Q2 2023 Dow Inc Earnings Call

Speaker 2: Greetings and welcome to the DAO 2nd Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question at that time, please press star followed by 1 on your telephone keypad. percent.

Speaker 2: As a reminder, this conference is being recorded. I will now turn the call over to Dow Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

Speaker 3: Good morning. Thank you for joining our webcast today. The accompanying slides are provided through this webcast and posted on our website. I am Pankaj Gupta, Dow Investor Relations Vice President, and joining me today on the call are Jim Fiddling, Dow Chair and Chief Executive Officer, and Howard Underlider.

Speaker 3: President and Chief Financial Officer.

Speaker 3: Please note our comments contain forward-looking statements and our subject to the related cautionary statement contained in the earnings news release and slides.

Speaker 3: Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items.

Speaker 3: We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides and are posted on our website. On slide two, you will see the agenda for our call. Jim will begin by reviewing our second quarter results and operating segment performance.

Speaker 3: Howard will then share our outlook and modeling guidance and then provide an update on our cost savings actions and financial position. To close, Jim will outline how we are continuing to advance our long-term decarbonized and grow, as well as transform the wage strategies while navigating challenging short-term dynamics.

Speaker 3: Following that, you will take your questions. Now let me turn the call over to Jay. Thank you, Ponkage. Beginning on slide three, we continue to navigate a challenging macroeconomic environment with slow global growth in the second quarter. Despite lower year over year sales and earnings.

Speaker 4: Team Dow delivered sequential earnings improvement by executing on our financial and operational playbook.

Speaker 4: We leveraged our diverse portfolio to capitalize on gains in packaging and modestly higher seasonal demand in building and construction.

Speaker 4: This resulted in a sequential improvement in volume. In addition, we continue to implement our $1 billion of proactive and targeted cost savings actions, delivering $250 million of savings in the quarter and $350 million year to date. In addition, we continue to implement our $1 billion of savings in the quarter and $350 million year to date. In addition, we continue to implement our $250 million of savings in the quarter and

Speaker 4: Met sales were 11.4 billion down 27% versus the year ago period, reflecting lower demand and prices due to slower macroeconomic activity.

Speaker 4: Sales were down 4% sequentially as volume gains were more than offset by lower local prices.

Speaker 4: Volume decreased 8% year over year, led by a 14% decline in Europe , the Middle East, Africa, and India, or Amia.

Speaker 4: and 5% sequentially due to lower demand on weak macroeconomic activity as well as lower global raw material costs.

Speaker 4: Operating EBIT for the quarter was $885 million, down from $2.4 billion in the year-ago period, primarily driven by lower local prices.

Speaker 4: Operating EBIT increased $177 million sequentially, driven by gains in packaging and specialty plastics.

Speaker 4: We generated cash flow from operations of more than $1.3 billion, up more than $800 million versus the prior quarter, driven by improved working capital.

Speaker 4: On a trailing 12 month basis, our cash flow conversion is 98%.

Speaker 4: Our strong financial position gives us the flexibility to continue to invads our long-term strategic priorities supported by our discipline and balanced capital allocation strategy.

Speaker 4: In the quarter, we returned $743 million to shareholders through dividends and share repurchases.

Speaker 4: Year to date, we've returned nearly $1.4 billion.

Speaker 4: And our balance sheet remains healthy, supported by strong investment grade credit ratings. And our balance sheet remains healthy, supported by strong investment grade credit ratings.

Speaker 4: We also published our 2022 intersections report in June .

Speaker 4: The report once again received limited assurance by our external audit firm, and showcases DAO's continued progress on our ambition to be the most innovative customer-centric, inclusive, and sustainable material science company in the world.

Speaker 4: Now turning to our operating segment performance on slide 4.

Speaker 4: In the packaging and specialty plastics segment, operating EBIT was $918 million compared to $1.4 billion in the year-ago period.

Speaker 4: Local price declines were driven by lower global energy and feedstock costs, which in turn impacted polyethylene prices across all regions.

Speaker 4: Volume declines, primarily in Amia, were driven by lower demand for olefins and aromatics.

Speaker 4: sequentially operating EBITM improved by $276 million, driven by lower energy and feedstock costs.

Speaker 4: Moving to the industrial intermediates and infrastructure segment, operating EBIT was a loss of $35 million compared to earnings of $426 million in the year-ago period.

Speaker 4: Results were driven by lower local prices and demand in both businesses. Volume declines were primarily driven by lower demand for consumer durables, building and construction and industrial applications.

Speaker 4: Sequentially operating EBIT was down $158 million due to lower local prices.

