Dow - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dow Inc. 2024 earnings report. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and if you'd like to withdraw that question, again, press star one. Thank you. I will now like to turn the conference over to Andrew Riker. Andrew, the floor is yours.

Andrew Riker (Head of Investor Relations)

Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Andrew Riker, Dow's Investor Relations Vice President. Leading today's call are Jim Fitterling, Dow's Chair and Chief Executive Officer, and Jeff Tate, Chief Financial Officer. 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 two is our agenda for today's call. Jim will review our second quarter results and operating segment performance.

Jeff will then share an update on the macroeconomic environment and modeling guidance, followed by a discussion on how our proven playbook will advance our near-term priorities and support growth. Jim will then provide more color on key milestones for our long-term strategy, including how we will capture earnings upside as macroeconomic conditions improve. Following that, we will take your questions. Now, let me turn the call over to Jim.

Jim Fitterling (Chair and CEO)

Thank you, Andrew. Beginning on slide three, in the second quarter, Team Dow delivered sequential top and bottom line growth, as well as a third consecutive quarter of year-over-year volume growth. We achieved this despite a slower-than-expected global macroeconomic recovery, particularly in areas like building and construction and consumer durables. Net sales were $10.9 billion, down 4% versus the year ago period and up 1% sequentially, driven by gains in Sackaging and Specialty Plastics and performance materials and coatings. Volume increased 1% versus the year ago period, with gains led by the United States and Canada. Excluding hydrocarbons and energy sales, which were down primarily due to lighter feed slate cracking in Europe, volume increased 4%. Sequentially, volume increased 1%, with gains in all regions except Asia Pacific, which was flat. Local price decreased 4% year-over-year.

Sequentially, local price increased 1%, led by gains in Europe, the Middle East, Africa, and India or EMEA. Operating EBIT was $819 million, up $145 million sequentially, reflecting gains in packaging and specialty plastics and performance materials and coatings. Cash flow from operations was $832 million on higher earnings and an efficient release of working capital, resulting in an 85% cash flow conversion on a trailing twelve-month basis. Our focus on cash flow generation enabled $691 million in returns to shareholders, including $491 million through dividends and $200 million in share repurchases. In June, we published our 2023 Intersections Progress Report. This report showcases the positive impact that we are making on the environment and society, and importantly, how those actions support long-term profitable growth.

Now, turning to our operating segment performance on slide four. In the packaging and specialty plastics segment, operating EBIT was $703 million, down $215 million year-over-year. This was driven by lower integrated margins, higher planned maintenance activity, and lower non-recurring licensing sales. Local price declines were due to lower downstream polymer prices, primarily in Asia Pacific. Volume decreased year-over-year as higher demand for functional polymers and polyethylene was more than offset by lower merchant hydrocarbon sales, primarily due to lighter feed slate cracking in Europe. Sequentially, operating EBIT increased by $98 million, primarily due to higher integrated margins behind both price and volume gains. Moving to the industrial intermediates and infrastructure segment, operating EBIT was $7 million, an improvement of $42 million versus the year ago period. Results were driven by improved equity earnings, partly offset by lower integrated margins.

Local price declined year-over-year, but volume was up, driven by gains in polyurethane and construction chemicals. Sequentially, operating EBIT decreased $80 million, driven by higher planned maintenance activity and higher equity losses, as well as lower volumes. In the Performance Materials and Coatings segment, operating EBIT was $146 million, up $80 million compared to the year ago period, driven by broad-based business and geographic volume growth. Local price declined year-over-year, but volume was up, driven by gains in both businesses and all geographic regions.... Sequentially, operating EBIT increased to $105 million, driven by volume and price gains in both businesses and lower planned maintenance activity. Now, I'll turn it over to Jeff to review our outlook and share some examples of our playbook in action.

Jeff Tate (CFO)

Thank you, Jim, and good morning to everyone joining our call today. Moving to slide 5. In the near term, we expect macro dynamics to remain largely unchanged. While global manufacturing PMI has been positive since February 2024, the pace of the global economic recovery has decelerated slightly. This is primarily led by China, where economic growth in the second quarter was lower than the market expected. Overall, we continue to keep a close eye on the weight of inflation on the U.S. consumer, global interest rates, and geopolitical tensions. Looking across our four market verticals, packaging demand is seeing global growth, primarily in the U.S. and Canada, as the industry experiences robust domestic and export demand for polyethylene. In Europe, soft demand across the value chain is reflected in manufacturing PMI levels, which, despite stabilizing, remains in contractionary territory.

In Asia, packaging demand has remained steady, but the region has been impacted by port congestion and rising transportation costs. Infrastructure demand, primarily residential construction, continues to be soft across most regions. In June, existing U.S. home sales, which tend to drive residential paint sales from both buyers and sellers, were below prior year levels, and building permits were down slightly year to date through June. Eurozone construction PMI remains in contractionary territory and declined to 41.8 last month, down from 42.9 in May. In China, new home prices were down 4.5% year-over-year in June. Consumer spending has shown resilience in most regions, except Europe, where consumer confidence remained negative in July. In the U.S., retail sales are up 2.3% year to date through June, but furniture and bedding sales remain low.

