Additionally, we are continuously leveraging our industry, leading feedstock and derivative flexibility to optimize margins.
Region by region and furnace by furnace, we are able to mitigate higher raw material and energy costs. This is particularly relevant in today's environment, where Dow has more than two to three times more propane flexibility that our European peers.
And our derivative flexibility allows us to optimize our product mix to capture differentiated prices and margins compared to our peers.
At the same time, our consumer led portfolio and track record of innovation enables us to grow in attractive market verticals of packaging infrastructure consumer and mobility, expanding our share and growing with our customers, particularly for sustainability led applications.
Growth across our end markets is expected to remain strong over the next several years with distinct demand drivers of sustainability efficiency and connectivity all of which are enabling growth rates above GDP.
Capturing these opportunities with innovative new products across our portfolio that not only feature advantaged polyolefin, but also silicones acrylics say yellow six polyurethane systems <unk> and elastomers for example, our DAU sell carbon neutral sealants increased design flexibility of smart build.
Things to reduce the environmental impact of new construction as infrastructure investments continue to ramp.
The renewal of a mattress recycling program converts use mattresses into raw materials for new building and home care applications.
Our engaged photovoltaic polyolefin elastomers offer improved performance and extended life for solar applications.
<unk> patented accu trade's plus fuel marker technology was recently selected by the European Commission to help facilitate fraud prevention, especially critical for monitoring fuel flows from sanctions supply sources.
Altogether these advantages enable resiliency growth and support higher mid cycle earnings compared to pre pandemic levels.
These advantages have been key to our 125 year history and will remain relevant for decades to come with that I'll turn it back to Jim.
Thank you Howard now turning to slide seven.
We have a clear roadmap to advance our decarbonize and growth strategy, which we expect will deliver greater than $3 billion in additional run rate EBITDA, while reducing carbon emissions by 30% by 2030.
This begins with our continued investment in renewable energy.
Asset efficiency improvements and innovative carbon efficient technologies like electric cracking and carbon capture.
Licensing our technologies will further expand our value pools, decarbonising, our assets and the industry.
For example, our <unk> unit will reduce cotwo emissions by as much as 20% compared to other leading PVH technologies.
And as we advance our electric cracking project in collaboration with shell, we will incorporate even more renewable energy into our network.
In Alberta, we're progressing engineering and development activities for the world's first net zero carbon emissions ethylene and derivatives cracker complex.
This year, we plan to complete our partner agreements, which will put us on track for regulatory approval and a final investment decision in 2023.
We're also advancing plans to reduce cotwo emissions at sites in both Europe and in the Americas, a key part of our decision to advance profitable projects will be ensuring competitive subsidies and commercial contracts before a final investment decision.
These projects will provide the low to zero emission products that our customers increasingly demand to reduce their own carbon footprint.
This is another demonstration of <unk> leadership in the transition to a sustainable world, while driving earnings growth.
Turning to slide eight.
That and our near term actions to Decarbonize grow the company and continue to improve our return on capital are well underway.
In 2022 are in flight growth programs remain on track to deliver a run rate of more than 300 million and underlying EBITDA with a focus on targeting downstream and sustainability led applications across all operating segments that will generate strong returns in.
In packaging and specialty plastics <unk> unit in Louisiana is on track to start up in the fourth quarter of this year and will contribute more than $75 million and run rate EBITDA with a return on invested capital greater than 15%, giving us the key proof point to accelerate the licensing of our technology.
In industrial intermediates <unk> infrastructure.
<unk>.
<unk> and other efficiency investments are also on track to start up this year and in total are expected to generate more than $50 million and run rate EBITDA with returns greater than 20%.
In order to support the accelerating demand growth across pharma cleaning and energy sectors. Today, we're proud to announce another series of our <unk> investments in the United States and Europe . These expansion maintain our current carbon emissions levels and are backed by supply agreements with leading consumer brands.