Speaker 4: and increase planned maintenance turnaround activity.

Speaker 4: And in the performance materials and coding segment, operating EBIT was $66 million compared to 561 million in the year ago period. Local price decreases were driven primarily by declines for celloxanes and acrylic monomers.

Speaker 4: Volume was down on lower global demand for silicones and coatings applications. Sequentially operating EBIT increased $31 million, driven primarily by seasonally higher volumes.

Speaker 4: Next, I will turn it over to Howard to review our outlook and actions on slide 5.

Speaker 4: Thank you Jim and good morning everyone. We continue to expect a challenging network and homic environment in the third quarter.

Speaker 5: While inflation is beginning to moderate, the lagging effects of higher monetary policy on consumer demand and a slower than expected demand recovery in China have resulted in a slowdown of industrial economic activity around the world.

Speaker 5: In the U.S., industrial activity remains weak, with June manufacturing PMI in contraction at 46.3. However, consumer demand has remained resilient, supported by low unemployment levels.

Speaker 5: With inflation starting to ease, consumer confidence in June is now at the highest level since early 2022.

Speaker 5: In Europe , recessionary conditions persist and are expected to continue, despite lower energy prices and inflation declining to a 17-month low. Industrial activity in the region continues to contract with PMI reaching the lowest level since May 2020.

Speaker 5: In China, while we are experiencing growth, the anticipated economic rebound following the end of zero COVID restrictions has yet to fully materialize.

Speaker 5: June manufacturing PMI continues to hover around the neutral level of 50, and China's exports were impacted by the global demand slowdown, contracting at the fastest pace since the beginning of the pandemic.

Speaker 5: Around the rest of the world, India's manufacturing PMI expanded to 57.8 in June as demand outpaste higher input costs, and Ozzy on manufacturing PMI remained in expansionary territory.

Speaker 5: Manufacturing activity in Japan, however, retreated back to contractionary levels following improvements in PMI for three consecutive months. Given these regional dynamics, we will continue to take a disciplined approach to managing our operations and adapt our business to the evolving market realities. Turning to our outlook for the third quarter on slide 6.

Speaker 5: In the packaging and specialty plastic segment, industry polyethylene demand increased 4% in June .

Speaker 5: Despite this tailwind, we exited the second quarter at lower price levels, which are expected to drive lower average prices sequentially.

Speaker 5: We're also experiencing increased speed stock costs, primarily driven by higher at-thing prices on the US Gold Coast.

Speaker 5: All in, we anticipate these market dynamics will be a $50 million headwind in the quarter.

Speaker 5: Additionally, increased planned maintenance turnaround activity at our cracker in St. Charles, Louisiana, is expected to be a $100 million headwind, and we see another $100 million headwind from the lack of project-based licensing sales from the prior quarter, which will not occur. However, we do expect to generate a $50 million tailwind in the quarter.

Speaker 5: as we continue to implement our cost savings actions.

Speaker 5: In the industrial intermediates and infrastructure segment, while demand in energy and markets remains resilient, we expect continued demand pressure in consumer durable and markets.

Speaker 5: We anticipate a $50 million tailwind from our cost savings actions, as well as a $25 million tailwind following the completion of a plan maintenance turnaround from the second quarter.

Speaker 5: Additionally, following an unplanned event at our Louisiana Operations this month, our preliminary estimate reflects $100 million headwind to earnings. I want to please reinforce that this estimate is only preliminary at this point. As we get a more refined estimate, we will update if needed.

Speaker 5: In the performance materials and coding segment, we expect continued price pressure in saloxames while seasonal demand remains below normal for building the construction and markets.

Speaker 5: together contributing a $50 million headwind. Our cost savings are on track to deliver $35 billion tailwind for the segment.

Speaker 5: Additionally, the completion of second quarter turnarounds that are carleton and are Jean-Jagong-Salot saying facilities are anticipated to contribute a $25 million tailwind in the third quarter. Operationally, our earnings are expected to be flat with the prior quarter, as our self-help has expected to fully offset the estimated margin compression. All in, we expect third quarter earnings to be down approximately 150 million sequins.

Speaker 5: continue to invest for the future.

Speaker 5: We are on track to deliver our billion dollars of cost savings in 2023.

Speaker 5: We achieved 35% of the savings in the first half of the year and continue to expect we will deliver the remaining 65% in the second half. This includes our previously announced global workforce reduction program.

Speaker 5: 75% of the 2000 impacted roles exited at the end of the second quarter and more than 90% are expected to exit by the end of the year.