In China, retail sales increased by 2% year-over-year in June, but marked the first month of deceleration since July 2023. And in mobility, China auto production was down 2.1% year-over-year in June, amidst the potential for tariff increases and slow to materialize incentives. In the U.S., auto sales were down year-over-year in June after increasing by more than 2% in May. Against this backdrop, we delivered the third consecutive quarter of year-over-year volume growth and will continue to leverage our differentiated portfolio to capitalize on areas of demand strength while maintaining operating and financial discipline. And I'll touch on these actions in more detail shortly. Now, turning to our outlook on slide 6. We expect third quarter earnings to be slightly above second quarter performance, continuing our string of sequential improvement.

We experienced minimal disruption from Hurricane Beryl in the U.S. Gulf Coast, and we expect the positive sequential signals in some markets will continue. In the packaging and specialty plastics segment, we expect modest top-line sequential growth. Domestic and export demand for polyethylene in North America will remain robust, and EMEA will experience typical lower demand seasonality from the summer holidays. In addition, the completion of our cracker turnaround in Sabine, Texas, in the second quarter will be offset by another plant turnaround at our Saint Charles, Louisiana, cracker in the third quarter. In the Industrial Intermediates and Infrastructure segment, market conditions remain mixed. Demand in energy and pharma end markets remains resilient, but consumer durables demand has not shown any significant signs of inflection. We expect an approximately $25 million headwind due to the planned maintenance activity in the U.S. Gulf Coast.

Importantly, at the end of June, we successfully started up our Glycol II facility at Louisiana operations, which will ramp through the quarter and provide a sequential tailwind of $75 million. In the Performance Materials and Coatings segment, we continue to see growth in downstream silicone applications across most end markets, but siloxane prices are still under pressure. Lower seasonal demand for building and construction end markets are expected to be a headwind of approximately $50 million, while lower planned maintenance activity will contribute a $25 million tailwind. Moving to slide 7. As we navigate the current market conditions, we are focused on executing our proven playbook to deliver increased value over the cycle. We benefit from our global asset footprint with leading positions in every region.

This is particularly true in the cost-advantaged Americas, where approximately 65% of our global production capacity is located, and we expect to reach 70% by 2030. With leading low-cost feedstock positions, plus our industry-leading feedstock flexibility, Dow is well positioned to capture growing global demand for our products. And supported by our solid financial position, we remain on track to deliver our countercyclical growth investments. Team Dow continues to operate with discipline as we maintain our low-cost to serve mindset, focus on maximizing cash flow, and further strengthen our financial position. Our actions include continued de-risking of our pension liabilities with minimal, if any, cash outlay. In fact, this month, we initiated the termination process for two of our US pension plans by the end of 2025....

While not impacting previously earned benefits, Dow is able to provide a secure, cost-effective way of paying pension benefits and reducing administrative costs and risk to the company. Lastly, in the near term, we expect to enhance our cash flow generation by executing over $1.5 billion in unique to Dow levers. We plan to use the proceeds to support our strategic growth investment, including our Path to Zero project in Fort Saskatchewan. In addition, we expect to receive more than $1.5 billion in cash and tax incentives by 2030, which is closely aligned with our CapEx deployment for the project. With that, I'll turn it back to Jim.

Jim Fitterling (Chair and CEO)

Thank you, Jeff. Moving to slide 8. Our expectations for 2024 reflect a slower pace of recovery in certain end markets. Dow is positioned to capture more than $3 billion in EBITDA upside as we return to mid-cycle earnings levels. We are encouraged by the positive top-line signals across our portfolio. This is demonstrated by our year-over-year volume improvement in the last three quarters, as well as price stabilization across the entire enterprise over that same period. In packaging and specialty plastics, we anticipate supply-demand fundamentals to continue improving as the recent polyethylene capacity builds in North America have been fully absorbed by growing global demand. We're also starting to see rationalization of higher cost assets, particularly in Europe. And going forward, we do not expect to see any new capacity in the cost-advantaged Americas until the 2026, 2027 time frame.

In industrial intermediates and infrastructure, we've maintained a disciplined approach to our inventory management. The beginning of an interest rate cutting cycle will accelerate demand in our polyurethanes business. In Industrial Solutions, the majority of our U.S. Gulf Coast capacity is aligned to higher value EO derivatives. With the successful restart of our Glycol 2 facility in Louisiana, we will see positive impact in consumer, mobility, pharma, and energy end markets. And in performance materials and coatings, industry siloxane capacity additions are expected to slow due to prolonged negative cash margins impacting non-integrated players. And lastly, our coatings business is highly correlated to existing home sales, with market demand forecasted to see pre-pandemic levels by next year. With these positive indicators combined with an economic recovery, Dow is positioned to capture significant annual earnings upside at mid-cycle levels.

Next, on slide nine, the work we've done to strengthen our financial foundation has allowed us to invest countercyclically in lower risk, higher return projects that will drive more than $3 billion in annual earnings growth by 2030. Our near-term investments are progressing and remain on track to deliver more than $2 billion of underlying mid-cycle EBITDA by mid-decade. To date, we have added the capacity to deliver $800 million of that $2 billion. So far this year, we've enhanced our product mix to produce higher value elastomers for photovoltaic films and ethylene copolymers at our site in Tarragona, Spain. We're also advancing multiple downstream silicone debottlenecking projects to support growth for liquid silicone rubber and adhesives. Our team in Fort Saskatchewan is making solid progress on our Path to Zero project.