Across a number of fast growing end markets. All combined these investments represent a 70% increase in our industry, leading downstream our confluence capacity over the next several years targeting high value applications, where we're delivering 10% to 15% annual growth rates.
Lastly in performance materials and coatings. We're also executing a series of incremental downstream debottlenecking projects with more than 20 projects expected to be completed this year <unk>.
Collectively contributing approximately $100 million and run rate EBITDA with return on invested capital of more than 20%.
All in all by 2025, we are projecting accumulative underlying EBITDA improvement of approximately $2 billion driven by projects like incremental high margin polyethylene and functional polymers capacity to serve growing demand for flexible packaging.
Debottlenecking projects to enhance our mix towards polyurethane systems, serving mobility and consumer applications.
And new capabilities to formulate differentiated silicones, including silicone adhesives for Nextgen electronics mobility and infrastructure applications.
At the same time, we continue to Decarbonize and deliver on our sustainability commitment by increasing our use of renewable energy.
Optimizing our assets to be more carbon efficient and driving continuous emissions reductions throughout our global asset base. Just one example, we will reduce our cotwo emissions by more than 350000 tons, which is more than 15% of our 2025 emissions reduction target when we.
He replaced end of life steam and gas turbines at our <unk>, Louisiana site with less capital intensive higher efficiency and lower operating cost systems.
Overall, we expect these near term actions to deliver $2 billion and additional underlying earnings while reducing carbon emissions by approximately 2 million metric tons by the year 2025.
And importantly, we will do this while maintaining capex within DNA and.
And continuing to target a return on capital of greater than 13% across the economic cycle as we invest in higher return lower risk projects across the enterprise.
Turning to slide nine now.
Dow has unique and resilient competitive advantages a clear strategy to decarbonize and grow earnings cash flow and return on capital.
And bind with top quartile operational and financial performance.
Our annual benchmarking update as published in the appendix of this presentation and demonstrates once again that we continue to deliver better results relative to our peers across many key financial performance metrics, including top quartile EBITDA margins return on capital free cash flow yield shareholder.
Remuneration and debt reduction.
Our commitment to industry, leading cash generation and shareholder remuneration and resulted in an attractive free cash flow and dividend yield above both our benchmarking peers as well as the broader S&P 500.
Furthermore, strong execution against our higher return growth projects over the past several years has resulted in three year EBITDA growth and return on invested capital that is well above the peer median.
And as we've outlined our in flight growth investments will deliver additional incremental earnings and cash flow upside with high quality return on invested capital across the economic cycle.
To close on slide 10 now.
Now continues to be well positioned to deliver higher mid cycle earnings and cash flow above pre pandemic levels in both the near term and over the economic cycle.
With our flexible and advantaged operating model, we're also able to effectively manage in a wide range of macro environments.
We continue to deploy our industry, leading cash flow in a disciplined and balanced way to maximize long term value creation case.
Case in point, our new share repurchase program reflects the strength of our performance and confidence in our ability to continue delivering industry, leading cash flow we're.
We're making good progress on our Decarbonize a growth strategy delivering incremental earnings by capitalizing on fast growing demand for more sustainable solutions.
Our in flight actions are elevating our underlying mid cycle EBITDA above pre pandemic levels.
Paul as we advance our return on capital.
Over the past 125 years now has transformed from a small science startup through the company that we are today and industry leader with global scale, a differentiated portfolio and sustainable solutions that enable us to tackle some of the world's greatest challenges.
Our ambition purpose and capabilities continue to make Dow a great place to work for ph DS engineers chemists and leading talent for many different disciplines for the second year in a row now has been recognized as the only material science company on the great place to work.
And Fortune 100, best companies to work for list.
These advantages enable us to capture value growth, while continuing to focus on delivering for our customers advancing our ambition and creating value for all stakeholders with that I will turn it over 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.
I'd like to ask a question. Please press star one now we ask that on today's call you only ask one question. Thank you.
We will now take our first question from Hassan Ahmed from <unk>.
Hello. Please go ahead.
Good morning, Kevin Howard.
