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    Dow Inc (DOW)

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    Business Description

    Dow Inc. is a leading materials science company that operates in high-growth markets such as packaging, infrastructure, mobility, and consumer applications . The company is organized into several business segments, including Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings . Dow primarily generates revenue through product sales to manufacturers and distributors, accounting for the vast majority of its income . Additionally, Dow engages in licensing arrangements for its patents and technology, contributing to its revenue through sales-based royalties . The company's focus on innovation and sustainability, including low-carbon emissions plastics and recycling efforts, supports its strong position in the global market .

    1. Packaging & Specialty Plastics - Produces polyethylene and functional polymers used in applications such as lightweighting in cars and extending the shelf life of food.
    2. Industrial Intermediates & Infrastructure - Focuses on products like polyurethanes and construction chemicals, serving various industrial and infrastructure needs.
    3. Performance Materials & Coatings - Includes coatings and performance monomers, catering to diverse performance and aesthetic requirements in multiple industries.

    Q3 2024 Summary

    Initial Price$53.00July 1, 2024
    Final Price$54.54October 1, 2024
    Price Change$1.54
    % Change+2.91%

    What went well

    • Dow has a strong liquidity position with $13 billion in total liquidity and no substantive debt maturities until 2027, providing financial flexibility to facilitate growth into 2025.
    • Dow is poised for recovery in construction and durables markets, which will drive demand in their polyurethanes business, a good business with diverse downstream markets where Dow has strong positions.
    • Silicones downstream applications are growing well, up 6% year-over-year, and strong growth in electric vehicles (up 13-14%) is driving silicones demand, positioning Dow for future growth.

    What went wrong

    • Dow is undertaking a strategic review of select European assets, primarily in the polyurethanes business, due to soft demand and regulatory challenges in the region. This may lead to asset shutdowns or divestitures, potentially impacting future revenues. ,
    • The coatings business has been slow, with reliance on a housing market pickup to drive growth. Additionally, the monomers segment "needs to tighten up", indicating potential oversupply or weak demand, which could pressure margins.
    • Despite reporting cash flow from operations of $800 million, this was down year-over-year, primarily due to higher inventories and labor-related supply chain disruptions, which may continue to strain cash flow and working capital.

    Q&A Summary

    1. P&SP Margins Outlook
      Q: How will P&SP margins and EBITDA trend into 2025?
      A: Despite issues at Texas-8 in Q3, Dow expects strong volume growth in Packaging & Specialty Plastics into 2025, with about 3% organic volume growth. Higher operating rates and add-backs from unplanned events are projected to add about $1 billion in EBITDA, increasing from a consensus of $5.6 billion in 2024.

    2. European Asset Review
      Q: What is the status of the European asset review in polyurethanes?
      A: Dow is reviewing its European polyurethanes assets, which are EBITDA positive and have good cost positions. The company is considering portfolio options to invest more in businesses with higher returns and downstream growth. The European polyurethanes assets make up about 20% of EMEA sales.

    3. Earnings Impact of Asset Changes
      Q: How will asset closures affect future earnings?
      A: Dow is tightening its footprint by moving capacity to lower-cost assets and running them at higher rates, which is expected to improve operating rates and positively impact the bottom line as it moves into 2025.

    4. Saskatchewan Project Returns
      Q: Are Fort Saskatchewan production costs higher than Freeport?
      A: The Fort Saskatchewan project will be advantaged on ethane, with ethylene costs among the best globally. Despite higher costs from the autothermal reformer, benefits from CO₂ sequestration and selling ethylene with zero Scope 1 and 2 emissions result in returns equal or higher than Texas-9, Dow's lowest-cost asset.

    5. Tariffs Impact
      Q: How will increasing tariffs affect Dow's business?
      A: Dow acknowledges tariffs in some businesses but remains a net exporter from the U.S. Gulf Coast due to strong competitive advantages. Increases in tariffs, like Brazil's rise from 12.5% to 20% on polyethylene imports, are seen as measures to protect domestic manufacturing.

    6. Feedstock Costs Outlook
      Q: What is the outlook for U.S. ethane costs?
      A: Dow expects ethane prices to range between $0.19 to $0.23 per gallon in the quarter, with frac spreads at $0.50 or below. Despite some fluctuations, Dow maintains very cost-advantaged positions.

    7. Cash Flow and Unique Cash Levers
      Q: How does Dow view its cash flow outlook into 2025?
      A: Dow generated $800 million in cash from operations in Q3, with a cash conversion cycle of 42 days. The company maintains total liquidity of $13 billion and commits to delivering at least $1 billion annually through unique-to-Dow cash levers.