Speaker 5: Our $300 million reduction in planned maintenance turnaround spending remains on track, and we're continuing to execute improvements in our raw materials, logistics, and utility costs.

Speaker 5: We're also continuing to execute actions to rationalize select higher-cost, lower-return assets in our polyurethanes, coatings, and industrial solutions businesses in line with market fundamentals. We're continuing to execute actions to rationalize select higher-cost, lower-return assets in

Speaker 5: These actions support the strong financial position that Team Dow has purposely built since been. Our debt and our credit profile give us a significant flexibility and optionality to continue to advance our strategic priorities across the economic cycle.

Speaker 5: All in, our actions have allowed us to lower our cash commitments by approximately $1 billion since then, driven by significantly lower cash interest and pension liabilities, reduced share count, and no joint venture cash contributions.

Speaker 5: For 2023, we expect our annual net interest expense to be down more than 40% versus 2019, and we have no substantive debt maturities due until 2027. And we see more than $1 billion of unique-to-dow additional cash levers going forward, including resolution of our pending NOVA litigation, structural working capital improvements, and

Speaker 5: and our intervention actions.

Speaker 4: Next, I'll turn it back to Jim for an update on our long-term strategy. Thank you, Howard. Moving to slide eight, we remain confident in our long-term growth as we drive the transition to a more sustainable future with a focus on profitability and maintaining our disciplined and balanced capital allocation priorities.

Speaker 4: Our decarbonizing growth strategy is expected to increase underlying earnings by $3 billion annually, while also reducing greenhouse gas emissions by 30% by 2030 versus 2005 levels.

Speaker 4: Notable updates this quarter include. Our FCDH unit is now fully operational and is ramping up rates.

Speaker 4: leveraging breakthrough technology, the unit expands our capacity at lower capital and cost intensity while reducing energy usage and greenhouse gas emissions relative to conventional PDH units. In collaboration with X Energy, we are preparing to submit a construction permit application.

Speaker 4: to the U.S. Nuclear Regulatory Commission for our small modular nuclear energy facility in Seedriff, Texas.

Speaker 4: We plan to break ground in 2026, and the project is expected to provide the site with safe, reliable, low-carbon power and steam. We plan to break ground in 2026, and the project is expected to provide the site with safe, reliable, low-carbon power and steam.

Speaker 4: In parallel, we are utilizing a capital efficient approach to quickly scale production and grow our supply of recycled and bio-based products.

Speaker 4: By 2030, we expect to advance our transform the waste strategy by commercializing 3 million metric tons per year of circular and renewable solutions.

Speaker 4: Our collaborations with Belorigen and Mira technology both remain on track to start up their respective mechanical and advanced recycling facilities in the fourth quarter.

Speaker 4: Together, these investments will help us unlock long-term growth opportunities as we meet increasing customer and brand owner demand for more sustainable and circular solutions.

Speaker 4: Taking a closer look at our fourth Saskatchewan Alberta Path to Zero Project on slide 9. This flagship project will create the world's first Net Zero CO2 emissions, ethylene and derivatives complex.

Speaker 4: Another example of how we're delivering long-term value growth through sustainability.

Speaker 4: By 2030, the project will be carbonized 20% of our global ethylene capacity while expanding our global polyethylene supply by 15% and tripling polyethylene capacity at our Alberta site. The project will be carbonized 20% of our global ethylene capacity at our Alberta site.

Speaker 4: We are on track to secure partner agreements and subsidies during the second half of this year, and we are targeting board and regulatory approval along with a final investment decision by year end. Construction is projected to begin in 2024 and startup of the project will occur in two phases.

Speaker 4: Phase one will add approximately 1,300 kilotons of ethylene and polyethylene capacity annually by 2027.

Speaker 4: Phase 2 will contribute another approximately 600 kilotons annually by 2029. We expect to spend, on average, roughly $1 billion of CAPEX annually on the project, beginning next year through project completion.

Speaker 4: By mid-decade, our total capex for the company is projected to ramp above DNA between 2025 and 2027 as we implement phase 1 of the Alberta project.

Speaker 4: We remain fully committed to keep our target capex within DNA across the economic cycle and expect to return to those levels after the completion of the first phase of this project.

Speaker 4: At full run rate, we expect the project to deliver $1 billion of EBITDA annually and targeted returns on invested capital above our enterprise goal of 13% over the economic cycle.

Speaker 4: driven by the Alberta feedstock cost advantage which provides Dow with lower ethylene costs compared to the rest of the world even more advantaged than the US Gulf Coast.

Speaker 4: Industry leading capital efficiency.

Speaker 4: industry-leading capital efficiency, building on the success of our Texas 9 investment.

