Q3 2022 Dow Inc Earnings Call
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I will now hand over to Pankaj Gupta Investor Relations. Please press Star Zero, if you need assistance welcome to your conference. Please enter your conference.
Our cash and we have prepared slides to supplement our comments today.
Posted on the Investor Relations section of Dow's website and through the link to our webcast.
Cash group that Dow Investor Relations, Vice President and joining me today on the call are Jim for Italy, Bowers, Chairman and 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 expectations or predictions about the future.
These statements are based on current assumptions and factors that involve risks and uncertainties. Our actual performance and results may differ materially from our forward looking statements dollars forms 10-Q, and 10-K include detailed discussions of principal risks and uncertainties, which may cause such differences.
Unless otherwise specified all financials, where applicable exclude significant items. We will also refer to non-GAAP measures and 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 as well as on the <unk>.
Our website on slide two you will see our agenda for the call Jim will begin by reviewing our third quarter results and operating segment performance. Howard will then share our outlook and modeling guidance and then to close Jim will discuss our actions and long term strategic priorities enabled us to deliver valuable in a dynamic environment.
Following that we will take your questions.
Now, let me turn the call over to Jim <unk>, beginning on slide three in the third quarter team Dow continued to proactively navigate higher energy costs and geopolitical uncertainties that are impacting consumer demand, particularly in Europe .
As macroeconomic conditions began to erode in the quarter.
We responded quickly by implementing a set of actions to prioritize resources toward higher end products align production rate to supply chain and logistics constraints as well as demand and reduce operational costs across the enterprise.
In addition, our advantaged portfolio enabled us to capitalize on demand strength in higher value functional polymers in packaging and specialty plastics and performance silicones in performance materials and coatings third quarter net sales were $14 $1 billion with sales declines of 5%.
Year over year, and 10% quarter over quarter.
Local price increased 3% year over year with gains in performance materials, and coatings and industrial intermediates and infrastructure.
<unk> prices declined 6% and was down across all operating segments and regions.
Volume was down 4% versus the year ago period as declines in Europe , the Middle East Africa, and India or EMEA.
More than offset volume growth in the U S and Canada and Asia Pacific sequentially volume was down 3% led by EMEA.
Continued strength of the U S. Dollar also impacted net sales by 4% year over year and 1% sequentially.
Operating EBIT for the quarter was $1.2 billion.
Our our consistent focus on cash flow generation and working capital management in the quarter supported cash flow from operations of $1 $9 billion or a conversion of 104% of EBITDA and free cash flow of 1.5 billion, we returned $1 3 billion.
To shareholders in the quarter, including 800 million in share repurchases and $493 million in dividends and our balance sheet continues to have no substantive long term debt maturities due until 'twenty 'twenty seven.
Turning to our operating segment performance on slide four in the packaging <unk> specialty plastics segment net sales were $7.3 billion down 5% year over year as price gains and resilient demand and functional polymers were more than offset by lower polyethylene pricing.
Sequentially net sales were down 11% also driven by lower polyethylene prices with reduced volumes as we decreased operating rates in response to continued global Marine pack cargo logistics constraints and lower demand in EMEA.
Operating EBIT for the segment was $785 million compared to 2 billion in the year ago period, and $1 4 billion in the prior quarter. These results were impacted primarily by higher raw material and energy costs and lower local prices.
Moving to moving to the industrial intermediates and infrastructure segment.
Net sales were $4 $1 billion down 9% from the year ago period with price gains in both businesses volume was down as strong demand for pharmaceutical agricultural and energy applications in industrial solutions were more than offset by declines in polyurethane and construction chemicals.
Due to inflationary pressures in EMEA decreased consumer durable demand and the slowing housing market sequentially.
Sequentially net sales were down 7% and stable volumes, primarily in mobility end markets were more than offset by lower local price and currency.
Operating EBIT for the segment was $167 million compared to $713 million in the year ago period and $426 million in the prior.
As lower EMEA demand and increased energy and raw material costs were partly offset by higher prices sequentially operating EBIT margins declined by 560 basis points on lower price and higher energy costs and.
And in the performance materials and coatings segment, we reported net sales of $2 $7 billion up 5% year over year with price gains in both businesses and all regions volume was down as resilient demand in mobility, and homecare and markets were more than offset by declines in building.
And construction sequentially net sales were down 12%, driven primarily by lower demand and decreased local price or siloxane due to supply additions in China as well as planned maintenance turnaround activity.
Operating EBIT for the segment was $302 million compared to $284 million in the year ago period as margins expanded by 20 basis points.
Due to price gains for both silicones and coatings applications.