    8. Polyurethane Market Outlook
      Q: How is the polyurethane market expected to evolve?
      A: Dow anticipates recovery in construction and durables markets, which drive polyurethanes. Destocking has run its course, and the company awaits an economic turn to stimulate these segments.

    9. Siloxanes Market Trends
      Q: What is the outlook for the siloxanes market in 2025?
      A: Dow has observed some tightening and pricing improvement in siloxanes but expects further rationalization. Growth in electric vehicles and eventual recovery in construction are anticipated to drive demand.

    10. Circularity and Long-term Contracts
      Q: Can Dow secure long-term contracts for low-carbon polyethylene?
      A: Dow remains confident in generating at least $500 million of additional earnings by 2030 from its "transform the waste" strategy, indicating strong customer demand for circular solutions.

    11. Licensing Income Timing
      Q: Was the higher licensing income expected?
      A: The higher licensing income was due to timing on engineering package deliveries and milestones; it was relatively small in terms of the beat on P&SP.

    12. II&I Segment Performance
      Q: Why did the II&I segment's EBITDA soften?
      A: The segment faced price pressure on PO polyols and lower MDI volumes due to a third-party outage. The MDI issue is a one-time event expected to correct itself.

    13. Coatings Market Outlook
      Q: Do you see improvement in operating rates for coatings?
      A: Despite a slow market, Dow reported strong volume growth by growing with strategic customers. Recovery in the housing market is expected to be a significant driver for the coatings business.

    14. Policy Impact on Plastics Treaty
      Q: How is Dow positioning regarding the UN Global Plastics Treaty?
      A: Dow continues to advocate focusing on plastic pollution solutions rather than production caps or bans and is surprised by recent shifts in U.S. administration positioning.

    15. Chlorine Integration in Europe
      Q: Are polyurethane decisions separable from chlorine assets?
      A: Decisions regarding European polyurethanes assets are not separable from chlorine integration; Dow will closely coordinate with its chlorine assets and partners.

    16. Devon JV Expansion
      Q: Is there appetite to expand the Devon JV?
      A: Dow is pleased with the Devon partnership, which helps offset feedstock exposures, and continues to ramp up activity, suggesting potential for expansion.

    Guidance Changes

    Quarterly guidance for Q4 2024:

    • Fourth Quarter Earnings: $1.3 billion (no prior guidance)
    • Packaging & Specialty Plastics – Pricing: Flat (no prior guidance)
    • Packaging & Specialty Plastics – Integrated Margins: Lower (no prior guidance)
    • Packaging & Specialty Plastics – Operating Rates: +$100 million add-back (no prior guidance)
    • Packaging & Specialty Plastics – Maintenance Activity: Lower planned maintenance (no prior guidance)
    • Industrial Intermediates & Infrastructure: $50 million tailwind from lower plant maintenance (raised from $25 million headwind )
    • Performance Materials & Coatings: $125 million negative from building & construction end markets (no prior guidance)

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Jim FitterlingChair and Chief Executive OfficerAugust 2018Jim Fitterling has been the Chair since April 2020 and CEO since August 2018. He joined Dow in 1984 and has held various executive positions, playing a key role in transforming Dow into a market-focused company .
    Jeffrey L. TateChief Financial OfficerNovember 1, 2023Jeffrey L. Tate rejoined Dow in October 2023 and became CFO on November 1, 2023. He first joined Dow in 1992 and has 27 years of experience in finance and management roles .
    A. N. SreeramSenior Vice President, Research & Development and CTON/AA. N. Sreeram is responsible for accelerating new product commercialization and leads Dow's R&D organization focused on sustainable technology development. His achievements include delivering innovation revenue .
    Amy E. WilsonGeneral Counsel and Corporate SecretaryN/AAmy E. Wilson is responsible for legal oversight and strategic initiatives, including mergers and acquisitions. She is a member of Dow's senior executive committee .
    John M. SampsonSenior Vice President, Operations, Manufacturing & EngineeringOctober 1, 2020John M. Sampson oversees the global Operations organization. He started with Dow in 1983, left in 2015, and rejoined on October 1, 2020 .
    Karen S. CarterChief Operating OfficerDecember 3, 2024Karen S. Carter will become COO on December 3, 2024. She has been with Dow since 1994, holding leadership roles in various departments, including as President of Dow's Packaging & Specialty Plastics segment .

    Questions to Ask Management

    1. Given the strategic review of select European assets representing about 20% of your EMEA sales in polyurethanes, what specific criteria are you using to decide between divestiture, closure, or other options, and how will these decisions impact your market presence and profitability in Europe?

