雅虎香港財經 Dow Inc. (NYSE:DOW) Q1 2024 Earnings Call Transcript
Dow Inc. (NYSE:DOW) Q1 2024 Earnings Call Transcript April 25, 2024
Dow Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.47. Dow Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Dow First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn it over to the Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.
Pankaj Gupta: Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Pankaj Gupta, Dow's outgoing Investor Relations Vice President. Leading today's call are Jim Fitterling, Dow's Chair and Chief Executive Officer, and Jeff Tate, Chief Financial Officer. Also, joining is our new Investor Relations Vice President, Andrew Riker, who you may remember, was a member of our IR team a few years ago. Please note, our comments contain forward-looking statements and are subject to the related cautionary statement contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties.
Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides that are posted on our website. On Slide 2 is our agenda for today's call. Jim will review our first quarter results and operating segment performance. Jeff will then provide an update on the macroeconomic environment and modeling guidance as well as the results of our annual benchmarking. Jim will then provide an update on key milestones for our long-term strategy, which positions us well to deliver growth through the cycle. Following that, we will take your questions.
Now, let me turn the call over to Jim.
Jim Fitterling: Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow delivered sequential volume growth and margin expansion. We strategically increased operating rates to capture improving demand, we maintained pricing and we benefited from lower feedstock and energy costs. These results reflect the strength of our advantaged portfolio, including our participation in diverse end markets and our cost advantage positions around the world. Net sales were $10.8 billion, down 9% versus the year-ago period, but up 1% sequentially, driven by gains in Performance Materials and Coatings and Industrial Intermediates and Infrastructure. Volume increased 1% year-over-year. And excluding hydrocarbons and energy, volume increased 5% with gains in all regions.
This marks the second consecutive quarter of year-over-year volume growth. Sequentially, volume increased 1% and excluding hydrocarbons and energy, was up 3%, led by gains in Performance Materials and Coatings. Local price decreased 10% year-over-year and was flat sequentially as modest gains in Europe, the Middle East, Africa and India or EMEAI were offset by declines in Asia-Pacific, the United States and Canada. Operating EBIT for the quarter was $674 million, down $34 million year-over-year, driven by lower prices in all regions. Sequentially, operating EBIT was up $115 million, reflecting gains in Performance Materials and Coatings, and Industrial Intermediates and Infrastructure. We delivered cash flow from operations of $460 million in the quarter, resulting in a 94% cash-flow conversion on a trailing 12-month basis.
This reflects our focus on cash-flow generation and enabled $693 million in returns to shareholders. We also advanced our long-term strategy with our higher-return, highly capital-efficient Path2Zero project in Fort Saskatchewan, Alberta, where construction started earlier this month. Now, turning to our operating segment performance on Slide 4. In the Packaging and Specialty Plastics segment, operating EBIT was $605 million, down $37 million compared to the year-ago period, primarily due to lower integrated margins. Local price declines were primarily driven by lower energy and feedstock costs globally. Volume decreased year-over-year, driven by declines in the hydrocarbons and energy business. This was primarily due to prioritizing higher-value downstream derivative polymer sales as well as lighter feedslate cracking in Europe.
Sequentially, operating EBIT decreased by $59 million as improved polyethylene integrated margins were more than offset by expected lower non-recurring licensing revenue and higher planned maintenance activity. Moving to the Industrial Intermediates and Infrastructure segment, operating EBIT was $87 million compared to $123 million in the year-ago period. Results were driven by lower prices in both businesses, which were partly offset by three items, lower energy and feedstock costs, improved equity earnings and volume gains in polyurethanes and construction chemicals. Sequentially, operating EBIT was up $72 million, driven by improved equity earnings and lower energy and feedstock costs, primarily in EMEA. And in the Performance Materials and Coatings segment, operating EBIT was $41 million, up $6 million compared to the year-ago period, driven by volume growth and higher operating rates.
Volume was up year-over-year, driven by gains primarily in the United States, Canada, and Latin America. Sequentially, operating EBIT increased $102 million, driven by higher seasonal volumes and overall improved demand. Now, I'll turn it over to Jeff to review our outlook and actions.