And a quick question around the Q2 guidance.
As I look at the different moving parts it seems youre <unk>.
Guidance to an EBITDA north of $2 9 billion. So first of all the question is is that correct and second part is that.
It seems that the <unk> bound April polyethylene price hike stock you guys seem to have a may price hike on the table as well so does the guidance factor in these polyethylene price hikes sticking.
Yes, good morning, Hassan I'll have Howard walk through the guidance on polyethylene our expectation is we'll see about four to five cents.
Coming through here in the near term for the Americas, We've got <unk> out there in April and seven out there in may.
Little bit less in Europe , and Asia Pacific.
So we are expecting to see prices continue to move up.
In packaging and specialty plastics through the quarter with that Howard maybe I'll walk through the guidance for second quarter, Yes, sure Jim Good morning Hassan. Thanks for the question, but you've got it right basically what we're guiding to.
Take the first quarter EBITDA actuals subtract the $225 million of turnaround headwinds.
In PSP in industrial intermediates <unk> infrastructure and that's that's our best estimate today of what we see with all the puts and takes of where second quarter EBITDA is likely to land.
Okay.
Thank you.
I'll now take our next question from.
P J Jessica from Citi. Please go ahead.
Yes, hi, good morning, and congratulations on your 125 years of history.
Jim I have a broader question on sort of the future of the European chemical industry and you Wonder what seems like a long term step up in energy prices there.
And then specifically on DAU in Europe , how are you performing there I know you use more LPG is there and what about in PMC, how are the margins holding up in Europe and those both segments. Thank you.
Thanks P. J a great question I think obviously there were questions about europes competitiveness at different times in history, and what's happened with Russia entering Ukraine. What that's caused has created more concerns on Europe stability.
<unk> two <unk>.
Non decouple from Russia and to compete longer term. That's one of the reasons. We made the announcement about the project and startup.
Basically host that LNG import terminal to help that happen.
I would say the crackers right now are operating well.
We're able to still have margin in Europe under these circumstances, obviously have to pass a lot of that along but.
The thing we have to work on is longer term getting them to a more competitive.
Feedstock and energy cost position Europe has been higher energy costs in the United States for quite some time and we've been able to be profitable there.
We did announce some expansions there and our <unk>.
For some of our brand owners, we've made expansions they're in Spain previously.
This will be introducing and as you know, we're going to convert to news and to be here.
Net zero ethylene facility over time, so I do think there will be.
Chemical industry in Europe .
But I think we have to continue to look at how it evolves and how we're going to continue to make Europe more energy competitive to support that industry longer term.
Thank you.
Now take our next question from David <unk> from Deutsche Bank. Please go ahead.
Okay.
Good morning.
Jim and Howard can you talk about PMC, a little bit about the doubling of earnings sequentially and.
And how sustainable is this pricing you realize right now in the silicones business. Thank you.
No.
Yeah.
Good morning, David.
<unk> had a great quarter, obviously <unk> had some issues throughout last year with different outages.
And some of the challenges from winter storm, Yuri So winter storm Yuri impact year over year is a big part here volume is also very strong coatings.
<unk> has had a super strong first quarter in terms of demand both on the construction side, but also on the personal care side, which is coming back.
Very strongly.
Coatings had one of the best first quarters ever which is the lead up to what's really it's typical strongest quarter, which would be second quarter.
And.
Not only that volume increase with pricing increased as well and we've been able to navigate COVID-19 in China.
Even though we had some issues around the <unk> area, we were able to keep the plant running and subsequently that has been lifted and <unk> is ramping back up to full rates. So I think we executed and navigated that whole situation pretty well.
Silicon metal spiked a bit in the quarter.
I would expect over time as things kind of normalize that will come down a little bit.
But that also help drive some of the pricing that we saw in the first quarter.
So all in all very strong performance I do think.
We will continue to be a strong year for PMC, we've got demand up and building electronics industrial mobility.
Personal care the only the only area that was little bit softer in 2022 versus 21 will be at home cleaning and that says we're coming out of the pandemic.