    2. Considering the persistent lack of competitive regulatory policy and soft demand in Europe, how do you plan to mitigate the potential negative effects on your revenue and market share during the strategic asset review period extending to mid-2025?

    3. You mentioned that higher inventories to support sales growth and labor-related supply chain disruptions led to decreased cash flow from continuing operations; can you elaborate on these disruptions and the steps you're taking to improve inventory management and cash flow?

    4. With the planned shutdown of your propylene oxide unit in Freeport, Texas in 2025 to reduce lower-value merchant exposure, how will this affect your supply chain and ability to meet customer demand, and what strategies are in place to offset this loss of production capacity?

    5. Despite higher planned maintenance activities and lower integrated margins impacting operating EBIT in certain segments, what concrete actions are you taking to enhance operational efficiency and margins, and how confident are you in achieving significant cost savings through these measures?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateApril 13, 2022
    End Date/DurationNo expiration date
    Total additional amount$3 billion
    Remaining authorization amountApproximately $931 million as of September 30, 2024
    DetailsPart of a long-term strategy to target shareholder remuneration of approximately 65% over the economic cycle. The company intends to repurchase shares at a minimum to cover dilution, with potential expansion based on macroeconomic conditions, free cash flow, and share price.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      1. Fourth Quarter Earnings: Expected to be approximately $1.3 billion, up year-over-year but lower quarter-over-quarter due to normal seasonality .
      2. Packaging & Specialty Plastics Segment:
        • Lower integrated margins due to higher feedstock costs and lower licensing revenue.
        • An add-back of approximately $100 million expected following the restart of the Texas-8 cracker .
      3. Industrial Intermediates & Infrastructure Segment:
        • Mixed conditions with seasonally lower demand in building and construction end markets.
        • A $50 million tailwind anticipated due to lower plant maintenance activity .
      4. Performance Materials & Coatings Segment:
        • Continued growth in downstream silicon applications, offset by weakness in the China property sector.
        • Lower seasonal demand for building and construction end markets expected to be a headwind of approximately $125 million .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024
    • Guidance:
      1. Q3 Sequential Guidance: Relatively flat EBITDA sequentially, considering planned maintenance at the St. Charles cracker, ethane prices, and hurricane impacts .
      2. Free Cash Flow: Expected use of cash from working capital in the range of $600 million to $800 million; at least $1.5 billion from unique-to-Dow cash levers in 2024 .
      3. Third Quarter Earnings: Expected to be slightly above second-quarter performance, with minimal disruption from Hurricane Barrel .
      4. Packaging & Specialty Plastics Segment: Modest top-line sequential growth expected, with robust demand for polyethylene in North America .
      5. Industrial Intermediates & Infrastructure Segment: Mixed market conditions, with a $25 million headwind due to planned maintenance in the U.S. Gulf Coast .
      6. Performance Materials & Coatings Segment: Growth expected in downstream silicone applications despite lower seasonal demand for building and construction .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024
    • Guidance:
      1. Packaging & Specialty Plastics Segment:
        • $150 million tailwind from higher global polyethylene integrated margins and resilient demand.
        • $25 million tailwind from Bahía Blanca site returning to operations.
        • $75 million headwind due to increased plant maintenance .
      2. Industrial Intermediates & Infrastructure Segment:
        • Margin expansion expected on improved MDI and polyols spreads in Europe.
        • $25 million tailwind from seasonal demand improvement and resilient demand in pharma and energy.
        • $25 million headwind due to planned maintenance .
      3. Performance Materials & Coatings Segment:
        • $75 million tailwind from higher global siloxane prices and seasonal demand increases.
        • $25 million tailwind from a turnaround at the siloxane pillar site .
      4. Overall Company Level: Expected second-quarter earnings to be approximately $200 million above first-quarter performance .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024
    • Guidance:
      1. EBITDA: Approximately $1.3 billion .
      2. Earnings: Expected to be $25 million to $50 million above fourth-quarter performance .
      3. Packaging & Specialty Plastics Segment: $25 million headwind from lower earnings due to nonrecurring licensing activity and $50 million headwind from higher planned maintenance .
      4. Industrial Intermediates & Infrastructure Segment:
        • $50 million tailwind from margin expansion and lower European energy costs.
        • $25 million tailwind from increased seasonal demand for deicing fluid.
        • $50 million headwind due to planned maintenance .
      5. Performance Materials & Coatings Segment:
        • $150 million tailwind from higher seasonal demand in building and construction.
        • $50 million headwind from higher planned maintenance turnaround activity .