Jeff Tate: Thank you, Jim, and good morning to everyone joining our call today. Turning to our outlook on Slide 5. We are seeing signs of improving macroeconomic conditions in several regions, which gives us cautious optimism heading into what is typically a seasonally strong quarter. That said, we are keeping a close eye on inflation, interest rates, and geopolitical tensions. The US is benefiting from improving industrial activity with manufacturing PMI and expansionary territory every month thus far this year. In fact, manufacturing production expanded at its fastest rate in 22 months in March. Average chemical railcar shipments were also up 4.3% year-to-date compared to last year through mid-April. And while high interest rates continue to temper building and construction activity in the US, building permits were 1.5% higher in March year-over-year, while existing home sales declined 3.7% in March.
In Europe, consumer spending and industrial activity remained weak with manufacturing PMI decreasing in February and March. This partly reflects ongoing geopolitical tensions in the Red Sea, which have led to higher freight costs globally. Declines in inventory levels are a promising indicator with March at the lowest levels since July 2022. Economic activity in China continued to recover steadily with signs of improving demand. Industrial production increased 4.5% year-over-year in March. Additionally, retail sales grew 3.1% year-over-year in March, supported by consumer spending around the Lunar New Year. Nonetheless, the property sector remains weak with new home prices continuing to decline through March. Industrial activity in other regions remains constructive.
In March, India manufacturing PMI reached its highest level in more than three years at 59.1. ASEAN manufacturing PMI reached an 11-month high at 51.5. And in Mexico, industrial production increased further in February. Now, turning to our outlook for the second quarter on Slide 6. In the Packaging and Specialty Plastics segment, higher global polyethylene integrated margins, resilient demand in packaging, as well as continued strength in the export markets are expected to drive a $150 million tailwind in the quarter. Additionally, we expect $25 million in tailwinds from our site in Bahia Blanca, Argentina, which has returned to operations following an unexpected storm in December of 2023. Lastly, we expect a $75 million headwind due to increased plant maintenance primarily in Sabine, Texas.
In the Industrial Intermediates and Infrastructure segment, consumer durables demand continues to be muted. However, we expect margin expansion on improved MDI and polyol spreads in Europe. We also expect modest seasonal demand improvement in building and construction end-markets, as well as resilient demand in pharma and energy end-markets. Altogether, these represent a $25 million tailwind. In addition, we expect a headwind of $25 million due to planned maintenance in Europe and the US Gulf Coast. This will be partly offset by the completion of a turnaround at a PDH unit in the first quarter. In the Performance Materials and Coating segment, higher global siloxane prices and seasonal demand increases in building and construction end-markets are expected to drive a $75 million tailwind in the second quarter.
We also expect an additional $25 million tailwind from a turnaround at our siloxane pillar site in the US while our Deer Park and PDH sites will come back up following planned maintenance in the first quarter. So, with all the puts and takes at a company level, we expect second quarter earnings to be approximately $200 million above first quarter performance. Now, moving to Slide 7. As we navigate the cycle and execute on our long-term strategic actions, Dow remains committed to our culture of transparency, accountability and benchmarking. Today, we publish the results of our annual benchmarking update, once again demonstrating our strong performance and value creation relative to our peers. The results can be found on our investor website.
Dow came in well ahead of peer average and broader S&P 500 with continued attractive three-year average free cash flow and dividend yields. This reflects our commitment to industry-leading cash generation and shareholder remuneration across the economic cycle. Our three-year EBITDA margins and return on invested capital are above the peer median with return on invested capital 200 basis points above our 13% target across the economic cycle. We also delivered best-in-class net-debt reduction since 2019, which allows us to deliver on our capital allocation priorities even at the bottom of the cycle. Our achievements in these areas point to our continued discipline and financial flexibility. As a result, Team Dow has set the stage for us to drive earnings growth and increased shareholder returns through the cycle.
With that, I'll turn it back to Jim.
Jim Fitterling: Thank you, Jeff. Moving to Slide 8. Dow is well positioned to capture demand and drive earnings growth as the economic recovery takes hold. This is reflected in our competitive advantages and early cycle growth investments, which are advancing while also demonstrating Dow's continued focus on operational and financial discipline. And we have a differentiated portfolio with structurally advantaged assets, global scale and low-cost positions in every region. Healthy oil-to-gas spreads supported by growing natural gas and NGL production in North America favor our cost advantage and ability to capture continued margin improvements as the economic recovery gathers strength. We've also taken actions to grow Dow's earnings as we execute our near-term, higher-value, lower-risk growth investments that are expected to deliver approximately $2 billion in incremental underlying EBITDA by mid-decade.