Speaker 4: which has delivered over 15% return on invested capital since startup with best in class capital intensity, conversion costs, and CO2 emissions. A higher value sustainable product offering, which drives value as we capitalize on technologies that deliver low and zero CO2 emission solutions.

Speaker 4: with enhanced performance for our customers, and by leveraging third-party investments for decarbonization and CO2 infrastructure assets, which will reduce our capital spend consistent with our best owner mindset.

Speaker 4: Altogether, we are well positioned to lead the industry and meet the needs of customers and brand owners as they seek products with a lower carbon footprint.

Speaker 4: Our disciplined and phased approach will enable us to decarbonize our assets, grow earnings, and keep CapEx within DNA across the cycle.

Speaker 4: Closing on slide 10.

Speaker 4: Dow remains focused on advancing our long-term strategy while navigating challenging short-term market dynamics.

Speaker 4: We're proactively reducing costs and maximizing cash flow while maintaining a broad focus on financial flexibility and operating discipline. The actions we've taken since spend to strengthen our balance sheet and improve our cash generation profile are enabling us to be more resilient as we deliver on our capital allocation priorities gives the shortcoming us concern for some time I read back saying I had the option to guide you on that but you shouldn't where you leave all concerned you all have the option.

Speaker 4: across the economic cycle. As a result, we have raised our underlying earnings above pre-pandemic levels.

Speaker 4: Substantially improved our 3DQ-Movet free cash flow.

Speaker 4: Reduced our net debt and pension liabilities by more than $10 billion and delivered around 84% of net income back to our shareholders since then.

Speaker 4: well above our target of 65% across the economic cycle.

Speaker 4: At the same time, our diverse, differentiated, and global product portfolio is well positioned to capture the above GDP demand growth across our attractive market verticals.

Speaker 4: With increasing customer demand for more sustainable and circular solutions, we'll continue to advance our decarbonize and grow and transform the waste strategies, which will raise our earnings profile, reduce our greenhouse gas emissions, and create a more circular economy.

Speaker 4: With that, I'll turn it back to Pankaj to open the Q&A.

Speaker 3: 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.

Speaker 3: 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.

Speaker 2: If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the cube, simply press star 1 again.

Speaker 2: We please ask that you limit yourself to one question in order to conserve time. One moment please for your first question.

Speaker 2: Your first question comes from the line of Vincent Andrews of Morgan Stanley . Please go ahead.

Speaker 4: Thank you and good morning everyone. Wondering if you could just give us a little bit more color perhaps by region and packaging especially plastics for the third quarter, that $50 million headwind you see on a net basis between the higher feedstock costs and the lower average pricing. How do those dynamics play out in each region?

Speaker 4: Good morning, Vince. Great question. Packaging, especially plastics, was strong in all four regions of the world. We saw volume increases in all four of them. We saw overall the biggest volume increases in the world.

Speaker 4: across all the businesses in NPNSP for the quarter. In terms of the $50 million headwind, obviously June closed out a little bit softer on pricing. North American prices settled down three cents in June .

Speaker 4: And that's because you've had some new capacity that came online during that time. Inventories came down actually during the month of June , I think which is a reflection of the strength in China, also India, also exports to Mexico. All three of those regions are relatively strong.

Speaker 4: off a bit in North America, a lot of that is really due to the hot weather that we've had and ethane staying in natural gas. The projection is that that will continue through the third quarter, but if the weather breaks, then obviously we'll see some of that come out.

Speaker 4: But our expectations is we'll start with that lower pricing in July and then we've got actions out there in July of up three cents, up five cents for August . And as we speak, Asia is increasing about $20 to $30 a metric ton in July .

Speaker 2: Thank you. Your next question comes from the line of David Begleiter of Deutsche Bank. Please go ahead.

Speaker 6: Thank you, good morning. Jim, staying on the $50 million decline in feedstocks and pricing, looking at integrated margins, that would suggest it would be worse than down $50 million.

Speaker 6: So what are you doing to offset the perhaps greater headwinds in at least

Speaker 4: consultant margins versus your forecast down $50 million. Thank you. Morning David. Look on integrated margins for the second quarter I think they ended slightly higher than where we were in the first quarter and that was good news in North America. Our expectation is that they will improve.

Speaker 4: is coming in both natural gas liquids and in frac capacity and so that's going to mean there's plenty of ethane available. There's more than 750,000 barrels a day of ethane in rejection today. I think some of it stayed in rejection because natural gas demand has been so strong because of the warm weather.

