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Text: I'm Pankaj Gupta, Dow investor relations vice president.
And joining me on the call today are Jim Fitterling, Dow's chairman and chief executive officer; and Howard Ungerleider, president and chief financial officer.
Dow's Forms 10-Q and 10-K include detailed discussions of principal risks and uncertainties which may cause such differences.
Unless otherwise specified, all financials, where applicable, exclude significant items.
We will also refer to non-GAAP measures.
On Slide 2, you will see our agenda for the call.
Jim will begin by reviewing our third-quarter highlights and operating segment performance.
Howard will share our modeling guidance and outlook, and then Jim will recap our strategy for disciplined value growth that we outlined at our investor day earlier this month and why Dow continues to be a compelling investment opportunity.
Starting on Slide 3.
In the third quarter, Dow achieved top and bottom-line growth, both year over year and sequentially.
Our proactive storm preparations enabled us to maintain the safety of our team and community and recover quickly.
We delivered a 53% sales increase year over year with double-digit gains in every segment, business, and region.
We also recorded a 7% increase in sales over the prior quarter.
We captured strong price momentum, driven by tight supply demand balances across our key value chains, and we achieved volume growth of 2% both year over year and sequentially, supported by continued strong end-market demand despite supply and logistics constraints.
We increased operating EBIT by more than $2.1 billion year over year with improvements in all segments and businesses and $58 million higher sequentially.
Key contributors included year-over-year margin expansion of 1,170 basis points, driven by price momentum and demand growth, and increased equity earnings, up $189 million, for margin expansion at our Sadara and Kuwait joint ventures.
Our continued focus on cash generation and our balanced disciplined capital allocation enabled us to deliver cash flow from operations of $2.7 billion, up $958 million year over year, driven by margin expansion from price momentum in key value chains.
We returned a total of $918 million to shareholders through our industry-leading dividend of $518 million, plus $400 million in share repurchases.
And we also reduced gross debt by more than $1.1 billion in the quarter.
Our proactive liability management actions to tender existing notes have resulted in no long-term debt maturities due until 2026, and we've reduced annual interest expense by more than $60 million.
Overall, Dow continues to deliver on its priorities, and we see further strength ahead as we benefit from a favorable macro backdrop and execute our disciplined strategy to decarbonize our footprint and grow earnings, driving significant value for all stakeholders.
Moving to our segment performance on Slide 4.
In the packaging and specialty plastics segment, operating EBIT was $2 billion, compared to $647 million in the year-ago period.
Sequentially, operating EBIT was down $60 million.
Price gains in both businesses and in all regions led to margin improvement in the core business and increased equity earnings.
On a sequential basis, operating EBIT margins declined by 300 basis points on higher feedstock and energy costs.
The packaging and specialty plastics business reported a net sales increase year over year, led by local price gains in industrial and consumer packaging and flexible food and beverage packaging applications.
Volumes declined year over year due to lower polyethylene supply as a result of planned maintenance turnarounds and weather-related outages in the quarter.
Compared to the prior quarter, the business delivered price and volume gains on strong demand in industrial and consumer packaging applications, which were partly offset by hurricane-related outages.
Moving to the industrial intermediates and infrastructure segment.
Operating EBIT was $713 million, up $609 million year over year, primarily due to continued tight supply and demand in both businesses.
Sequentially, operating EBIT was up $65 million, and operating EBIT margins expanded by 50 basis points on volume and price gains in both businesses.
The polyurethanes and construction chemicals business increased net sales compared to the year-ago period with price gains in all regions on tight supply demand balances.
Volume declines year over year primarily reflected the planned transition of a low-margin coproducer contract, as well as weather-related outages and third-party supply constraints.
Sequentially, the business delivered sales growth due to increased local price and volume from additional supply availability to meet resilient demand.
The industrial solutions business delivered a net sales improvement compared to the year-ago period with local price gains in all regions.