Sequentially operating EBIT declined $259 million, driven by lower prices for siloxane and increased raw material and energy costs I'll now turn it over to Howard to review our outlook and actions on slide five.
Jim turning to slide five and.
In the fourth quarter, we expect to continue navigating high inflation supply chain constraints and the impact of geopolitical tensions in Europe high energy and feedstock costs are driving record eurozone inflation, reaching a new high of 10% in September .
As a result result, we see reduced industrial production and consumer spending.
In China, COVID-19 related Lockdowns continue to hinder economic activity with weaker than expected regional or spending and infrastructure investments that said, we're seeing continued strength in the mobility sector with automotive sales are up more than 25% in September year over year.
In the U S healthy consumer spending and low unemployment rates have supported resilient underlying demand despite high inflation with U S consumer confidence rising in September for the third consecutive month.
Looking forward, we're closely monitoring the impact of rising interest rates on demand and in Latin America, we continue to see robust demand for flexible food packaging and consumer durables as well as transportation and infrastructure end markets.
To manage these evolving dynamics, we continue taking actions region by region and business by business.
Throughout the third quarter, Dow implemented plans to reduce natural gas consumption at our sites in Europe by more than 15% due to high energy costs.
In August we also temporarily lowered our polyethylene nameplate capacity by 15% and have now implemented a cold furnace idling program at our crackers for fixed and energy cost savings in parallel we continue to prioritize higher margin functional polymers to capitalize on continued demand strength, while working to ease logistics can.
Strains along the U S Gulf Coast.
We're also reducing operating rates and shifting production across polyurethane siloxane can acrylic monomer assets in Europe to manage our costs and our inventory levels and as we plan for next year. We have additional actions focused on production optimization turnaround spending and reductions in purchase services with the potential to deliver more.
War than $1 billion in cost savings on a run rate basis.
Turning to slide six you'll see our current expectations for the fourth quarter and the packaging and specialty plastics segment, we see stable demand for consumables in food packaging applications, we anticipate global energy markets to remain volatile in response to geopolitical dynamics as well as weather in the northern Hemisphere and Kantar.
We expect lower consumer spending primarily in Europe , while lower turnaround costs will be a sequential tailwind in total we expect $150 million seasonal headwind for the segment versus the prior quarter.
In the industrial intermediates and infrastructure segment demand for energy applications, particularly in the U S and a seasonal increase in de icing fluid demand are expected to positively impact the quarter.
Inflationary pressures, however continue to impact consumer durables and building and construction demand, particularly in Europe . We also expect continued pressure on propylene oxide and imaging margins due to increased supply from producers in Asia.
After completing major planned maintenance activity in the prior quarter on a net basis, we expect similar dynamics with a typical seasonality on a sequential basis.
In the performance materials and coating segment demand for personal care and mobility applications remained stable as consumers move toward holiday season buying patterns for we also anticipate a seasonal decline in demand for coating applications.
Lower spending on plant maintenance activity will partially offset margin pressure from supply of both siloxane and acrylic monomers from Asia, particularly to Europe .
All in we anticipate a $258 million headwind for the segment.
So in total for the fourth quarter, we expect a $400 million net EBITDA headwind come to third quarter.
We have also provided updates to the full year modeling inputs in the appendix of the presentation equity earnings have been revised to align with the current market conditions and the weaker margins in Asia.
We've lowered full year capex from $2 1 billion to $1 $9 billion and our full year tax rate is now expected to be slightly higher than our prior guidance due to the geographic mix and lower equity earnings. This upward pressure on the full year rate is also expected to increase the fourth quarter tax rate to account for the typical year to date true up with that.
Turn it back to Jim.
Howard turning to slide seven as a result of our actions over the last several years, we've created a streamlined portfolio with unique levers to manage through the current macro backdrop.
We have global scale, and leading positions across a diverse set of attractive market verticals geographies and value chain.
This gives us significant ability to quickly respond to evolving demand trends and capture demand better than our peers.
65% of our production capacity is in the cost advantaged Americas and.
And we have two to three times more LPG flexibility in Europe versus yours are advantaged cost position and unmatched feedstock and derivative flexibility enables us to optimize our margins and our commitment to operational and financial discipline underpinned by our culture of benchmarking and a best owner mindset.
Ed have resulted in a low cost operating model and strong cash conversion. These advantages have served us well since spin providing a solid financial foundation that supports long term value creation. Despite the current unprecedented events impacting the market.
Importantly, our early cycle growth investments and our efficiency programs are enabling us to raise our underlying mid cycle earnings above pandemic levels, we've nearly tripled our three year trailing cumulative free cash flow since span across a variety of macro environments.