Speaker 4: But it doesn't take much for that to turn and there will be an incentive to break that out. Frac spreads are good right now. I also think that inventories on NGOs are above the 5 year average, about 15%, above that 5 year average even with this warmer weather.

Speaker 4: those things can be very dynamic and they can change during the quarter. Exports continue to be strong. We continue to see month over month and quarter over quarter improvements in ability to move exports out. Our experience with China, even though China is relatively slower from a GDP growth standpoint than previous years, it's still...

Speaker 4: in the 4.5 to 5% GDP range, which is relatively good, and we've been able to move good volume into China.

Speaker 5: And Dave, in terms of what additional tailwinds are there to help compensate or offset some of those headwinds that you talked about, you know, a big chunk of it, we continue to ramp our marine pack cargo and our shipment, so you should expect sequential volume growth in PMSP from Q2 to Q3. And then also it's a self-help that the team delivered in the second quarter. If you look at all of the beach

Speaker 5: of that is impacted in PNSP. So the self-help and the interventions will also be a tailwind sequentially for PNSP.

Speaker 2: Thank you. Your next question comes from the line of Hassan Ahmed of Olympic Global Advisors. Please go ahead.

Speaker 3: Good morning Jim and Howard. Just wanted to ask a quick question around the supply edition side of things, ethylene, polyethylene specifically. There have been some rumblings in the press about China potentially considering rationalizing inefficient facilities. Hey!

Speaker 7: So, what are your thoughts around that and also around the base of capacity additions, given the macro the way it is?

Speaker 4: Good morning, Hasan. Look, I think if you look over the near term, the pace of capacity additions versus capacity additions.

Speaker 4: demand increases is really going to be net short. I mean, most of the capacity is on now. And so I think that's what's leading to obviously some of the pricing pressure that we've seen. But the volume growth is there. And so as that volume growth increases,

Speaker 4: We're going to see that eat up on that capacity relatively quickly. On China, obviously China's had the benefit from a NAFTA standpoint. China's moved into a better cost position than Europe . Obviously Europe's NAFTA crack cost position has become higher. But China's moved into a better cost position and so that means they've been able to get up to a higher level of capacity.

Speaker 4: today but MTO producers aren't really running which I think speaks to the NAFTA advantage there. And then I think if you look at the industry capacity, about a quarter of the industry capacity is greater than 40 years old. And if you think about assets that are high carbon footprint, assets that are in high cost position, those are...

Speaker 4: highly suspect and they're going to be under pressure. I haven't seen any announcements to shut down but I think usually those things lag a little bit. My expectation is that polyethylene typically holds up the best through an economic slowdown that continues to be true today.

Speaker 4: our cost advantage and our feedstock cost advantage with our flexibility is showing through in the results.

Speaker 4: We're seeing that even in Europe where we're cracking more LPGs right now, maxing out on LPGs, and that improves our European position. And I think that's going to carry through the back half of the year.

Speaker 2: Thank you. Your next question comes from the line of Jeff Zakaskis of JP Morgan. Please go ahead.

Speaker 5: Thanks very much. Two-part question. Can you comment on sequential MDI price trends in the United States? And secondly, you bought back $250 million in shares, so that's maybe about 5 million shares, but your shares went up 2 million sequentially.

Speaker 4: and you have them flat for the third quarter. So what's the magnitude of share issuance this year?

Speaker 4: Yeah, I'll take a look at MDI and then I'll have Howard get the share by back part of that.

Speaker 4: Look, on MBI, I think things are in relatively good position. We've seen MBI continue to be relatively strong. I mean, the markets where MBI impacts obviously automotive has continued to be strong. But we've seen MBI continue to be strong.

Speaker 4: Demand down is obviously in durable goods like appliances. And so that has, in some systems offering there, that has put some pressure on prices. I think we are in the process of starting up a MBI distillation down in Freeport.

Speaker 4: which is an expansion off of the report capacity, but allows us to retire the report asset. And so I think, relatively speaking, MDI is holding up relatively well. And I think from a supply-demand balance standpoint.

Speaker 4: Our expectation is that some of the capacity that's been announced out there is going to come on later than expected. And I think that's going to offer a little bit tighter operating rates than what the industry analysts might be predicting.

Speaker 5: Yeah, Jeff, good morning. Look, this is Howard. On the share count issue, good eyes, what I would say is, look, in the first quarter, because we had a gap loss in the period, we had to use the basic share count, not the diluted share count. All else equal, it would have been 711 if you were doing an apples to apples.