Volume increased year over year on strong demand for materials in industrial manufacturing and energy applications.
Net sales also increased sequentially, driven by volume growth, primarily in coatings and industrial applications from increased supply and local price gains in all regions.
And finally, the performance materials and coatings segment reported operating EBIT of $284 million, up $209 million versus the same quarter last year as margins increased 750 basis points due to strong price momentum and robust demand recovery for silicones and industrial coatings offerings.
Sequentially, operating EBIT was up $59 million on price gains, leading to margin expansion of 210 basis points.
The consumer solutions business achieved higher net sales year over year with price gains in all regions.
Volume increased over the prior year on stronger consumer demand for personal care, mobility and electronics offerings.
Sequentially, sales were down as price increases in all regions were more than offset by volume declines as a result of planned maintenance and third-party supply and logistics constraints.
The coatings and performance monomers business delivered increased net sales year over year as higher raw material costs and tight supply/demand balances led to price gains in all regions.
Volumes were down year over year as demand recovery for industrial coatings was more than offset by weather-related outages and third-party supply and logistics constraints.
Sequentially, the business delivered local price gains in all regions, supported by increased volume due to continued strong demand for acrylic monomers and architectural coatings and increased supply availability.
Turning to Slide 5.
In the fourth quarter, we see a continuation of robust demand growth across our packaging infrastructure, consumer, and mobility end markets.
Brand owner inventory levels remain low.
And as a result, we anticipate higher seasonal demand continuing into the holiday season this year.
In packaging and specialty plastics, we continue to see resilient demand for packaging applications and for our differentiated functional polymers.
Global polyethylene supply remains constrained as the industry completes higher turnaround activity and supply chains recover from weather events on the U.S. Gulf Coast.
We exited the third quarter experiencing higher raw material and energy costs which we anticipate will likely persist through the fourth quarter.
We expect these costs to be an approximately $350 million headwind sequentially.
Dow will continue to utilize our broad geographic footprint and best-in-class feedstock flexibility to help mitigate these impacts.
We also anticipate a $175 million tailwind from turnarounds in the quarter as we completed our planned maintenance at our cracker in Canada.
In industrial intermediates and infrastructure, continued consumer demand for furniture and bedding, appliances, pharma, and home care are expected to keep supply tight in our key value chains.
Due to the weather-related outages in the third quarter, some of our planned turnaround activity was moved to the fourth quarter.
Sadara will also start a turnaround at its isocyanate facility in the fourth quarter as well.
Altogether, we anticipate $100 million in this segment from turnaround impacts.
Short-term increased energy costs in the U.S. Gulf Coast and Europe are expected to be an additional $100 million headwind in the quarter.
We continue to see sequential recovery in industrial activity, particularly for energy applications.
We anticipate this recovery will continue at least through the fourth quarter as industrial production continues to ramp up from very low inventory levels to meet demand.
In performance materials and coatings, demand for electronics, mobility, building, and construction continues to outpace supply.
Demand for architectural coatings is also expected to remain elevated due to persistently low inventory levels across the value chain.
Global production for silicones has been impacted by the recent dual control policy enforcement actions in China, with silicone metal prices almost three times their previous highs.
We intend to pull forward a scheduled turnaround at a siloxane facility in Zhangjiagang in China to coincide with government actions to curtail power usage.
Our current estimate for the quarter includes $125 million from increased raw material costs and turnaround impacts.
We'll continue to work on mitigating the impacts of rising raw material costs through our integrated position in both businesses.
Despite higher raw material and energy costs in the fourth quarter, Dow will continue to leverage its advantaged global footprint, structural cost, and feedstock advantages, as well as our broad suite of differentiated products, to meet growing demand.
On Slide 6, as we look ahead, we expect robust economic growth to continue.
With the Delta variant slowing the reopening of economies around the world, there remains significant pent-up demand globally, particularly across our industrial and consumer end markets.
Many industries continue to see elevated order backlogs, coupled with low inventory levels, as supply chain struggled to keep up with robust demand.