And we will continue to execute on levers to drive even higher cash flow, including working capital improvements joint venture dividends and cash interest savings and our balance sheet is now the strongest it's been in my more than 35 years with the company, creating a solid financial position that offers.
Significant flexibility.
The combination of robust cash flow generation and a strong credit profile enables us to deploy capital in a disciplined and balanced manner, we advance our decarbonize and growth strategy. While also consistently returning cash to our shareholders through the economic cycle.
Moving to slide eight.
In 2022, we expect to deliver an incremental underlying EBITDA run rate of approximately $300 million to $400 million comprised of $300 million from growth initiative across our operating segments as well as 50 to 100 million from efficiency levers.
We have we have to our constellation investments coming online this year to serve high value home care and pharma end markets are 60 kiloton project in the United <unk> started up in the third quarter and our 34 Kilotons project in Spain is on track to startup in the fourth quarter, our 150 Kilotons.
F C D. H pilot plant in Louisiana is also on track to start up in the fourth quarter and year to date, we have completed 13 downstream silicones debottlenecking projects.
Longer term, we remain on track to grow underlying EBITDA by greater than $3 billion by 2030, while reducing our carbon emissions by 30% versus our 2005 baseline.
Our suite of higher return lower risk and faster payback investments will deliver $2 billion in additional run rate EBITDA, while we reduce our carbon emissions by approximately 2 million metric tons by the middle of this decade, these investments target higher value applications that any.
<unk> us to capitalize on increasing demand for more sustainable and circular solutions, let me.
Me highlight a couple of examples.
Our engage elastomers increase the lifetime of solar panels and enable over 50 gigawatts of solar power generation around the world.
And we recently launched Silastic the worlds first silicon based self sealing tire solution that can be easily recycled which is being commercialized and upcoming bridgestone tyres under the technology name based deals. We also remain on track to reach preliminary investment.
Decision by year end for our path to zero project in Alberta to build the world's first zero carbon emissions ethylene and derivatives cracker complex, which will grow our global polyethylene supply by 15%, while decarbonising, 20% of our global ethylene capacity this project with <unk>.
Generate an additional $1 billion of underlying EBITDA by 2030.
We deliver on our growth strategy, we remain committed to the disciplined and balanced approach to capital allocation that has served us well since spin our first priority is to maintain safe and reliable operations.
We continued to advance our growth investments with capex at or below DNA and drive return on invested capital greater than 13% across the cycle.
With adjusted debt to EBITDA inside our long term target range of two to two and a half times, we have the financial flexibility to deploy cash to maximize long term shareholder value creation, and we're targeting to returned 65% of our operating net income to shareholders.
Since spin we.
We have exceeded this target returning an average of 78% turning to slide nine.
Despite near term macroeconomic challenges innovating circular and sustainable solutions remains a key aspect of our long term decarbonize and growth strategy.
We see increasing demand for these products, which represent a significant growth opportunity for Dow with attractive pricing that will support longer term higher quality earnings.
We have continued to accelerate our actions to capitalize on this opportunity and create a circular economy and we recently announced a new commitment to commercialize 3 million metric tons of circular and renewable plastics solutions annually by 2030.
This new goal expands our sustainability targets and our focus on advancing a circular plastics business platform.
To meet our customers' increasing demands for more sustainable and circular products as evidenced in our recent letter published by the consumer goods Forum, citing demand for advanced recycled plastic material to achieve this goal we will exceed our original target to enable 1 million metric tons.
The plastic waste to be collected used reused or recycled and we're well on our way as we scale a robust pipeline of more than 20 strategic collaborations to enable recycling infrastructure.
Across the value chain to bring hard to recycle waste into the circular economy and to help communities address waste management and recycling gaps. This includes our most recent and significant commitment to date to scale advanced recycling with neurotechnology, which positions without of either.
Largest consumer of recycled plastic feedstock for polyethylene globally.
These collaborations are a unique advantage as demand for circular solutions continues to grow when you considered together the circular and renewable sales target along with the additional capacity from our Alberta project in 2030, our combined circular renewable and <unk>.
Low carbon emissions capacity will comprise a greater than 50% of our global polyethylene capacity.
I'll close on slide 10, our strategic priorities remain unchanged, we will continue to operate with agility as we navigate the current market dynamics as evidenced by our recent actions to balance production, while ensuring we remain well positioned to capture demand as market conditions improve.
At the same time, we remain focused on executing our long term growth strategy, expanding our competitive advantages and delivering on our financial priorities to position. The company for long term success with that I'll turn it back to <unk> to open up 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 might the Q&A instructions.
Thank you. Thank you as a reminder to ask a question. Please press star one on your telephone keypad. Please limit yourself to one question with your question from the queue. Please press star two.