Yeah.
Thank you.
We will now take our next question from.
Jeff.
<unk> from Jpmorgan. Please go ahead.
Thanks, very much it's a two part question.
Europe consolidated volumes were up 1%.
Which is a slower rate than global GDP growth.
In general what do you make of that.
And secondly, Jim you've been running Dow chemical now for three years.
Has your concept of how you create shareholder value changed over that period, and if you had to summarize what would it be.
Yes, good morning, Jeff.
Good questions I would say volume year over year up 1% consolidated basis.
Is one way to look at it I would say also sequentially remember we were up about 5%.
We had a very strong.
Operating rates in <unk>.
Hydrocarbons and energy in the first quarter.
So we took advantage of the spreads between oil and natural gas and that was a big underlying support for all the businesses.
Some of the businesses that are the big volume generators had a pretty strong first quarter last year and more of their impact from the freeze happened in the second quarter, we were able to manage first quarter last year by selling out of inventory, but second quarter really saw the stronger volume impact from winter storm here.
In terms of.
Shareholder return first.
The first three years post spend we were faced with.
Quite a few issues right. After spin we were moving into a really a declining market.
Which led into Covid and all the issues, we had to deal with and so our focus there.
During that time frame was to make sure that we navigated that protected that dividend.
And made sure that we came out with the best balance sheet in the industry.
When we came out of the pandemic I believe we did all of those things.
Great Company is not always a great stock. The actions we took on share buyback were meant to reflect that we think we're undervalued and theres better total shareholder return ahead, and I think we're starting to see that show through in the marketplace.
Thank you.
Now take our next question from Chris Parkinson from Mizuho Bank. Please go ahead.
Great. Thank you so much just very quickly on the free cash flow side buyback.
Buyback activity is obviously robust disabilities, including the recent addition.
Can you just give us a real quick update on your thoughts for uses for cash 22, perhaps through 2024, just anything new on Capex some of the growth investments you've been looking at.
Anything else investors should really be considering thank you so much.
Sure Howard do you want to take.
I'll walk through cash priorities.
Yes look in terms of our capital allocation framework safely and reliably operate our plants is number one so to do that we have about $1 3 billion of turnaround expenses. This year, our capex is going to be around two two to $2 3 billion. This year from an organic investment that's up from one.
$101 six last year, we're continuing to work on the 65% shareholder remuneration as a percentage of our operating net income that's across the economic cycle, but as you rightly point out Chris our share buyback continues to ramp we did $400 million.
In the fourth quarter, we did $600 million in Q1 and of course, new stock buyback announcement of $3 billion. We have about 700 million left on the current program that will be done by mid year and so then we will have a significant amount of firepower left with that full $3 billion program.
On a go forward basis.
And then we will continue to look at incremental net debt, we still want to.
Two to two and a half rating agency adjusted net debt to EBITDA.
We are looking at between maybe a $500 million and $1 billion net debt reduction.
<unk> before the end of the year, we will see how the how the cash flow goes and I would say.
But don't forget about the cash tailwind.
As Jim talked about in the prepared remarks, our cash flow yield is significant significantly above our peer group, 50% five zero percent above our peer group.
It is 20% better than our next closest peer.
And one of the reasons is everybody in team Dow now has not just the P&L statement and our balance sheet and our cash flow statement. We're actively working on working capital improvements our working capital was improved by three to four days, depending on whether youre looking at same quarter last year or prior quarter and then the unique to Dow <unk>.
<unk> that we continue to work on and we've got more than $1 billion of unique to Dow cash tailwind that we're working on still this year that haven't come through that should come through over the next three quarters.
Okay.
Thank you.
We will now take our next question from Vincent Andrews Morgan Stanley . Please go ahead.
Hi, Good morning, everyone. Just first can we just clarify the comments you made on the polyethylene prices. I think you said you were expecting a four to five increase for QQ I just couldn't tell whether that was a global comment or how that compared versus the 14 that you have out for the next two months in the U S. Then my actual question.