These supply chain disruptions are expected to persist, which will certainly prolong the ability to restock inventories across most value chains.
As a result, we expect tighter-than-forecasted market conditions to continue, a view strengthened by China's recent dual control policy that has impacted both cold olefins and methanol to olefins-based capacity, which represent more than 30% of China's total polyethylene production.
2022 GDP growth forecasts are well above historical averages in most areas of the world as industries ramp up to match the robust consumer demand with further upside as global chip shortages continue to extend the recovery in manufacturing.
Collectively, G7 countries have not yet fully recovered to pre-pandemic GDP.
This points to additional upside as economies return to more normalized consumption levels with degree of vaccination increasing, particularly in Asia, where levels remain low relative to the rest of the world.
Moving to Slide 7.
At our investor day earlier this month, we outlined how our differentiated portfolio and our focus on sustainability-driven innovation will enable more than $3 billion in underlying EBITDA improvement across the cycle.
Our restructuring program and digital investments will yield $600 million in increased EBITDA.
Both are in progress, and our restructuring program is on track to achieve its $300 million run rate by year end.
We also have a suite of higher return, lower risk, and faster payback capital and operating investments that will enable an additional $2 billion in EBITDA in the near term.
And our investments to decarbonize and grow at our Fort Saskatchewan site in Alberta, Canada are also expected to deliver approximately $1 billion in increased EBITDA.
And as we've already shared, we're executing against a favorable macro backdrop that we expect will continue to support constructive market fundamentals for our key value chains.
Turning to Slide 8.
You'll see the detailed list of these low-risk growth investments.
Our capital investments are expected to generate $1 billion in EBITDA through incremental capacity expansions, debottlenecking, and enhanced feedstock flexibility across our operating segments.
We're already making good progress.
For example, in packaging and specialty plastics, our Fort Saskatchewan expansion to add ethylene capacity of 65,000 metric tons per year to support growing polyethylene demand is now complete and will ramp by the end of the fourth quarter.
Our FCDH pilot plant in Louisiana will start up in 2022, featuring 20% to 40% lower capex and 5% to 7% lower opex while reducing CO2 emissions by up to 20% compared to other PDH technologies.
In industrial intermediates and infrastructure, our debottlenecking project to add 60,000 metric tons per year of aniline will be fully online by year end.
And earlier this year, we signed an MOU for a new South China hub to advance local supply and formulating capabilities to serve the fast-growing Asia-Pacific market.
In performance materials and coatings, we recently completed a capacity expansion at one of our silicone polymer plants.
And by year end, we will complete a new silicone sealant compounding unit to enable sustainable solutions for high-performance building and infrastructure applications.
And we are progressing our 50 kt methacrylate investment on the U.S. Gulf Coast to support global end markets, such as inks, resins, and packaging materials, which is scheduled to come online in the first half of next year.
In addition, our operating investments are also expected to generate another $1 billion in EBITDA as we improve our production capabilities and shift our product mix to higher growth and higher value markets.
For example, in industrial intermediates and infrastructure, we're increasing capabilities and shifting our mix toward higher-margin polyurethane systems for mobility and consumer applications.
Our industrial solutions business is increasing capabilities to supply differentiated materials into the textile market.
Our ECOFAST collaboration with Ralph Lauren lowers energy usage by 40% and water usage by 50% in the fabric dying process.
And by 2025, the brand aims to incorporate this technology in more than 80% of its solid cotton products.
In performance materials and coatings, we're expanding our ability to formulate differentiated silicones for a number of attractive markets, including silicone adhesives for foldable displays in consumer electronics, thermal conducted silicone solutions for electric vehicles, and silicone solutions for 5G where the market is expected to more than double over the next 10 years.
And we recently partnered with customers on high-value innovations like paper barrier coating applications that use our award-winning Rhobarr polyolefin dispersion technology and Callaway's Supersoft golf balls, which feature a new hybrid cover made with Dow's paraloid-impact modifier.