We will take the first question from P. J <unk> from Citi. Please go ahead.
Yes, good morning, Jim and Howard.
You know what.
The IAA and Ccs credit going to $85 per ton.
Are there any projects in Ccs that you could deploy to your existing plants that come into the money now that weren't there before.
And then secondly on Europe .
Or would you accelerate incrementally would you accelerate capex in the U S. Given the situation in Europe is in and then if Europe is not producing much chemicals, how does that impact in your mind sort.
Their downstream automotive building and construction business is in Europe .
<unk>.
Good morning P J.
Two really good questions.
I think when we look at the IR, a which has a lot of good elements.
For our sustainability agenda.
Both hydrogen in Ccs as well as advanced nuclear.
The challenge right now is where do you have the availability of the existing pipeline infrastructure to get carbon off of an existing asset into a ccs.
Category, that's why we put the project in Jerusalem, and the project in Alberta, first because we have existing capacity there.
I should say and <unk> not yet, but <unk> got a plan in place to get it in place.
This is going to help us get some infrastructure in place in the U S. Gulf coast that will make that possible and as that becomes available we'll look at accelerating.
Deployment here in the U S Gulf Coast.
And I would say $85 a ton we think long term those numbers are probably going more towards $100, a ton or higher and that should really help accelerate hydrogen in ccs.
On Capex in the U S and in the future of chemicals in Europe .
Third quarter.
The two big challenges we had were.
Vegas was primarily electricity related in the third quarter, you saw European electricity cost go as high as 400 euros, a megawatt hour they've come off a little bit now because natural gas has come off about half of our footprint in Europe has advantaged electricity. So we did it.
The quarter was bring down rates to the advantaged positions.
What kind of run at breakeven in Europe .
And obviously load other assets with that demand I think in the short term you're seeing more product flow into Europe from the middle East and some right now from China.
Longer term, we're working with the governments through energy policy changes that are going to help one of the reasons, we announced the project and start up.
One of the five floating re gas units that will be put in Germany to really help Germany diversify away from just solely Russian gas to make the European question long term will be in front of us through next year, but in the short term we've got a good game plan to navigate the winter and to navigate next year.
That's why we announced the $1 billion worth of cost reductions for 2023.
We will now take the next question from Hassan Ahmed from Alembic Global Advisors. Please go ahead.
Good morning, Kevin Howard.
Just trying to reconcile the Q4 guidance you guys have given and it seems to me you're guiding for an EBITDA of roughly 1.45 billion.
If that is the case I'm, just trying to sort of understand what sort of polyethylene pricing youre baking into that guidance because it just seems that theres some price hikes on the table. Some consultants out there sort of doubting some of those price hikes going through so if you could provide any color around that.
Okay.
Thank you Hassan good good question, obviously, we saw pricing in polyethylene through the third quarter declined it started to stabilize at the beginning of the fourth quarter and what's in that fourth quarter outlook is more stable pricing in polyethylene.
But you get the dollar averaging that happened through the quarter. So when we start the lower pricing and that carries through the quarter inventories came down on the Gulf Coast stepped down from the high levels that they were in the third quarter and so that is helping and we've seen some better marine pad cargo logistics we have.
Good.
Good volumes out in the third quarter, we could have done more and so we're continuing to try to work on the logistics constraints.
So most of what's in there is.
Dollar averaging more stabilized pricing and then a little bit of a tailwind because we have lower turnaround costs into the fourth quarter for polyethylene.
The other thing I would mention is that input costs are starting to look more favorable we started to see a little bit of improvement in the ethylene chain oil is obviously oil inventories continue to be low and natural gas production continues to be higher and so that's positive.
Skewed I would say the estimate skew to the upside if oil and gas continue on these trends.
Okay.
We will now take the next question from Jeff Zekauskas from J P. Morgan.
Thanks very much.
Two questions can you talk about MTI.
Prices and volumes sequentially in your general expectations.
And secondly in performance materials.
There seems to be a fair amount of pressure and sidewalks same prices are entering some kind of cyclical downturn in that business and so what we should expect as a relatively.
Level level of earnings from the fourth quarter going forward.
Okay.
Yes, good morning, Jeff. Thank you for the question.
On MDI.
In industrial intermediates <unk> infrastructure the <unk>.
Apply the melon says through the middle part of the decade look good on MDI, where we've seen market weaknesses in consumer durables.
<unk> held up pretty well electric vehicles are really probably the shining star on growth in that space, but as housing and construction, where we've seen the biggest weakness and then of course appliances closely related to that I would also say what you see in the numbers of what you see in the guide.
Remember that.
We have quite a bit of a footprint in Europe , and so with the energy situation. There that just really compressed as the margins are I think it's lesser lesser pricing and less.