Speaker 5: In Q1, in Q2, we opportunistically repurchased $250 million worth or 5 million shares. What we continue to say is we're going to buy back at least a dilution and we will continue to be opportunistic. So, I mean, I would say you should at least expect another $125 million of stock buyback in the world subsistence industries. Absolutely.

Speaker 5: in Q3. In terms of what's left on the program, we've got $1.7 billion left on the current Open Share Repurchase Program.

Speaker 2: Thank you. Your next question comes from a line of Mike Sisson of Wells Fargo Securities. Please go ahead.

Speaker 6: Hey guys, good morning. Your volumes are down 8% in 2Q. I think it's the fourth quarter of down volumes. It sounds like third quarter will be down as well. Are you seeing any bottoming in any of your end markets? Do you think the volumes in the second half will maybe improve on a year-over-year basis at some point?

Speaker 4: Morning, Mike. Good question. Volumes were down eight. Obviously Europe was off 14, so that's a pretty significant part of that volume being down. Asia Pacific and Latin America volumes were stronger, and so they've held up relatively well. North America has been relatively flat, about 1% on volume.

Speaker 4: So I think you can see obviously the pressure on Europe showing up in some of those markets. In terms of the look at the macro economy,

Speaker 4: My feeling is this, we know we're in a global economic slowdown. It really started mid last year.

Speaker 4: We saw GDP decline through the back half of last year. We saw a little spike up in Q1 of this year, but it's been down in Q2 and the expectation is it'll be down in Q3 and Q4. I think it's setting up for a ramp back in 2024.

Speaker 4: You know, people ask a lot of times, are we in a recession? I think we'll determine if we're in a recession or not when we look in the rearview mirror.

Speaker 4: But the leading indicators, the de-stocking that happened in the fourth quarter and into the first quarter, appears to be over. Inventories are in relatively good control. MEG, ethylene glycol, typically leads into a a slowdown. We saw that happen last year and obviously it led into this slowdown.

Speaker 4: And then a lagging indicator into a slowdown is caustic and chlorine, both sides of the electrochemical unit. Obviously we saw a time where chlorine demand was relatively strong and caustic demand was relatively strong. Then we saw caustic fall off but chlorine stay high.

Speaker 4: And now we see both caustic and chlorine fall off. And that's a lagging indicator that you're into a slowdown. So I would say all the indicators say we're in it right now. And it feels to me like third, fourth quarter is gonna be that low point. And then we start to ramp back from there. And with the Fed seem to be nearing the ending of rate increases.

Speaker 4: A little bit of green shoots in housing, people moving back into the housing market. I think there's some areas to be optimistic for 2024. Thank you. Your next question comes from the line of Kevin McCarthy of Vertical Research Partners. Please go ahead. Yes, good morning. Okay, everyone has functioned I'm going to let aden the floor and I'll jump on there. Okay.

Speaker 2: Jim, with regards to your industrial intermediates segment, can you speak to some of the actions that you're taking there in terms of copylene oxide and your kind of two-way resupply arrangements with Olin on site there?

Speaker 4: And then more broadly, maybe as a follow up to Mike's question, you're guiding 3Q a little bit lower. Do you think you're at or near an earnings bottom in 3Q in industrial intermediates? Or how would you frame that in terms of the bigger picture cycle there?

Speaker 4: Morning, Kevin. Good questions. Let me just break it up into polyurethanes and construction chemicals and industrial solutions and look at them differently.

Speaker 4: In polyurethanes and construction chemicals, we've been overweight propylene oxide and underweight isocyanates for some time. So you see what's happening with the asset moves. They've been trying to right-size a bit on PO and exit the merchant market PO business.

Speaker 4: And that's what has been announced so far. And then also increase the MDI distillation capacity and free port, which is what we're doing and retiring the LePort asset. I think that balances is out better with the growth in polyurethane, which is in the downstream systems businesses where we make higher value. And so I think you'll continue to see us do that. In terms of the olden relationship, we've completed the negotiation of a series of contracts in the US Gulf Co-

Speaker 4: I asked Corey and Michelle F. Lunt for the PO Businesses in Placaman and also Corey into the MDI assets and free boards. I feel good about the working relationship with Olin. I think we've continued to manage this well and I think we both understand that the best value for each company is to continue to work together and keep that.

Speaker 4: integrated economics alive.

Speaker 4: In terms of industrial intermediates, I would say it has been growing well. Our focus there is to continue to invest in downstream. Alcoholics means to support the growth in things like home and personal care.

Speaker 4: areas like low VOC solvents for the paints and coatings industry, the intermediates for the agricultural sector, and obviously all of the higher value derivatives that we make that go into pharma applications and energy, think oil and gas and gas treatment gas scrubbing.

