Dow : Transcript

Dow Inc.

Dow Inc. presentation delivered at the 2021 Industrials Conference on Tuesday, March 16, 2021 at 9:40 AM

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Jeff Zekauskas: Hi, good morning. This is Jeff Zekauskas, the chemical analyst at J.P. Morgan.

This morning, it's my pleasure to welcome you to the J.P. Morgan Virtual Industrials Conference.

The format of our conference is virtual in the interests of health and safety. We very much appreciate your attendance.

For today's fireside chat, you can submit questions by emailing me [e-mail] by using the conference website through the Ask a Question feature.

It's my pleasure this morning to introduce Howard Ungerleider, who is the President and Chief Financial Officer of Dow Chemical. Howard has been a long time Dow veteran, both on the financial side and on the business side. Joining Howard is Colleen Kay and Pankaj Gupta in investor relations.

As a reminder, this event is open to the public. Please refer to the cautionary and forward-looking statements in the materials that Dow will pass. With that, I'll turn it over to Howard who will make some opening statements, and then we'll proceed with our fireside chat. Howard?

Howard Ungerleider: Thanks for having us, Jeff, and good morning to you and good morning to everyone. Jeff, I answer to any name and any title, so you just feel free to call me whatever you want.

I really appreciate the opportunity to provide an update on the quarter including the impact of winter storm Uri. Perhaps you want to talk a little bit about changes. We recently announced to our US pension plans and of course our continued focus on driving long-term growth in our enterprise value.

Now, as we shared on our fourth quarter earnings call, we exited 2020 with increasingmomentum. Underlying market fundamentals, frankly, have only continued to improve in the first quarter, despite the unexpected disruption from winter storm Uri in February, which was significant.

Demand for packaging applications continues to remain resilient. What we've seen is really construction, automotive, and manufacturing production really continue to trend positively. Just a little bit of a stat, new US housing stats and existing home. Sales are up double digits over last year.

Frankly, they've reached now levels that we haven't seen since the economic up cycle of 2005, just to put those statistics in perspective. The Dow team continues to proactively capture these favorable market dynamics, managing through the winter storm impact, as well as several planned turnarounds.

In polyethylene, we achieved price increases in January, and February, and March. We also have nominations in place for April as a result of the continued solid demand momentum, the disrupted supply conditions, and the very, very tight chain inventory levels that we see.

Strengthening demand and industrial and consumer durable goods end markets combined with industry tight supply and low inventory levels have also supported margin strength in MDI and polyurethane applications.

In our silicone business, it's beginning to benefit from industry demand improvements in consumer end markets, such as electronics, home care, and mobility.

What we're seeing now is particularly strong in our higher-margin offerings, which was lagging when you think about the last half of last year. Then in our coatings business at the do-it-yourself, coatings demand continues to remain high as consumer home improvement trends continue.

In addition, I would say our previous and our ongoing investments in lower risk, faster payback expansion, the bottleneck projects in silicones and industrial solutions continues to enable data capture, the strengthening demand we see in automotive, and electronics, in pharmaceutical markets as the global economy continues to recover.

In terms of winter storm Uri, first, let me just say how proud and thankful we are that Team Dow remains safe as our team took swift action to activate our preparedness plans and move rapidly to respond. Winter storm Uri had a broad impact on the US Gulf Coast, in particular across theentire state of Texas, and resulted in widespread utility and raw material supply disruptions.

This was a very significant event for the entire industry, and I would say much more significant than a typical hurricane as it covered the entire state. It impacted almost all the gas fields plus the entire electrical grid in the state.

While Dow like many others in the industry experienced production outages predominantly across Texas, I'm proud of the fact that our team successfully began to bring our impacted assets back online as early as one to two weeks from the storm's peak.

As of today, I'm pleased to report that all of our crackers on Dow's US Gulf Coast are operational, with the one exception being Sabine River.

Sabine will restart later this month. We expect all of the assets impacted by the winter storm to continue to ramp through the end of March and into April, as we still are dealing like many others are, with a few raw material constraints and we are continuing to do some freeze damage repairs.

In general, I would say we expect our Texas assets to be at 80 percent rates by the end of the month and full rates at some point before the end of April. That'll enable us to begin to fulfill the backlog of demand which is pretty significant. Dow's ability to rapidly respond and restart is a true testament to Team Dow's dedication and our pride of ownership.

Once all the units are back at full production rates as we do with all significant operational events, we'll be taking a look at additional maintenance and improvements and incorporating all of our learnings into our future plans.

While many of our businesses declared force majeure on products in the aftermath of the storm, our teams are certainly working hard to mitigate the operational and customer impact as much as possible. We continue to stay as close to our customers as possible as these product and supply chain impacts across the industry have clearly created extremely tight supply balances.

Now, as all units come up, we'll continue to work through the backlog of orders and the pent-up demand in each of our value chains. Assessment of the financial impact due to the storm is still underway.

Despite the impact from the shutdown to repair the ramp-up costs, we actually today expect net upside for the quarter from the tight dynamics we're experiencing across both durable andconsumer end markets, resulting in first-quarter results that should be $50-$100 million higher than the current First Call EBITDA consensus estimate.

Moving forward into the second quarter, we expect these strong supply-demand fundamentals to continue in light of the order backlogs that I mentioned, the pent-up demand, and the low inventories and most of the value chains that we see. As of right now, I would call the upside of at least $300-$400 million versus the current second quarter First Call consensus EBITDA.

When combined with the continued recovery that we see from the pandemic driven by increased vaccinations, further economic stimulus out of Washington, rising demand as the service sector reopens, and frankly, an expected increase in industrial capital spending, we expect these tailwinds to continue into the second half of the year as well.

Of course, we'll share more detailed guidance, Jeff, for the second quarter during our earnings call in April. A couple of other things before we turn it to Q&A, I would say earlier this month we announced updates to our compensation and benefit programs.

We followed a comprehensive review, a benchmark relative to our peers, as well as a survey of our organization in order to better align with the market as well as the needs and preferences of

Dow's globally diverse workforce, while also continuing our focus on financial flexibility and of course continuing to strengthen our balance sheet.

This included the decision to freeze our US pension plans as of December 31, 2023, which is a shift in line with the industry trends and market practice today.

We also made a one-billion-dollar voluntary plan contribution to our US-defined benefit plans this month as a result. These actions will enhance the strength of our balance sheet by reducing our pension plan obligations by approximately $350 million.

It'll decrease our pension expense related to the US plans by more than $160 million this year. It'll also improve the funded status by almost $1.4 billion, and it'll eliminate required pension contributions for the US plans until 2024.

Beginning next year, the annual benefit cost reduction will be partially offset by a higher company match of employee contributions to the US defined contribution plan. We'll have more details on this along with an updated view of our full-year model and guidance to share on our earnings call when the pension remeasurement is complete.