That issue than it is.
The input cost issues. So that's why we brought rates down to low levels in Europe .
China also seeing housing and construction slow and so I think we'll see what happens after we come out of this party Congress and whether we see a change in COVID-19 restrictions that might signal that 2023 will be better.
So I'm, saying capacity has come on in China, and that's really what's brought the prices down.
And we're really back to kind of a long term.
Mid cycle average prices for so ox names in the marketplace and yes, we expect that will continue into 2023.
So I think it's more the timing of the supply coming on has put that pressure on.
We will now take the next question from David Begleiter from Deutsche Bank.
Thank you good morning, Jim and Howard.
Howard just a modeling guidance does the $4 million of sequential EBIT headwinds full capture of the seasonality in Q4.
And is there any benefit in the guidance from the $1 billion of cost savings you highlight today as well. Thank you.
Yeah. Good morning, David So yeah at look at an enterprise level. The short answer to your question is it does so the $400 million net.
Really a decline I would call half of that is enterprise level seasonality or typical Q3 to Q4 seasonality and the other half is the averaging effect of the margin decline that we saw through the third quarter.
And then you've got two two pieces that are kind of offsetting each other the higher the more favorable turnarounds of the lower turnarounds that Jim mentioned that are getting offset by some currency headwinds that we're seeing sequentially embedded in that are some of those interventions that we listed in our in the slide that is in the earnings deck. So we are.
Already and have been intervening since the beginning of the third quarter. So we're going to see that continue through the fourth quarter and then obviously in a bigger way next year.
We will now take the next question from Vincent Andrews from Morgan Stanley .
Thank you and good morning, everyone. I'm just wondering if you can talk a little bit more about sort of the delta between what you. What you think underlying demand is versus maybe stocking that's going on just given all the macro uncertainty out there and part of what I'm getting at is you've obviously made some seasonality assumptions sequentially from <unk> to <unk>.
Just trying to understand how much of what we've seen already in terms of weak demand might have been a pull forward of what we might have previously thought could've happened more traditionally in November and December So just sort of any any comments you have helping us bridge sort of the weak volume with these.
Destocking versus underlying demand would be helpful.
That's a that's a good question Vince on obviously the retail sector.
So a lot of higher inventories and pulled back.
And Automotives things are still restricted.
Primarily by those supply chains of all the different various parts coming together so the auto companies can make their deliveries.
Probably shows up moron.
Internal combustion engine vehicles somewhat on evs, but EV growth in the U S and EV growth in China have been really really strong. So I think that's going to continue to be good our outlook for automotive next year is 86 million light vehicles.
Up from $80 million projection for this year.
And I think thats good packaging.
I don't think we we saw a lot of destocking in packaging in the market.
I would say, we saw adjustment to lower operating rates because of the slowdown of demand in EMEA EMEA being off 12% was a significant slowdown consumer pressures in EMEA are much stronger than even the consumer pressures here and there and there are significant.
The durable goods in the consumer electronics is a tough one to call it pretty tightly.
Connected to housing.
China housing is down 38%.
Housing starts are down 38% year over year.
So that's a pretty low level I'd say, there's opportunity for upside going into next year.
Europe has slowed down.
But we're still working off of.
Issuance of houses that are under construction.
So I think the general consensus is demand is a little bit slower for 2023 on housing here, Brian other bright spot is infrastructure and so for those businesses.
That are tied to infrastructure.
We still see very good infrastructure spending.
We will now take the next question from Michael Sison from Wells Fargo.
Okay.
Hi, This is Richard on for Mike.
Just wanted some.
Color on the $1 billion in cost savings for 2023.
Is that he is embedded.
In the 3 billion to $3 nine that you are targeting to increase.
Further your earnings range through the cycle.
And also is that.
Does that also include the.
The temporary 15% reductions in polyethylene and maybe additional.
Reductions in capacity potentially in.
Maybe I and II.
Yes, it's a good good question Richard so.
Our target is to come up with more than $1 billion in cost saves I would I would down into a few different buckets for you.
One is what we can do with optimizing our mix of flexing the assets across geographies and product and application mix tanks with improved margins.
The second would be where you talked about in terms of plant idling their shutdowns right now we don't have anything lined up for shutdowns, but we obviously reduced rates.
For higher cost plants, and we'll continue to do that especially in Europe , while energy costs remain as high as they are.
And then we're working on always things to drive operational excellence.
And the other big moving part next year is.
We're going to reduce turnaround spending.
We're starting to see commodities come down and input costs come down and some relief on freight and logistics costs. So we've got a big effort on purchased materials and freight and logistics to get costs down and also on purchase services, including contract Labor and then we have been implementing digital and.