Phase one startup is expected in 2027, and phase two will start up in 2029. The project will deliver an additional $1 billion of EBITDA annually at full run rates by 2030. Construction continued in the second quarter, where we started our piling program, which will anchor the foundation of our new net-zero cracker. Major foundation work is expected to begin in the third quarter. We're also advancing our Transform the Waste strategy to deliver more than $500 million in incremental underlying EBITDA by 2030 through partnerships and direct investments. In June, we announced that Dow signed an agreement to acquire Circulus, a leading U.S.-based mechanical recycler. This will help us accelerate our goals while enabling more high-performance circular products that brands and customers are demanding.

We expect the deal, which includes two facilities with combined capacity of 50,000 metric tons of recycled materials annually, to close in the third quarter. Consistent with our best owner mindset, we also announced in the second quarter that we reached an agreement with Arkema to sell our laminating adhesives business, which is part of the packaging and specialty plastics portfolio. That transaction is expected to close by the fourth quarter of 2024. And lastly, in the second half of the year, we're planning to commercialize products with greater circularity using offtake from both the Beringen Mechanical and Mura Advanced Recycling facilities. In closing, on slide 10, Dow remains focused on driving earnings growth by executing our playbook, delivering on our capital allocation priorities, and closely managing costs as we advance our long-term strategy. We're committed to operational and financial discipline.

We've delivered returns and cash generation better than our peer benchmark,... and we will maintain our low cost to serve mindset while capturing high-value demand and optimizing margins. Our financial flexibility allows us to invest countercyclically in higher value areas that will raise our underlying earnings and drive circularity. With all of this, Dow is well-positioned to create significant upside in top and bottom line growth as cycle dynamics improve, and we unlock the full benefit of these investments, enabling higher shareholder returns. With that, I'll turn it back to Andrew to get us started with the Q&A.

Andrew Riker (Head of Investor Relations)

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 the prepared remarks and the following Q&A. Operator, please provide the Q&A instruction.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, again, press star one. And please be advised that after you answer your first question, you will be muted. Your first question comes from Hassan Ahmed with Alembic Global Advisors. Please go ahead.

Hassan Ahmed (Analyst)

Morning, Jim and Jeff. You know, just a question around Q3 sequential guidance. You know, particularly as I sort of take a look at some of the commentary around P&SP, it seems that you guys are looking for relatively flat EBITDA sequentially. Obviously, I understand you guys have the St. Charles cracker sort of planned maintenance, but I'm just trying to get a better sense of what's baked into that guidance from an underlying fundamentals perspective. Meaning, obviously, you guys, you know, the industry has North American Q3 price hikes on the table. It seems inventory levels are down. It seems exports, you know, have been sort of steadily picking up. So just, you know, if you could give me a sense of, beyond your planned maintenance, what you guys have baked into those fundamentals for the Q3 guidance.

Jim Fitterling (Chair and CEO)

Good morning. I'm happy to understand. You know, as we look at the outlook for P&SP into the third quarter, I do expect to see prices up in North America. I think we're gonna see $0.02 on margin improvement. You know, you got a combination of price, which I think the macro number is there and direction is correct. We do expect, and we have in the plan, that we expect ethane to be up $0.01-$0.02. It's not been instantaneously as we sit here today, but I do expect it will be. One of the reasons natural gas and ethane is so low is because you had the Freeport LNG down due to Hurricane Beryl, and that backs up volume here at the Gulf Coast.

That's gonna reverse itself, but I think when that happens, our expectation is that you'll see some ethylene pricing move up. In Europe, we have still positive propane spread, but it's a little bit less than what it was in the second quarter, but it's still very advantageous for us to crack propane. I mentioned cracking light. You know, we cracked light in the quarter, which led to less byproduct sales for cracker byproducts in Europe, but the derivative demand is good. If you look at derivatives volumes across the board, they've been up. Asia was a little bit low in the second quarter, mainly because Asia was pushing a lot of export volumes out, especially in China, to get ahead of some tariff barriers, and that kind of caused some congestion over there.

I think that's working itself out, and I think we'll see continued strong export environment out of the U.S. Gulf Coast. As you mentioned, inventories are low right now. Inventories are right in line with where they've been historically, and exports are very strong. So I do think the environment is there for pricing to take hold in the third quarter. I expect the derivative volumes to be strong. We've got advantaged cost positions and operating rates are strong for us, so I think net turnarounds won't be any more than they were in the second quarter. I think you'll see some slight improvement in third quarter.

Operator (participant)

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews (Analyst)

Thank you, and good morning, everyone. Jim, would love to get your sort of high-level thoughts on two things that you know might have opposite reactions. One, you know, it does seem like we're finally gonna get into a period where interest rates are gonna come down, which I would expect to be broadly positive for your business, particularly your exposure to building and construction. But politically, we may be also reentering a period geopolitically with tariffs and duties and things like that. So I'm wondering if you can compare and contrast you know sort of what the impact of both of those dynamics could be for Dow as we look into 2025.