In packaging and specialty plastics, we're enhancing our extensive conversion and testing capabilities to commercialize residents through packaging design, speeding the innovation process, and expanding the addressable market for higher margin and more sustainable products.
For example, we're already benefiting from the nine-layer blown film extrusion line project completed this year.
We're also making investments to improve asset reliability, which will increase output and expand margins.
And we're using digital technology for customer trials and process automation to accelerate catalyst development for new resins and processes like FCDH where we can typically be 100x more efficient than conventional experimentation.
Collectively, our slate of near-term investments will generate an increase of approximately $2 billion in underlying EBITDA, and we intend to deliver this growth with a disciplined and balanced approach, maintaining our top quartile performance in cash flow, cost structure, debt reduction, and shareholder remuneration.
Turning to Slide 9.
The strategy we outlined at our investor day builds on our long history of industry leadership.
Our plan enables us to capture demand from sustainability drivers, achieve zero Scope 1 and 2 carbon emissions, and deliver meaningful underlying earnings and cash flow growth for years to come.
Our path to decarbonize our footprint and grow earnings is a phased site-by-site approach that both retrofits and replaces end-of-life assets with low-carbon-emission facilities while also expanding our capacity.
This plan will deliver a 30% reduction in our CO2 emissions between 2005 and 2030 through a disciplined approach that manages timing based on affordability, macro and regulatory drivers around the world.
Our Texas 9 cracker proves that we can do this and do it well.
Texas-9 is 60% lower-carbon intensity than any asset in our fleet, and that's without any specific design for carbon capture or hydrogen.
The project was delivered with 20% better capital efficiency and 12 months faster than any other crackers built in that wave.
Overall, the project has a 65% lower conversion cost, is running consistently at more than 110% of nameplate capacity, and has delivered greater than 15% return on invested capital since start-up.
We will leverage key learnings from Texas-9 as we plan to build the world's first-ever net-zero carbon emissions ethylene cracker and derivatives complex in Fort Saskatchewan, Alberta, delivering approximately $1 billion in EBITDA, as Howard outlined earlier.
This project will more than triple our ethylene and downstream derivative capacity at the site while decarbonizing emissions for 20% of our global ethylene capacity.
We selected this site due to the availability of carbon capture, infrastructure, advantaged feedstocks, and supportive government policies and incentives.
On Slide 10, as we capture these attractive growth opportunities, we will maintain our balanced and disciplined financial approach since spin.
We are committed to keeping capex at or below D&A, well below pre-spin levels while targeting return on invested capital above 13% across the economic cycle.
We will continue to align our capital spend to the macroeconomic environment, our affordability, and return targets.
Our investments align to three categories: First, we'll maintain our foundation and maximize the return of our existing assets while ensuring safe and reliable operations.
Second, we'll execute our pipeline of faster payback, lower-risk incremental growth projects for downstream and sustainability-driven applications growing faster than GDP.
And we'll invest approximately $1 billion per year to decarbonize our footprint and grow earnings.
These investments enable us to capture increasing demand for low carbon footprint products while derisking the enterprise with lower emissions assets.
In closing, on Slide 11, Dow is well-positioned to deliver significant long-term value for shareholders.
We have actions in place to both decarbonize our footprint and grow the enterprise as we achieve an additional $3 billion in underlying EBITDA, maintain industry-leading cash flow generation, and drive toward zero Scope 1 and 2 carbon emissions.
Our balanced capital allocation approach targets more than 13% return on invested capital, keeps capex within D&A, and return 65% of net income to shareholders across the economic cycle.
All of this is underpinned by our industry-leading portfolio, cost position, and strong track record of innovation that enables us to deliver differentiated products and solutions for our customers and a more sustainable world.
Operator, please provide the Q&A instructions.

user
continue to see robust end-market demand that is expected to extend into 2022.

assistant