Acceleration of finishing those projects delivers bottomline margins and productivity to us. So those are really the five big buckets that we're working on the target here. If you looked at the earnings corridor that we published back in Investor Day, Our 2023 lower end of that corridor Isabel.
$7.2 billion. So our efforts here are really driven to protect that earnings corridor that we put out there a lot of the path to zero project growth in that earnings corridor, The Alberta project, which is a $1 billion of underlying EBITDA growth starts in 2027.
That project will come on in two phases between 2027 and 2030 with the other 2 billion comes on through the years as we bring on these smaller higher return.
Lower risk projects.
We will now take the next question from Kevin Mccarthy from vertical research partners.
Hi, Good morning, this is corey on for Kevin.
Turning back to a question on the outlook, you had mentioned and a benefit in the ethylene chain.
We're baking into your pork your outlook as it relates to ethane costs.
And what is your view in light of today's natural gas market backdrop, and then for the Cold furnace Idling program can you talk through or.
<unk> what impact you expect that to have on fixed cost absorption at your reduced plants. Thank you.
Yes.
Right.
That's a good question on ethane.
I mentioned.
Natural gas earlier, so gas production continues to be more than half a million barrels a day of ethane in rejection that has really brought the frac spreads down.
And so we've seen frac spreads come back down to about 33 cents a million btu and so off of some of the highest that we saw.
And first second quarter.
And I think our projection is going to continue to be that way natural gas productions.
Yeah.
Bcf a day right now and the outlook for next year is 110 Bcf a day.
There'll be plenty of ethane available. So I think our feeling is we expect through winter 40 to 60 cents a gallon on the.
Depending on what happens with winter gas demand.
That's.
Really where it was 35% to 65 in third quarter and I think next year, we're going to see continued availability and lower pricing on ethane.
In terms of the coal furnace idling I don't have a good number for you to estimate what that is.
Essentially.
As you can.
Historically, it would have been to keep those assets on hot standby and ready to go but with the slower demand there is no need to do that.
With these higher gas costs taken them cold and warm and backup is not going to penalize us in the marketplace.
We will now take the next question from Steve Byrne from Bofa.
Thanks, It's Matt Deyoe on for Steve.
Can we talk about the trend in functional polymers, a bit I think price was up.
Year over year, but down be down sequentially did margins in that business improved quarter over quarter with base commodities deflating and when we look at for Q.
<unk>.
Did that that performance catch up on the downside or do you still think things should hold in pretty well.
Yes. Thank you good question.
Prices typically are pretty resilient through the cycle and in that space.
We saw.
Prices.
Flat flat really from quarter to quarter, and so net margin declined a little bit because of the higher energy and raw material costs.
The demand continues to be good.
Demand in areas like commercial construction, which is holding up.
Relatively well mixed use both residential and commercial buildings are holding up pretty strong around the world.
And that takes a fair amount of material.
Obviously products into automotive are holding up pretty well and then energy energy infrastructure. It takes a lot from the wire and cable business and that continues to hold up well.
What you'll see is they can.
Can the margins can ebb and flow a little bit, but the volumes and the price trends are very strong.
We will take the next question from John Roberts from Credit Suisse.
Good morning, Jim and Howard This is Matt Skowronski on for John Some of the consultants have reported that polyethylene storage levels are very high in North America would you can were taking operating rates lower than the 15% reduction you've already taken if demand weakens further and then sitting here today do you think it's possible.
Further reductions in production will need to happen either through the end of this year or early 2023.
Thanks for the question I think the storage levels, primarily at the ports or are waiting for ships to arrive to get the product out a lot of that product for the export market. So it is that that product is going to magically turnaround into the north.
American market.
With what we see with demand growth in the North American market I don't see a reason to reduce operating rates any further.
Also say Latin American businesses, holding up relatively well so that gives us some opportunity as well.
I think it's going to be worked out as we get.
Better ship arrival times and better loading I think youre going to see those numbers pretty quickly.
I would just also add the latest ACC data says that inventory levels actually decreased by 7% or about four days month on month. So I mean, I think you still see fundamental demand in the United States and.
In Canada hanging in there.
We will now take the next question from Christopher Parkinson from Mizuho.
Hi, good morning.
I was just wondering if you can parse out a little bit you know what.
End markets and regions you saw the biggest shift in demand risk from original expectations in the second quarter and how those areas are trending into the fourth quarter was there any area, where you're more optimistic or more concerned as we head into the end of the year in 2023. Thank you.
Yes, good question Chris.
Areas of strength.
Our industrial electronics, and think about telecom fiber infrastructure Ada centers.