Jim Fitterling (Chair and CEO)

Good morning, Vincent. Happy to do that. On interest rates, you know, we had expected that by this time we probably have seen two or three interest rate cuts in the year. We haven't seen the first one yet. I do think the expectation is they're coming. If you look at the housing market, I think you're seeing the weight right now of the higher interest rates on housing. You're seeing it on new builds, you're seeing it on-

... you know, inventories that are kind of stacking up out there. And part of it's because people are unable to qualify for mortgages with these high rates. So I think when we start to see mortgage rates get something like a five handle on them, you're gonna see a couple of things happen. We're gonna see people who have financed mortgages at these higher rates of 7%+, will get some advantage to do a refinance. You're gonna see people who've been sitting on the sidelines with properties they want to sell, move in to start to sell them because people can get qualified for the mortgages, and you're gonna start to see building permits increase. In polyolefins and construction chemicals, when that starts to happen, you get a domino effect that happens.

You, you get both existing homes sold and new builds starting to build. That drives volume. And then, of course, when you call you out that, you've got appliances, carpets, all the other components, all the other things that go on with it. And so that tends to ratchet up pretty quickly. We haven't seen that yet. Obviously, teams are managing it closely, but we haven't seen that tick up. On the geopolitics side, yeah, I think on, you know, you view on, on both sides on the political spectrum, you're expecting a more, protectionist tone that we're going to come out from both sides.

I would say that, the big driver behind that is, in many cases where a lot of capacity has been built in China, there's enough data to suggest that, they're being subsidized and those products are being flooded into other markets. And, we're starting to see anti-dumping cases being brought against China around the world in different areas. And so I think you are going to see activities that are gonna try to halt some of that from happening in concert with trying to bring manufacturing back. To date, most of the manufacturing has really gone to them, into Mexico. If you think about it, from our perspective, we haven't had time to see the impact from semiconductors and other things being invested. So that'll take a few years to get to market.

But, I think we're gonna see increased rates on a whole host of things, most of them in the 25%-50% range, and most of that is what people believe is the amount of subsidies going on to those markets today. So we're prepared for, you know, whatever case we get, depending on the outcome of the election. And as always, we just have to get in there and make sure that each side understands the supply chains, how product flows, and what's important to keep industry moving, not just here, but in Europe and around the world.

Operator (participant)

Your next question comes from the line of Steve Byrne with Bank of America. Please go ahead.

Steve Byrne (Analyst)

Yes, thank you. And, Jim, if you change your audio in some way, it would really be helpful. We're having a really hard time hearing you. I have a couple of questions regarding your slide nine. With respect to your Fort Saskatchewan project, that billion-dollar EBITDA on a per pound basis, is that comparable to what you would expect, you know, mid-cycle for your existing assets, you know, EBITDA per pound for polyethylene? Or is this an expansion? And do you have customer commitments that give you that confidence in that, in the profitability of that?

And maybe just an extension on this, that the 3 million tons of Transform the Waste, you know, the incremental EBITDA on that per pound, I think there must be a huge range depending on the type of product there, because you have a competitor that has a similar objective, and the incremental EBITDA per pound is 3 times this. And I would assume that it's relevant to how much is mechanical versus how much is, say, pyrolysis-driven. Can you comment on where do you see the most profitable outlook in your circular plastic platform?

Jim Fitterling (Chair and CEO)

Yeah. Thank you, Steve. I probably would say Fort Saskatchewan, first, we think long-term is similar to the mid-cycle earnings for previous investments. It could be some delta in terms of the detail that's still in there, but in general, it's pretty similar to what we see today. And as I mentioned before, I think the upside there is the ability to get the additional value out of the fact that it's zero Scope 1 and 2 emissions. And we can't expect that right now in terms of this policy and deliverables in terms of how you capture that value and how you convert those facilities to the end of it.

On circularity, circularity will be a combination of mechanical and eventually chemical, but I think we still feel that long-term, and the two-thirds of our volume is expected to be the best we thought it would be. Mainly because in terms of the capital, flexible forms, we believe to get the high quality, which is what you need to get those margins, you're gonna have to increase slightly. On the chemical side, on the circulars, investment, that's a great case in point. We're focused on trying to move the quality of the material side to that point.

So typically, we're not then looking at making big investments in the product side, but I think our ability with that time to kind of take the company on Circulus and move the quality of that 50,000 tons per year of waste up allows us to get the kind of margin uplift over volume PE that we need to deliver that $500 million. And so it's gonna be different by different markets, but it's all gonna be driven by the quality of the material that we produce out of those assets. But certainly, the demand is there, right? The issue is supply and supply of high-quality recycled content.

Operator (participant)

Your next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter (Analyst)

Thank you. Good morning. Jim, your run rate at roughly $6 billion of EBITDA. Consensus for next year is $7.3 billion. How much of that earnings ramp is in Dow's control?