Since 2021, we have added capacity that will increase our mid-cycle EBITDA by approximately $800 million, including investments in our FCDH unit in Louisiana and alkoxylation capacity investments in the United States and Europe that serve attractive market segments such as consumer non-durables and pharma. In addition, we have invested in multiple downstream silicone debottlenecks to address fast-growing applications in mobility science and electronics. We are on track to achieve the remaining $1.2 billion of our near-term EBITDA target by mid-decade, enabled by our lower-risk and higher-return growth projects. These investments represent a significant portion of Dow's earnings growth in the next up-cycle. Moving to Slide 9. Dow continues to execute with financial and operational discipline as we invest through the bottom of the chemical industry's economic cycle for long-term profitable growth.
Our near-term growth and efficiency investments continue to progress with our propylene glycol expansion in Thailand achieving mechanical completion this month. We are also making good progress on our decarbonizing growth strategy, including our Path2Zero project in Fort Saskatchewan, Alberta. Construction began earlier this month, where we are installing the first of approximately 4,000 piles that will anchor the foundation of our new net zero cracker. In addition, all long-lead time equipment items have been ordered, further demonstrating our consistent focus on locking in cost efficiencies for this project. We also entered into a long-term agreement with Pembina, a leading ethane supply and transportation provider to supply and transport up to 50,000 barrels per day of ethane.
With this latest agreement, we have secured the majority of our cost-advantaged ethane supply with multiple suppliers in the region. Overall, we expect the Path2Zero project to deliver an additional $1 billion per year in mid-cycle EBITDA growth at full run-rates over the economic cycle. In addition, we continue to advance circularity through our Transform the Waste strategy via strategic partnerships and offtake agreements. This includes a recent joint development agreement with Procter & Gamble, which will create a new recycling technology aimed at converting hard-to-recycle plastic packaging into recycled polyethylene. The result will be near-virgin quality and lower greenhouse gas emissions than virgin polyethylene. All-in, we expect our Transform the Waste initiatives to generate more than $500 million of incremental run-rate EBITDA by 2030.
Turning to Slide 10. Our actions since 2019 have created a stronger Dow. Over the past five years, we have worked hard to improve our balance sheet, to improve cash-flow conversion and to build a more resilient company that maintains consistent discipline. This was demonstrated when we delivered $12.4 billion in peak EBITDA in 2021, higher than any other timeframe in Dow's history. This has created the opportunity for us to invest strategically at the bottom of the cycle for long-term profitable growth. And as implementation of our growth strategy increases our underlying EBITDA, we will continue to target at least 65% of operating net income to shareholders as we move up the next peak. This means at least 45% in dividends and 20% in share buybacks.
Closing on Slide 11, I want to thank you for your interest and ownership in Dow. The team and I look forward to engaging with many of you on our 2024 Investor Day on May 16. As a reminder, the event will be hosted from the New York Stock Exchange. It will also be available via live webcast. More information can be found on our website at investors.dow.com. During the event, we will share progress on Dow's commitment to improve underlying earnings by greater than $3 billion by 2030 that will enable raising the mid-cycle as well as the trough and peak earnings levels. We will demonstrate our consistent commitment to operational and financial discipline, our capital allocation priorities and our leadership in attractive market verticals. And we'll show how, taken together, this creates significant value-creation as we grow earnings and enhance shareholder returns over the cycle.
Before I turn it over to Pankaj, he mentioned at the top of the call that we have our incoming Vice President of Investor Relations, Andrew Riker, joining us today. I'd like to take a minute to congratulate Andrew as he takes charge and to thank Pankaj for leading the Investor Relations team over the last three years and also for his contributions to our upcoming Investor Day. Pankaj, we look forward to seeing your achievements in your next role leading our Dow Industrial Solutions business. With that, Pankaj, please get us started with the Q&A.
Pankaj Gupta: 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.
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