Speaker 4: all which have great growth drivers and to deemphasize our exposure to ethylene glycol which is commodity.

Speaker 4: And most people probably won't remember when we did the deal with ME Global, we still had a couple of assets here that made ethylene glycol. Longer term, it doesn't make sense for us to make ethylene glycol on small scale assets. So we'll move to purified EO only assets for industrial intermediates.

Speaker 4: and then all the higher value downstream and really emphasize the specialty side of that business versus the commodity. Hi, and I do think had the additional drag in the quarter of the fact that ag intermediates were very slow in second quarter because of the hot weather.

Speaker 4: Farmers did not spray in the second quarter, so they missed the whole spray of crops. That's a pretty significant volume on IINI intermediate capacity. And that's really why you saw the drag on them. I do feel like with housing and construction being at the bottom right now, I do think you can say we're at the bottom in that space.

Speaker 4: And I think things will have optimistic as we moved in, more optimistic as we move into 2024.

Speaker 5: Thank you. Your next question comes from line of Frank Mitch of Fermion Research. Please go ahead. I hate good morning. Clarification and a question, Jim, just to clarify, your expectation is that we're going to see a thing pricing come back down more in balance with where natural gases and

Speaker 8: in the back here.

Speaker 4: Right, morning Frank. Yeah, I look, I think Efrain's supply is going to continue to increase. There's about 15% of additional supply coming on the 23, 24 timeframe. And there's 700,000 barrels a day in rejection today with, this is after the startup of new assets. So I think the supply is there. I think some of it is obviously.

I think is going to hit its peak before the winter season comes. And so I think as we see some moderation in the weather, I think you're going to see potential for ethane pricing to come off. Sadara, you're right at a couple of turnarounds that impacted the results. And of course, they have a strong exposure to Asia Pacific. They have a very good cost position.

So with them back online now and fully operating, and with the demand in Asia continue to be strong, and remember India has GDP rates above 7%, I think you'll see that Sadara will come back a bit in the third quarter and in the fourth quarter.

Yeah, Frank, I would also just add that Siddhartha just like Dow itself, they have a number of structural and operational improvements underway, including some product mix enhancements to increase margins and then their own cost intervention. So you should start to see that build through the back half of the year as well.

Thank you. And again, we please ask that you restrict yourself to one question for time constraints. Your next question comes from the line of Lawrence Alexander of Jefferies. Please go ahead. Good morning. This is Dan Rizzo on for Lawrence. Just in terms of cash flow conversion, it's obviously very high now, but I was wondering how we should think about it over the next few years given what you're expecting in terms of the new projects you've been working on.

on cash flow. I would not expect 98% going forward. Over the long run, an 80% cash conversion is a good number. Obviously, during periods of low macroeconomic activity, that number will be high because we tend to release working capital dollars. So a 90% number in the bottom of the cycle.

probably a 70% number at the top of the cycle and then using 80 kind of as a normalized conversion is probably in line Thank you your next question comes from the line of Duffy Fisher of Goldman Sachs. Please go ahead Good morning

If you could, on your slide six, just walk through each of the segments on the top line guides sequentially. Roughly, what are you looking volume versus price within those ranges? Morning, Duffy. Well, obviously on the...

Top line. I think sales obviously are gonna be down about 5% on the high side. It could be down as much as nine. I think you're going to see, obviously we talked a lot about feed stocks and packaging, especially plastics, that'll be one element.

We have the one time related items from second quarter to third quarter that won't repeat on licensing. So that's about a hundred million. Cost savings is about 50 million to the positive. And then we just finished. We just have the turnaround at the cracker, say Charles, which is a hundred million.

We're going to take advantage of that in the third quarter. And then we're going to navigate the price and obviously the headwinds that we have on raw materials. I would say the team's already shifting on flexibility. We've got butane, in some cases, and propane back in the slate in some areas to mitigate some of the higher ethane costs.

If you look at IINI, obviously the big impact will be the loss of capacity out of glycol in Placaman. So that will be $100 million headwind. That's partly lost margin on those sales and partly the cost of rebuilding the asset and getting it back operational.

Cost savings and maintenance activities are actually about a $40 million tailwind and then we'll continue to see You know how demand holds up automotive demand has been relatively good But housing and construction has been relatively weak on the polyuretane side Performance materials and coatings. I think volumes are going to hold up well

The price pressure in silox line has been the biggest headwind there. Although it's flattened and if it maintains flat, then we may not see as much of a headwind there. Cost savings and lower plan maintenance activity are about a $60 million tailwind for them.