Jim Fitterling (Chair and CEO)

David, the biggest will be what we see in terms of the durable goods market and the housing market coming back. Plastics right now, P&SP, silicones, and coatings. I think we have a pretty good line of sight, and with Glycol 2 coming back in June, we feel good about that. The real question mark will be: How quickly does polyurethanes come back? And that's gonna be driven by what happens with interest rates and what happens in housing and construction. That's not just here, that's Europe and Asia as well.

Operator (participant)

Your next question comes from the line of Jeffrey Zekauskas with JP Morgan. Please go ahead.

Jeffrey Zekauskas (Analyst)

Thanks very much. Maybe a couple of questions for Jeff. Your corporate expense was $30 million this quarter, and you forecast $30 versus $60 in the year ago, and you forecast $60 for the third quarter versus $40 in the year-ago period. Why that higher increment? Why doesn't it stay at the $30 level? And second, you've been repurchasing shares, and Dow's share price has been, you know, pretty flat since its inception as a public company. What criteria will you use to determine whether a share repurchase is a good use of capital for Dow? How will you judge that?

Jeff Tate (CFO)

Yeah. Good morning, Jeff. Appreciate the questions here. Starting on the corporate side, when we look at the second quarter, you're right, it was slightly lower, more favorable than what we traditionally had. I would say, as you're thinking about the second half of the year, it's gonna be pretty much in the range of $60 million-$65 million of negative EBITDA, which we've delivered in past times. And what we had in second quarter was we had actually some gains from our insurance operations, as well as some lower environmental cost accruals as well. So when you think about the second half of the year, you can expect it to be in that $60 million-$65 million range.

In relation to share repurchases, so you're right, we have continued to trend to cover dilution, and that's one of the things from a capital allocation perspective that we've been consistent with. As we think about the CapEx ramp-up that we have and our commitment to deliver, you know, overall 65% more back to our shareholders, we're gonna stay consistent with that at this point, because of the cash flow expectations as well as our ability to be able to manage all of those capital allocation priorities. But we will look at, from a criteria perspective, you know, what will give us the greatest return, over that time period in comparison to the commitments that we have for our capital allocation prioritization.

Operator (participant)

Your next question comes from the line of Michael Sison with Wells Fargo. Please go ahead.

Michael Sison (Managing Director)

Hey, good morning. You know, in the first half, your free cash flow didn't generate a lot. Could you give us a feel of, you know, how much free cash flow you generate in the second half and maybe for the full year?

Jim Fitterling (Chair and CEO)

Jeff, you want to take that?

Jeff Tate (CFO)

Yeah. Good morning, Mike. Thanks for the question. You know, from our perspective, first of all, when you look at the second quarter, you know, we saw some really positive signs. We were able to deliver over $800 million in cash from operations. Our conversion rate was at 55%, and our free cash flow was a positive $109 million. All of those are sequential improvements over what we delivered in the first quarter, so we're really trending well. As we think about the full year, Mike, one of the things that we would expect is from a working capital standpoint, you can expect the use of cash anywhere from the $600 million-$800 million range.

You know, you've seen in our slide deck here, we've got some guidance on some of the other key levers related to full year cash flow. But one of the areas that we're pleased about is our ability and the joint ventures to be able to get greater dividends out of that, which we're focused on moving forward. As well as our, you know, looking at our liquidity right now, in a really good position. We've got well over $3 billion of cash and cash equivalent, and total liquidity of $13 billion. Right now, we don't have any debt maturities of substantive levels until 2027.

The other thing I'd also like to remind you of as well, is the fact that, you know, over the past several years, Dow has done a solid job of being able to deliver what we like to call unique to Dow cash levers of anywhere from $1-$3 billion. And our expectation is that we'll deliver at least $1.5 billion of those levers here in 2024.

Operator (participant)

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please go ahead.

Kevin McCarthy (Analyst)

Yes, thank you, and good morning. Can you comment as you look across your portfolio on the monthly cadence in June, as well as your order books in July, were there any businesses that stood out, varied versus your prior expectations through that period? And on a related note, can you comment on the Hurricane Beryl impact in the third quarter, and whether you're expecting that to have a net positive, or negative, or neutral impact on the quarter? Thank you.

Jim Fitterling (Chair and CEO)

Yeah. Good morning, Kevin. You know, we've seen pretty solid order book at the beginning of every month. I would say as we finished the second quarter, you'd see then some softness toward the end of the month. July order book looks pretty solid as we move forward. Hurricane Beryl, we ran most of Freeport through the hurricane, so all the power plants and all the crackers ran through. We obviously had damage to electrical lines and cooling towers and things, but within a week, we were back up. So I expect it is not gonna have a significant impact on volumes. There will be some cost impact to it.

We're insured for it, but there's a deductible, and I don't remember how much that is, Jeff.

Jeff Tate (CFO)

Fifty.

Jim Fitterling (Chair and CEO)

$50 million on the deductible. But Beryl's Freeport's back up and running, and, you know, I'd say that, you know, we've gotten most of the issues identified. And we're fortunate, you know, no impact to our employees or no impact to people, other than the normal things that impact their homes. But we jump in and help them out, so that they're able to focus on what they need to do.