<unk> is for Howard just to talk about the pension.
Just given.
Rates have already gone up a lot year to date and with most expectations for what the fed's going to do for the rest of the year.
What does that do in terms of your pension and what opportunities could that present for you too.
Materially reduce that liability.
So if you look Vince good morning. Good question, if you look.
At our polyethylene numbers quarter over quarter, the IHS markers that are out there right now.
For Americas to be up five.
Europe , and Asia Pacific to be up <unk>, and the global weighted average to be up about five.
Our current nominations that are out there in the marketplace today or <unk> in the month of April and <unk> in the month of May for North America.
<unk> on the table from Latin America, which carry as a carryover from late March will.
We've got 400 euros in Europe , and we've got five in Asia Pacific. So those are the current nominations.
So I would say I think we're going to land somewhere between our nominations and won that IHS data is coming in.
Sure.
<unk> demand and inventory on.
Inventory has decreased about 9%.
U S and Canada demand was strong in the first quarter. So that was part of being the decrease but.
But the other part was.
Product that was sitting waiting to be exports from the United States and the export channels moving better.
It's not back to where it needs to be but we're seeing weekly and monthly improvements in the export channel and that is helping us out and we're starting to see that roll through in the inventory data.
And did I missed the second half of that question. The second question was around pension I can take that one so when you look at our underfunded pension. We ended the year last year that number has come down dramatically. It has come down 6 billion total since year end 2020 at the at the end of last year was at $6 billion of pension plus.
<unk> all in and.
Just with the rate moves we've seen year to date that $6 billion number is now lower by 2 billion. So our total pension OPEC underfunding is $4 billion.
It really only takes.
Another maybe 75 basis points of rate increases and a one more year of <unk> for us to fully fund that gap. What we're doing is we have a methodical plan that as rates continue to move that as each pension plan against a fully funded status we are working to.
<unk> each plant individually with the goal of not putting additional cash into immunize. So that will all depend on each country's rules and regulations and obviously the ROA.
Each individual pension plan, but over the next I would say three years, plus or minus depending on how rates move from here and obviously, how the arrow does we should be able to fully fund and fully immunize that plan.
That's the path that we're working toward today.
Thank you we will now take our next question from Stephen Richardson of Evercore ISI. Please go ahead.
Thank you Jim I Wonder if you could talk a little bit about your outlook for U S. Natural gas I appreciate all the discussion on feedstock and all the flexibility that <unk> enjoys.
We have seen a big move in the back of the forward curve.
A lot of talk about accelerating LNG exports, some more global linkages at least seasonally so.
Curious does that make you want to expand some of your joint ventures in some of your access further upstream or.
How is your outlook changing as a big.
Downstream consumer.
Domestic natural gas.
Yes, good morning, good question.
Natural gas has been.
Stubbornly high it was higher than last year before the Russia, Ukraine incident, and obviously that drove quite a bit higher.
I would say the biggest issue behind natural gas pricing in the near term has been tradeoffs in the U S and the fact that we have not been back to the 98 Bcf a day that we need to produce that to get inventories back to the five year level, we've only been running about 95 Bcf per day.
Dave So we're about three Bcf a day short.
Those inventories back to that level some of that has been due to freeze offs through the winter and just not a big rebound.
But we're starting to see the production and the rigs shift into natural gas production.
What's going to happen I think is that natural gas production is going to come on faster than any LNG export capability, we're pretty well maxed out on LNG export capability today. So if we can get these inventories back to the five year average levels by the fall then I think youre going to see natural gas prices.
It's really come back into more normal trading range in the medium term I'd say they'll get back to four to $6 1 million btu longer term.
Those inventories get to that five year level around $3 a million Btu and then I think youll see how many new export facilities get put up and also how much new important capability in Europe gets added to be able to decouple them from the Russian situation I think.
Natural gas.