So on PM and C, I'd say the other seasonal impact will be a slower, seasonal, return to kind of a normal seasonal outlook for coatings because architectural coatings have been relatively weaker. Industrial coatings have been strong but architectural coatings compared to last year have been relatively weaker.

That's kind of the outlook on all three. I'd expect at the high end, all three of them will be down. Primarily due to price, not so much on volume. And then as obviously demand returns, we'll start to see some pricing power come back in.

you know duffy look at i would just say at a very high level if you think about if you take a step back at the enterprise and think about what we're trying to guide to it really is on an operating basis essentially flat sequentially uh... you know you've got uh... uh... myself help which were guiding a hundred million dollar increase in in cost savings

That's what we expected. That will be eaten up by the margin compression that Begleiter talked about that the third party indices are projecting. And then that leaves you with $150 million of stuff that either happened in the second quarter that won't recur. So the project-driven licensing sales from Unovation, we don't expect another $100 million in the third quarter.

although the team continues to work on additional licensing, and then the 50 million turnaround headwind at an enterprise level, which is net. And so that's operationally flat. And then of course, we're still, we've got to repair and restore the Plaquemine glycol plant that Jim said. So we're guiding on that 100 million kind of a one-time impact on margin on lost sales, and then the cost to rebuild and...

Read commission and get that returned to operations. That's a preliminary number and as we as we learn more through The root cause investigation and the implementation plan to get it restarted will will will will give a further update Thank you and your next question comes from the line of Christopher Parkinson of Mizzouho securities. Please go ahead

I just wanted to hit back on slide nine, if I may. Just given the outlook for the CapEx versus DNA and some of the comments on Alberta, can you hit on any incremental thoughts you'd have on buyback activity in the second half of the year, dividend growth throughout that period in terms of the current coverage ratio?

What are the kind of the puts and takes and how your thought process entering the 24 through 27 period? Thank you so much. Howard, you want to hit view on buybacks? Yeah, look we're going to continue to be opportunistic as we think about the back half I would say we're going to have my mindset our mindset which is what I think I gave the answer on Jeff's question

a hundred and twenty five million that's our estimate for delusion so you know all things equal we're going to cover delusion uh... each quarter Q3 and then Q4 but we're going to continue to be opportunistic as we have the free cash flow and the doubt he must have an exceptional job uh... on working capital and just managing cash in a much tighter way remember that was one of the big changes we decided

uh... together as leadership to make it's been that every pnl leader will also have their own balance sheet uh... and also their own cash flow statement so every single leader in our company that manages a pnl now manages a cash roll and that rolls up to the one that human eye in the leadership team uh... are responsible for uh... they've been doing a phenomenal job

the 98% cash conversion. So we did 250 of stock buyback in Q2. And so you could see that similar kind of number potentially in Q3 and we'll see in Q4. The other thing, and I don't think we touched on it in this call, but we've talked about in the past is look, we continue every year since spin, we've had about a billion dollars or more of what I would call unique to Dow cash flow interventions or levers.

you know a structure working capital is two to three hundred million dollars you know tax team continues to do great job around the world we're looking at uh... you know any cash that we can potentially extract from our joint ventures uh... just as several examples so you know we we also have the no-veh litigation which is several hundred million dollars that we fully expect to win

and I would say the final round of that Canadian litigation. So there's another billion dollars out there over the next 12, 18 months. And as we get that money and we have the room, we will continue to be even more opportunistic on stock by that.

Thank you. Your next question comes from Lane of Iran. Vist 1athon of RBC, Capital Markets. Please go ahead. Great. Thanks for taking my question. We're at the Q2. As far as the Q3 outlook goes.

It looks like you mentioned the social edgish markets and China's recovery there. Would you call out that as really the main driver of when we can expect things to get better? That is, should we be looking mainly for an improvement in China that would help lower the days across many of your segments?

and signal better demand? What do you think are the main drivers of improving volume from here? Morning, Arun. Look, I think China, even though it's slower than what we're expecting, is still relatively good in global GDP. I mean, I think China is still relatively good in global GDP.

4.5 to 5% global GDP and the second largest economy in the world is pretty good. And India has been greater than 7%. And Mexico has been strong and we're well positioned to serve all those markets. And we're seeing that as we increase the exports.

And obviously both China and India still need higher value functional polymers, which are highly profitable part of what we export from the US Gulf Coast.

So I feel good about that. I don't think it's totally just a pitted on China improving. I Also, they get dependent on things like housing starting to improve again in North America and the European economy coming back So energy costs have come down in Europe natural gas LNG prices in Europe have kind of flattened around