Operator (participant)

Your next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

John McNulty (Analyst)

Yeah, thanks for taking my question. Maybe just a follow-up on Beryl. It didn't hit the way some of the major hurricanes necessarily take down lots of capacity for long periods, but it does look like a lot of assets were taken down, including your own, for, you know, at least a week or so. Can you speak to what that did to the market for you, and in terms of inventory levels and how you're thinking about what that might mean for pricing in the next couple of months or so?

Jim Fitterling (Chair and CEO)

Yeah, good question, John. I think you can already see in the market that it's starting to have some impact of firming things up, because it happened early in the hurricane cycle, and early August or early July is typically not when we would tend to see the first hurricanes come through. We tend to see them more in the August timeframe. And so I think what you're seeing is that's firming up the sentiment that there will be price increase moves. I think what you're going to see in terms of impacts are gonna be different grade by grade, so depending on what derivatives are down and what grades are gonna become a little bit tighter.

And then you've got, you know, some planned downtime that's happening on the third quarter as well, so you've got some planned outages for third quarter. I'd say we're back up and running hard, trying to catch up to those volumes and get customers stocked back up at this point. And there is a little bit of concern starting to come through the market from customers about being ready for the next impact. Hats off to our team for moving product out in rail cars and other areas ahead of it, you know, so we were able to get things positioned to be able to react, so that we could keep product moving to customers. And we always do a good job of preparing for that and doing things in advance.

Operator (participant)

Your next question comes from the line of Josh Spector with UBS. Please go ahead.

Josh Spector (Executive Director of Chemicals Equity Research)

Yeah. Hi, good morning. I was wondering if you could give some early thoughts on fourth quarter. So, you know, a couple of quarters ago, you thought that there'd be some maybe unseasonal improvement as volumes improve. As we sit today, would you think about a normal seasonal in fourth quarter, call it down $100-$200 million in EBITDA sequentially, or are there other factors you'd call out that would buck that trend? Thank you.

Jim Fitterling (Chair and CEO)

I think plastics is going to continue to see solid volumes, and we've got cost advantage, so I think you're gonna continue to see plastics deliver through fourth quarter. Silicones is positive. You could see the impact on volumes in the derivatives part, and because we're fully integrated. You know, we have an advantage there. So silicones, I would think, is going to hold up well. II&I is going to improve because we've got Glycol 2 back. We've got $75 million of tailwind in third quarter. I think that'll ramp to closer to $90 million for fourth quarter and get up to the $100 million, which is kind of full run rate by first quarter. And so that's good. I think the coatings had a really solid second quarter.

You know, even though I talked earlier about housing and some of the issues in housing, our volumes were very solid there. I think what's working in housing right now is obviously higher value homes, and some of the big home builders you can see are actually delivering pretty good numbers. But that tends to go through the contract side of the business. So the contract painters are doing better than, say, the do-it-yourself business that you would see. And so that's a big chunk of the market, and that's moving positively. We're benefiting from that, and we're also getting some share gains there. So I think third quarter will continue to be good for coatings, maybe a little bit less than second quarter.

Fourth quarter is typically low season for coatings anyway, and that's when we start to get ourselves prepared with maintenance and other activities, so we're ready to run into next year's season. But on those businesses, I would expect, you're gonna continue to see strength. On polyurethanes and construction chemicals, volumes are improving. You even saw that even with some limitations that we had some turnaround downtime in the quarter, you saw volumes improving. Inventories are, are well under control. So I think if there are interest rate cuts that happen this quarter and next quarter, you're gonna see some positive impact there. And then it'll be a question of how much of that will flow to the bottom line.

Operator (participant)

Your next question comes from the line of Frank Mitsch with Fermium Research. Please go ahead.

Frank Mitsch (Analyst)

Thank you. Good morning. And happy to hear that the sound quality on the answers has gotten materially better. But I believe the first answer that you gave concerned polyethylene, and that came through fairly garbled. So I was just wondering, Jim, since you were very accurate in forecasting the April price increase, obviously, June didn't go through, but I'm curious as to what your thoughts are with respect to July and the third quarter in general, in terms of polyethylene pricing and margins. And then also on the Glycol 2 restart, there was an expectation that it would add about $100 million in the third quarter and $100 million in the fourth quarter. You're indicating today that it's $75 million in the third quarter, which makes sense as it ramps up.

You know, would you anticipate that $100 million coming through in the fourth quarter? Thank you.

Jim Fitterling (Chair and CEO)

Yeah. Good morning, John. Thanks. They brought me another microphone here, so I'm sorry about if the first question wasn't answered or understood well. On pricing, we've got prices out around the world, everywhere except Argentina, for July and August. In North America, we've got +5 and +5 out in the market. That is gonna—you're gonna see price stick in the quarter, so price is gonna come through. Now, the question is how much of all that comes through? I think what we put into the estimate is we've put in that we're gonna see two cents per pound margin improvement. So net of price, and as I mentioned, I think ethane costs will come up through the quarter.

I think it'll come up $0.01 or $0.02 through the quarter, if you look quarter-over-quarter. So I think net of that ethane cost increase, you're gonna see a $0.02-per-pound margin increase in North America. I'd, I'd say volume on derivatives around the world supports that, inventory levels support that. And, and I think, you know, there's the outside things that we can't predict, like will we have more hurricane activity? But inventories in the chain are low, so I, I would expect that it's gonna go through. When it comes to glycol, the startup was, was smooth and as expected on glycol, too.