It is going to see more investment and has a more positive outlook in the near term than oil oil has not had the investment for new capacity for the last several years and if we were back to the level of the oil needed to invest that today, we'd have to sustain that for a few years before we would see the oil the oil supply com.
I think the natural gas supply will come quicker, you'll see a response on natural gas in the six months to 12 months timeframe not two to three years.
Thank you.
Take our next question from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes, good morning.
Jim If I look at slide eight where you provided some helpful detail on your various capital projects.
Few of them relate to silicones and so I was wondering if you could expand on your near term and also longer term outlook there.
In terms of supply demand.
And also educate us a bit on where you are adding capacity how much in the returns look awfully good at north of 20%. So just curious to understand what kind of pricing you're embedding in that as well.
Yeah.
Sure we've got.
Quite a bit of downstream silicones capacity coming on fair amount of it is in China.
In a wide range of markets and construction markets in electronics and mobility.
It's in personal care markets.
Silicones is used in such a wide variety of applications and in those markets are all growing substantially.
<unk> two to three times more silicones than a traditional <unk>.
Internal combustion engine vehicles, and evs growth rates right now relative year over year growth rates are super strong.
I think both return of internal combustion vehicle sales as the semiconductor chip issue is alleviated and the EV growth is going to really drive a lot of demand there autonomous vehicles five G capabilities.
All require more silicones, we'd have to eliminate the cross talk and all of those areas and you've got to put up a lot more infrastructure and cities for <unk> to support absolute continuous coverage in those areas.
It's really really strong.
There are about 20 debottlenecking projects that are in those total projects.
There anything from <unk>.
New vulcanize products lower viscosity fluids for personal care applications.
<unk>.
All kinds of gels for Evs electronics multiple optics for automotive lighting.
So think about the headlamps and a vehicle not being polycarbonate anymore, but being multiple optical silicone.
Those are some of the biggest growth areas in that sector.
Thank you we will now take our next question from Mike Sison from Wells Fargo. Please go ahead.
Hey, good morning, nice start to the year just curious if you do happen to get sort of this 9% increase in the second quarter I think polyethylene prices will be back to October's peak.
With integrated margins be if that was achieved I understand energy costs clearly are.
Higher now versus what they were in October So would you be close to the past peak margins or would you need to get more.
Price increase to get there and can you bifurcate that between North America and Europe .
Yes, good morning, Michael if we were to get <unk>.
As you had suggested.
We'd probably be close to that peak in the Americas, maybe a little bit shy of that peak in Europe .
And and a fair bit off the peak in Asia Pacific Asia Pacific spend under a lot of pressure because of the much higher cost theyre cash margins in Asia have been really really slow and you've seen a lot of turn down in rates in Asia.
But I would say on North America.
Feedback close to that peak maybe.
Maybe a few cents below.
All right.
Same with same with Europe . So I think there I think youre looking at it the right way, if we were to get <unk>.
The way to look at it is where it gets the whole <unk>.
We would probably cover the turnaround costs.
That wouldn't be a drag on the quarter.
That's not what we've got in the forecast but.
It is possible that that could happen.
Thank you.
We will now take our next question from Frank Mitsch Fan-tan Research. Please go ahead.
Good morning, and let me also offer my congrats on a 125.
Jamie just talked about some of the difficulties in Asia in terms of margins and I was wondering if you could expand a little bit more on what youre seeing on the ground right now in terms of demand are relative to the shutdowns that are going on with Covid zero in China, and how do you think that that plays out.
Yes, good morning, Frank Dimmed.
Demand has been relatively stable I would say we we.
We don't have as much of a footprint in plastics in China as we do in performance materials and coatings and we do in silicones and we're doing in industrial solutions and so.
For plastics, a lot of what we would move in would be from the U S Gulf coast or obviously from our partners in the Middle East.
Having said that our demand was still pretty strong year over year going into China, we're seeing a lot of.
Accelerated turnaround activity right now in China, So youre seeing crackers, not just in China, but in Southeast Asia North Asia.