And that continues to be pretty good there can be some supply chain constraints, there, but it's been pretty strong.
In industrial solutions, we make intermediates.
Intermediates and sedans for the pharma industry.
Demand has been strong we're looking at greater than 7% compound average growth rates through 2026.
And so that's I think that's going to continue to industrial solutions in general I would say has good growth trends in silicones downstream silicones and job growth trends Automotives, we're seeing some supply constraints easing and even those sales. This year of deliveries. This year are flat year over year.
<unk>.
Really robust EV growth.
Especially in China if.
If you look at China, Evs are up 90% year over year in automotive in China is up 25% year over year I think that's a bright spot we expect to continue.
As in the United States also was strong and I expect that to continue.
That's good for us because two to three times more silicone materials in Evs and similar amount of materials that we would have in an internal combustion engine for things like controlling noise vibration harshness.
Infrastructure structure is going to continue to be strong there are stimulus packages out there many governments around the world and.
That tends to pull a lot and functional polymers, which we joked about it will pull some polyurethane and construction materials that will pull some in coatings and that infrastructure space and some in and out of industrial solutions.
In plastics and tends to Paul.
And things like water pipelines natural gas pipelines I think we will continue to see that grow.
Okay.
Steady markets I would say would be oil and gas, we're starting to see an uptick in oil and gas production that pools are means for macho solutions business personal care has been very resilient cosmetics would come back after a soft second quarter in China and packaging for food.
So the issues in packaging and are really more.
That demand, but really more the higher energy cost and slowing economic activity in Europe .
And then places where I mentioned before a week are related to housing and big ticket items, so appliances food and beverage.
Hi activities like.
Furniture and bedding.
I mean, not food and beverage appliances, and furniture, and bedding slowed down third quarter and in the fourth quarter.
And then consumer electronics slowed down as well a large tvs.
Large home Pcs and electronic devices.
Residential softening here in the U S. Europe also in China.
But commercial construction.
Has been relatively good mixed residential and commercial buildings, especially in big cities.
I think next year, India U.
U S Canada, Latin America will be bright spots, we'll still have to manage through Europe .
The situation with Russia, Ukraine, having the biggest impact there and then.
China.
We're the best quarter in China, we were up 13% quarter over quarter, and 7% year over year in volume and could have been better.
With the ability to get more plastics out of the Gulf Coast. So I think theres been a lot of concern about what they've reported.
Not reported.
But our our view is that demand has been good.
We will now take the next question from Josh Spector from UBS.
Yeah, Hi, good morning.
I was curious if there is a way to think about the cost you've got European Europe from higher energy. So we think about <unk> and <unk> your expectations versus the level of <unk> is there any way to quantify how much you feel like you've had to absorb and not be able to kind of shift away from from flexing your production or your pricing or other means so if pricing or <unk>.
<unk> prices were to move down, but the demand environment remains similar.
How would you think that will play out.
So simple answer two thirds of the total EBITDA decline in third quarter, whether it was versus previous quarter or last year was in EMEA and that's the impact of high inflation.
Elevated energy costs on our raw materials, and then what that high inflation has done the consumer demand in EMEA volume was down 12%.
In the quarter in EMEA.
Yes.
We will now take the next question from everyone Vishal Nathan from RBC capital markets.
Great. Thanks for taking my question good morning.
But my question is around North America and.
You know potential.
Your outlook there now Europe was responsible for two thirds of the weakness in Q3, and that's frankly been the case for a little while now.
Are you at all concerned of a weakness that could emerge in North America as North America, just a little bit behind Europe , and China, and the weakness that you're seeing there I mean, I guess, you're asking China weakness, but but on Europe .
And what are some of the factors that would differentiate and keep North America, a little bit more resilient, maybe you can touch on inventories or a supply demand or anything else.
Well the cost position that we have in the Americas is very advantaged and so I think thats. The most important thing to keep in mind.
The consumer demand has been strong, especially consumer non durables consumer discretionary.
It has been good I would say big ticket items like I mentioned have already slowed this year. So if anything there's a chance for upside next year.
I think that same is true on on automotive automotive has really been supply constrained and so we get through some of that will start to see that move up we're starting to see here.
I'm not talking just about dow's business, but we're starting to see prices come down and bulk commodities. It takes those prices a while to work through.
The fabrication shops and get themselves into the price of a product that a consumer would buy in the store.
So those prices have come down through the year and I think you'll start to see those show up in the consumer markets next year that that may actually help things improve.
European energy situation is totally different than the United States and right now we're trying to work through how we can help the government get to a better energy policy that will help them out and I think that'll be the biggest the biggest improvement globally that will help the economy move.
We will now take the next question from Aleksey <unk> from Keybanc capital markets. Please go ahead.