Obviously, we've got to, you know, get through the product mix, and we've got to get some safety stocks built back up, and that's part of the ramp-up that happens from $75 million to $90 million to $100 million. Could it ramp up more than $90 million in the fourth quarter? I guess it could. I mean, usually year-end, there's a little bit of seasonal slowness. So our expectation is it would probably ramp more into the first quarter, which is when we tend to get the, you know, into some higher volumes across some of the markets. But that's what we've got in the estimate right now.

Operator (participant)

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander (Analyst)

Good morning. I just wanted to follow up on your discussion around, you know, potential tariff structures, and how they might evolve. How do you think the response function in the industry with your customers has shifted? That is, if there is movement towards new tariffs, how significant a restock cycle do you see that triggering in advance?

Jim Fitterling (Chair and CEO)

I don't think anything has started yet, Laurence, on people, you know, doing stocking in advance of tariffs. And I, and I, you know, I think primarily because there's all the uncertainty around the election and what policies are gonna actually stick. I think on the same—by the same token, I think there's a little bit of view that China doesn't know what it's gonna do yet from an incentive standpoint for its own economy until it gets a better feel for what's gonna happen with the U.S. presidential election. We're doing scenario planning here to look at the impacts.

As I mentioned, there are anti-dumping activities going on in different parts of the world because of challenges that we see from volumes being dropped into markets, and so there's a lot of work going on behind the scenes. I think we'll get a clearer picture for that by the end of the year. But right now, I, I would say I haven't seen any uptick in volumes or stocking because of that.

Operator (participant)

Your next question comes from the line of John Roberts with Mizuho. Please go ahead.

John Roberts (Analyst)

Thank you. Jim or Jeff, I'm looking at slide 8 in the top exhibit on volumes. You've had relatively easy year-over-year comparisons the last 3 quarters, and then you have that in the third quarter as well, but the fourth quarter begins, I think, more challenging year-over-year comps. If we have normal seasonality, will the fourth quarter be down in volume?

Jim Fitterling (Chair and CEO)

I still think you're gonna see strength, John, in plastics. I don't remember if silicones had turnaround time in fourth quarter last year. It should be up, based on the downstream demand forecast that we've seen. Normal seasonality, I would expect out of coatings. But I think in plastics and silicones, you're gonna see up, and in II&I, because of industrial solutions and Glycol 2 being back, you're gonna see up. The question mark will be: how much do we see in terms of demand uptick on durable goods? And that'll be what determines whether PU is up or not.

Operator (participant)

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Please go ahead.

Duffy Fischer (Analyst)

Yes, good morning. Two questions. First, Jim, you made a comment that you thought your coatings raw material business did quite well in Q2. A lot of the paint companies have come out, and their volumes seem weak, so can you just kinda triangulate that? And then for Jeff, the other assets and liabilities on the cash flow statement has eaten almost $1 billion of cash so far this year, which is much higher than normal. What is that, and what happens to that going forward?

Jim Fitterling (Chair and CEO)

Yeah, Duffy, I'll take coatings. On coatings, mix is part of it, so in addition to architectural coatings, where, as I mentioned, I think in the contractor space and, and with the customers who are in that space, we've done quite well. We also saw traffic paint improvements, and that's been driven by infrastructure projects that have gone along. And also, you know, continue to see good response on, on the innovation side there. The team's done a great job of, you know, getting their assets running well, had great uptime, and I think has been delivering on market share gains, across that, taking advantage of their good cost positions. Jeff, on the cash side?

Jeff Tate (CFO)

Yeah, good morning, Duffy. In terms of other assets and liabilities, you know, you're right. The primary driver there is we had a reduction in long-term tax payables related to some of our tax audit reassessments over the period. And you may recall, even in the first quarter, we had a significant item more specific to one of our regions as well. So those things were somewhat unique from that vantage point of view, so it should stabilize here moving forward.

Operator (participant)

Your next question comes from the line of Patrick Cunningham with Citi. Please go ahead.

Patrick Cunningham (Analyst)

Hi, good morning. I'm just curious on siloxanes pricing in Asia. Would you characterize this as, you know, lingering oversupply issues, or it's just the pace of demand recovery not as strong as expected? And I think there was maybe a bit more confidence on the pricing environment in the second quarter. Did that revert over the past couple of months? Thank you.

Jim Fitterling (Chair and CEO)

Yeah, good question, Patrick. I mentioned on the call the difference between integrated and non-integrated players. I think some of the weakness you see in siloxanes in Asia is from the non-integrated players, and as you say, the capacity overhang that is there. Capacity additions have slowed, so we do think we're gonna start to see, as we move into next year, some pricing improvement on siloxanes. We've been working to make investments in downstream silicone products, which have all been doing well, and we continue to move that way, really trying to drive that volume growth for those downstream derivatives and sell less into that merchant siloxanes market and more into the downstream derivatives. And you're seeing that start to come through in the volume in the second quarter. That was one of the big drivers.