Lowering operating rates Youre seeing them take turnaround time now instead of just slowing rates and continuing to operate we've seen a lot of pressure on coal to olefins and methanol to olefins and so I think that will continue.
Obviously I do believe that China is seeing some advantage from being able to buy.
Feedstocks, probably from Russia, and sources of discounted rates, so that may be helping a little bit, but it certainly isn't making them positive cash margins and I think we're going to be in that kind of environment for the next couple of quarters.
Okay.
Thank you we will now.
Now take our next question from Steve Byrne from Bank of America. Please go ahead.
Yes. Thank you I have a couple of energy related questions for you.
In Europe do you have gas hedged in any any hedges that roll off.
Two two.
To note here.
And with respect to.
Germany is mulling over whether they they cut off Russian gas <unk> need to pay in rubles. How do you how do you manage that risk is it a.
<unk> for you and then maybe one other energy related question for you.
Jimmy talked through the the ambitious decarbonization.
Target and one of the projects is too.
Just to try to develop these crackers my question for you on that is are.
Are you seeing some demand pull for for a greener sources of polyethylene that.
Might enable you to two.
To sell those products at a higher price.
Do you think you can get a return on on such projects like that.
Okay.
Yes good.
Good question, Steve I would say in general on hedging.
Both both in United States as well as in Europe .
We've increased our hedging positions on natural gas.
Based on what we've seen over the last couple of quarters.
And we move those positions over time, whether it'd be oil or natural gas and we've had higher positions on both over the last couple of years.
Our biggest.
Our biggest move is just based on our usage in our in our usage of natural gas and other feedstock.
Feedstocks and so ratable that physical demand that we create is where we play most with the hedging so what we can do with physical positions, what we can do it.
Feedstock flexibility around cracking probably is our biggest bang for the Buck bottom line and then the paper strip in the physical or the financial hedge is next after that.
When it comes to a cracking.
The biggest challenge on <unk> right now is.
Finally, the right materials of construction to make an electric coil for a cracker furnace that can withstand the heat that you need to be able to crack hydrocarbons and have any kind of life and so I would say.
Before we start thinking about what the return on that will be we've got to just see if we can get the materials of construction right and be able to have a furnace <unk> that will have any kind of life to it at all.
It can operate at a high.
<unk> rate and have good reliability over a long period of time and Thats. The biggest proof point on this pilot project and then we can work ourselves into do we have the renewed.
Renewable energy at the right cost to be able to make that happen. We're doing that work in the Netherlands I think it's important to note that the Netherlands has six new nuclear plants on there.
Long term plan and I think Thats a great sign on in terms of what they see in terms of the need to basically decouple theyre going to have to rely a lot more on nuclear power to have high reliability low cost power and thats going to be especially important for industry as we move forward and we need to look at that.
One thing we're looking at that here in the U S. In terms of small modular nuclear reactors.
Thank you we will now take our next question from Josh Spector from UBS. Please go ahead.
Yes, hi, good morning.
Follow up from your release, you guys talked about functional polymer pricing was up while commodity polyethylene pricing was down. So I'm. Just curious is that normal that you would see that kind of divergence and if you can give us some perspective.
What that spread is today of that functional polymer over commodity is that higher or lower than where you would say its been on average and where do you see that going.
Yes, that's a good question about 25% of our product mix is in the functional polymers. When you look at PNM SP downstream.
Typically the way you would think about functional polymers as they would typically hold their price through the cycle. They typically have less.
Rice dynamic movement.
Compared to the commodity side of the business.
But they are up quite a bit this quarter and I would say that's because demand has been strong on the downstream for them and there hasnt been a lot of new capacity added there.
So just a tighter supply demand balance on some of those functional polymers than we've seen and I think some of that will continue because some of the markets that they go into our infrastructure related they can go into wire and cable markets. They can go into things like geo membranes in roofing or commercial buildings.
And so as you see more infrastructure related projects I think youre going to see.
That strong demand last longer here for functional polymers and that'll probably keep the prices of those materials up.