Hi, This is Paul on for legacy as we approach winter. How are you guys managing the cost front in both the U S and Europe .
And do you see the potential for any idling of that in Europe , maybe not your assets, but just broadly in the industry.
Yes, I think we have seen in energy intensive industries in Europe , like steel and aluminum already idling of assets.
Maybe not complete some some energy intensive industries complete closure.
May jeopardize the long term.
Probability of starting them back up.
A lot of pressure on smaller producers in Europe , especially.
Having some scale matters and having good advantage cost positions matters.
About half of our energy footprint in Europe is advantaged and so we've dialed back to those rates to take advantage of that cost layer and then we've loaded that demand onto other locations that are more cost advantaged, we'll continue to do that.
I think the the other answer do shutdowns is going to be whether we see a way through the energy policy situation the longer we stay in this situated longer the Russia, Ukraine situation last it'll put more pressure on the industry.
Take a look at rationalizing.
And they've already got.
A lot of pressures there they need government help more than anything.
We will take the next question from Laurence Alexander from Jefferies.
Good morning, So can you.
Describe how youre thinking about capex flexibility.
Over the next couple of years, given the given the credit cycle.
In prior cycles.
From a tunneled mortality looks at retrenching, but as you look at the investments required for the circular economy initiatives could.
Did you pull forward or be opportunistic in expanding what you do in that value chain.
Other people retrench.
Good question, Laurence and obviously, we're trying to.
Have the financial flexibility to keep moving on those.
Projects, but I don't think long term any of those trends are going to change we would see the consumer demand.
Throughout the year in spite of what's going on in the global macro economy consumer has come back to us consistently wanting more and more and more of both mechanical recycle and advanced recycled products and products made with bio based ingredients more more renewable products and that's what we're investing in.
Some of it's our capital some of it is joint capital together with partners like I mentioned with neuro technologies, we have about 20 projects and plastics today.
We had a 1 million metric ton target and we have good line of sight to be able to deliver the $1 million and we just increased it to 3 million metric tons of circular and renewable solutions by 2030, mainly because of those brand owners, who are telling us. The demand is there for those products and so we will keep those projects moving through.
Moreover, we will keep our de carbonization and passenger zero projects moving forward.
Obviously, we're going to be disciplined about it.
Most of the monies that we spend on path to zero right now our engineering dollars and we will not pull the trigger and start those projects until we see the bulk contracts for steel and fabricated products and long lead time items in the right range and when we see that we will be ready to go.
I think in this next wave will have first mover advantage with the Canadian projects, just like we did with the U S. Gulf projects that started up in 2017.
Okay.
We will now take the next question from J D <unk> from field research.
Okay.
Okay.
The first is on the dialog same value chain could you just tell us what is the current cost differential between Europe versus the U S and China on a landed cost base. If you include the energy cost and given that significant supplies coming in China in the next 12 to 18 months, especially in <unk>.
And John and Yunnan.
What do you expect for dialog, saying utilization outside of China. That's my first question and the second question really is around the ethylene oxide imaging chain. This chain has done extremely well for not just yourself, but a lot of your peers as well and again, we are starting to see as freight rates normalize product come out of.
China. So what do you expect for the Eo chain in 2023 and 2024.
Do you expect a normalization or do you think that demand is going to continue to be good. Thanks a lot.
It's the wrong thing prices there that are available there in China have become available.
In all the regions around the world already.
It's already at that if that spot.
Silicon metals market prices.
Are down a bit mainly just because demand in some higher volume applications are down higher volume applications related to building and construction.
But that I think is going to steadily improve I would expect it to be in these levels in 2023, and then as we see inflation come down which I do believe it will I think you'll see the demand start to pick back up again and things will tightened back up.
More pressure on Europe , I would say that in North America.
And that's why we took some slower rates.
Our U K facility.
On Eo demand was that the second half of the question and <unk>.
<unk> is the weak spot in <unk>, if you look at our industrial solutions strategy. It is to keep investing in.
High value <unk> applications, and so all <unk> investments that you see investments in our oil and gas franchise remains those are continuing to do very very well and we're going to continue investing there to try to increase the amount of business that goes to those higher value applications for purified Ito and away from.
<unk> G LNG prices.
Where we're actually at a low spot in the third quarter and has improved a little bit.
<unk> because of falling inventories I think a big part is going to be dependent upon.
Higher China activity after they've stopped zero Covid lockdowns.
Okay.
Yes, thanks, everyone for joining our call I think that's all the time we have for today. We appreciate your interest in Dow for your reference a copy of our transcript will be posted on dows website within approximately four hours.
This concludes our this concludes our call. Thanks once again.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.