So that was a big driver, plus the fact that you've seen an improvement in downstream demand in things like consumer electronics. You saw pretty strong automotive business, and still good on the commercial construction side of things, which drives a lot of volume of products. Health and personal care has been pretty solid. I'd say we see good volume growth year-over-year, kind of 3%, a little bit more than 3%.... mix is under a little bit of pressure because consumers are trading brands and trading quality maybe a little bit as they're trying to balance their spending at the grocery store and at the pharmacy.

Operator (participant)

Your next question comes from the line of Michael Leithead with Barclays. Please go ahead.

Michael Leithead (Analyst)

Great, thanks. Good morning. Jim, just a bigger picture question. Dow's obviously investing a lot for medium-term growth. You've laid out a lot of 2025 and 2030 expansion targets, but at the same time, the overall demand backdrop since about mid-2022 has probably been materially worse than you or anybody has thought at that time. So as that timing gap between near-term weakness, medium-term growth sort of closes, I mean, 2025 is only five months away now, does that give you any pause at all on some of your investments? Do you need to rethink or pivot any of these expansions in sort of a slower for longer economic scenario?

Jim Fitterling (Chair and CEO)

It's a good question, Mike. But I would also, you know, ask you to think about it in even a longer-term timeframe. It takes years to plan and make these investments, and we have to look at what's happened in plastics. Take, for an example, since 2019, we've seen a 20% increase in volumes in plastics. You can't obviously respond to the market when you see the increase and start to get this capacity in place. You got to get in place to take advantage of the mid-cycle and the upcycle ahead of time. So typically, when we're at this point in the cycle, it's a common question that everybody asks, but we've got to look through at the long-term trends. And the long-term trends for plastics say the growth is gonna continue to be there.

We've tried to move into the areas where there is differentiation and there's higher growth rates, whether that's silicones, whether that's plastics, whether that's industrial solutions on the higher value, especially EO derivatives, where we're investing. That's where the dollars are going. So those three markets are consuming most of your capacity expansion. What we've been doing in polyurethanes is more rationalizing the footprint around the higher value markets, more downstream, less commodity like EO, more MDI-containing components. And on coatings, obviously, being able to move with the market as the housing market improves. So I feel good about the long-term direction. We're not back at mid-cycle yet.

As we get back to mid-cycle, there's a $3 billion step-up in earnings at mid-cycle, margins, and then once Path to Zero comes on in the 2027-2029 timeframe, and you get to peak, there's another $3 billion step-up to peak.

Operator (participant)

Your next question comes from the line of Chris Parkinson with Wolfe Research. Please go ahead.

Christopher Parkinson (Analyst)

Great. Thank you so much. Jim, in your $2 billion of, you know, mid-cycle upside for, P&SP, you know, I understand there are obviously a lot of moving factors there, but if we stick to the U.S., can you just offer some insights in terms of what you're expecting in terms of integrated, you know, PE margins, just given where the current SD dynamic is, export trends, NGLs? Just any color in terms of the kind of getting that back would be especially helpful. Thank you.

Jim Fitterling (Chair and CEO)

Yeah, so mid-cycle, margins typically run in the range of $0.27 globally, but that, that can run from, you know, in Europe, maybe $0.20 mid-cycle margins to Americas $0.32. When we've gotten to peak, the global average on peak would tend to be more like $0.48. And maybe that range would run from Europe being in the $0.40 range, $0.38-$0.40, and Americas being as much as $0.56. So that's, you know, kind of what the outlook is. And of the $2 billion of upside, I'd say some of that is capacity debottlenecking and things that we're adding.

So about $800 million of the $2 billion is from additions and tweaking on making some more higher value products available, like we announced, you know, we've done with elastomers and things in Tarragona, and then the rest of it will come from margin expansion.

Operator (participant)

Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Michael Leithead (Analyst)

Good morning, everyone. Jim, looking at ACC numbers, North American polyethylene demand this year is roughly at the same level as in 2018, 2019. Do you have any thoughts on this observation? Do you think there's another leg up for US polyethylene demand?

Jim Fitterling (Chair and CEO)

I do. I think when we look at North American demand, we're starting to see, you know, the total domestic demand plus exports getting north of, you know, 5 billion pounds. So, you know, this is a step-up. Obviously, exports have been a big driver. Historically, you know, 30% of total demand was export. You're running about 45% of that demand in 2023. Also, we tend to look at not just U.S. data, but I would also look at Mexico. I mean, we move product into Mexico the same way we move into the U.S. market. And as I mentioned, you know, one of the biggest consumption increases has been in Mexico with manufacturing reshoring, moving into that area. So I think we're seeing good volumes this year in the U.S.

I think we're gonna continue to see that improve at a steady rate.

Operator (participant)

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead. Arun, your line is open.

Jim Fitterling (Chair and CEO)

Andrew?

Andrew Riker (Head of Investor Relations)

Yeah, thank you, everyone, for joining our call, and we appreciate your interest in Dow. Also, we understand there were some technical issues and audio issues to start the early part of the Q&A. We do apologize for this. As a reminder, we do post the transcript to our investor website, and we'll do so as quickly as possible today to make sure everything's addressed. This concludes our call. Thank you for your time, and thank you for your interest in Dow.

Operator (participant)

This concludes today's conference call. Thank you for your participation, and you may now disconnect.