Also some higher input cost for some of the monomers.
Functional polymers is going to have to pass through as well.
Thank you Cleveland now take our next question from.
Evan This is <unk> from RBC capital markets. Please go ahead.
Great. Thanks for taking my question good morning.
I guess two questions real quickly. So could you just give a give us a quick outlook on MDI and then also maybe if you could.
Discuss the certain situations that you see as far as inventories in polyethylene.
No that theres, some tied up in supply chain, but do you see that alleviating over the next couple of months.
Yes look good question Arun on MDI the balances through 2026 are pretty good demand it looks like it's going to continue to outpace supply through 2026.
So I think thats.
<unk> to be positive for MDI.
Polyethylene as I mentioned in the Gulf Coast in the U S Gulf Coast, we've seen.
Lean inventories come down.
Inventories were down in March by about 200 million pounds.
And days of demand decreased by about 9%.
So it's about 46 days of demand and Thats pretty.
If I looked at all of last year. They probably ran around 45 days all of last year, So I'd say pretty normal and that is with still some congestion in the ports for the export channel.
So I would say supply challenges will still put upward pressure of about three to four days on DDI.
And half of that is due to third party congestion and the other half is inventories that were built to cover turnaround season in the second quarter, which is typically the heaviest turnaround season.
<unk>.
Based on the way things are moving every month, we're seeing a little bit better.
Export flows out of the Gulf Coast. So I think if we can keep steady improvement through the year hopefully we can get back to a more normal kind.
Kind of predictable rate by the end of this year.
Thank you we will now take our next question from Alexei <unk> from Keybanc. Please go ahead.
Thank you good morning, everyone.
On the LNG import terminal in Europe .
I think in general you've been selling midstream energy assets. As this was an exception because it's so strategic or could you in the long run and also maybe monetize this one.
Okay.
Well that's a good question I think it's unlikely that we get into it just to monetize it.
Our contribution.
And remember our equity interest here is relatively low.
We stepped in and made a contribution of land and access to our infrastructure services or the site in China and those of you not familiar <unk> is about 40 minutes.
Stream from Hamburg on the elbow River and.
And we've got the capability, we've got our own port there and we've got the capability to have a birth for an LNG ship to land in there and so by contributing that land, we take an equity position in that Hans genetic energy hub, they've got plans to build a new terminal by 2026 are going through the approvals right now.
They can get that done that will satisfy 15% of Germany as natural gas demand and so that will that will really help Germany have a second source of supply to the Russians and.
It's very strategic and I think that's important for the country.
So that's the reason we got into it to make it happen.
Not far enough along yet to get into what the offtake agreements are but we will provide utilities will provide cooling and other things to be able to help them make that a zero carbon emissions hub.
And.
I am glad we are in a position to be able to do it there's been some talk about.
Building, an LNG import facility in Germany for some time, but we were.
We're at the point, where we're not sure whether startup would still be on the table and this came together relatively quickly after the Russia, Ukraine situation and Im really happy that the team was able to move in fast and put a stake in the ground on this.
Sure.
Thank you.
That is all we have time for today I will now pass the call back to your host Mr. Penn cash Gupta for closing remarks.
Thank you Emma and thanks, everyone for joining our call. We appreciate your interest in Dow and for your reference a copy of our transcript will be posted on <unk> website.
Within approximately 24 hours or so this concludes our call. Thank you very much.
Ladies and gentlemen that will conclude today's conference you may now all disconnect.
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<unk>.
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Good day and welcome to <unk> Q1, 2022 earnings call.
You may signal to ask a question by pressing star one.
Any time during today's presentation.
Also today's call is being recorded I would now like to turn the call over to Mr. Pankaj Gupta.
Please go ahead Sir.
Good morning, Thank you for joining <unk> first 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, Vice President of Darwin.
Relations and joining me today on the call are Jim Fairley Chair.
Chairman and Chief Executive Officer, and Howard Underwriter, President and Chief Financial Officer. Please.
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.
<unk> forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.