Dow Inc. Q3 FY2025 earnings call

• Executed against strategic priorities to deliver sequential earnings and cash flow improvement despite industry pressure. In third quarter, delivered net sales of $10 billion, EBITDA $868 million. Cash provided by operating activities up $1.6 billion sequentially. - Advanced several strategic actions in third quarter: announced expansion of strategic agreement, closed second phase of strategic infrastructure asset partnership, completed second noncore divestiture, issued additional $1.4 billion bond. - Progressing delivery of at least $1 billion in targeted cost savings by end of 2026, on track to deliver ~$400 million this year. Lowered CapEx spending in alignment with $1 billion reduction target, delaying Alberta project until market conditions improve. - Focused on margin improvement, prioritizing volume growth in attractive end markets, and taking decisive actions to lower cost base and progress cost savings actions. - Optimized global manufacturing footprint, such as shutting down 3 upstream assets in Europe as announced last quarter.

Packaging and Specialty Plastics segment

• Net sales: Down compared to year ago period, sequentially declined due to lower prices of downstream polymers and olefins. Volume decreased 1% year-over-year and 2% sequentially. Polyethylene volumes increased in both periods, but offset by lower Olefins volumes in Europe. Operating EBIT was $199 million, reflecting a decrease compared to year ago period but increased sequentially due to higher integrated margins, operating rates, lower fixed costs from cost reduction actions, and benefit of new polyethylene unit in U.S. Gulf Coast.

Industrial Intermediates & Infrastructure segment

• Net sales: Down 4% year-over-year driven by pricing pressures, but sequentially increased reflecting volume gains in both businesses and all regions. Volumes increased 2% year-over-year and 5% sequentially. Operating EBIT increased versus year ago period driven by higher volumes and operating rates as well as lower fixed costs, partly offset by lower prices.

Performance Materials & Coatings segment

• Net sales: $2.1 billion in the quarter, down 6% versus year ago period and 2% sequentially, driven by pricing pressures on upstream areas. Operating EBIT decreased both year-over-year and sequentially driven by upstream margin compression, partly offset by lower fixed costs from cost reduction actions.

• Anticipate fourth quarter EBITDA to be approximately $725 million. - Packaging and Specialty Plastics: Lower planned maintenance in U.S. Gulf Coast and Europe will provide $25 million sequential tailwind, along with ~$25 million from cost reduction actions, but higher feedstock and energy costs expected to be a headwind despite anticipating higher downstream volumes, with ~$0.01 per pound of margin contraction, partly offset by higher equity earnings but impacted by fire at polyethylene unit in Texas with $25 million unfavorable impact. - Industrial Intermediates & Infrastructure: Expect fourth quarter EBITDA to be approximately $20 million lower than third quarter, largely driven by seasonally lower demand in building and construction, margin compression from higher energy costs and pricing pressures, but with sequential tailwinds from higher demand for deicing fluids, lower turnaround spending and cost reduction actions. - Performance Materials & Coatings: Expect lower sequential EBITDA of approximately $100 million, with normal seasonally driven decreases in demand for building and construction and infrastructure end markets as a headwind, partly offset by continued strength for downstream silicones applications in electronics and home care, but partly offset by planned maintenance at Deer Park Texas site.

• Broader macroeconomic landscape remains uncertain with subdued business investment and consumer spending due to economic uncertainty and affordability challenges, impacting demand across key end markets. - Industry oversupply continues to weigh on the entire industry, with ongoing rationalization efforts needed. - Trade policies and antidumping duties can impact market conditions and product pricing, as seen in discussions around protecting local production and fair trade environment.

Q: Wondering if we could just get a bit of a reconciliation about the third quarter. Ultimately, the results came in nicely ahead of what you expected when you gave the original guidance at 2Q. Obviously, about a month ago, you were anticipating things were going to fall short of that, particularly in Packaging and Specialty Plastics, but you wound up being able to exceed your original estimate there, likewise in III. So just wondering what happened. Was it just in September came in better than expected? Or were you better on costs or just what allowed this outcome to take shape?

A: James Fitterling asked Karen to walk through the business results, and then Jeff to comment on cost and cash. Karen said there were 2 areas of sequential improvement: higher integrated margins in both NSP and II&I driven by new growth assets with better volume than expected, and cost efforts with accelerated $400 million cost savings showing up in bottom line. Jeff added related to cash flow, cost reductions were better than expected, cash from operations came in at $1.1 billion in third quarter with improvement in working capital, long-term strategic supply agreements, and improved earnings sequentially Q: Jim, really appreciate the industry sort of outlook you guys provided on Slide 10. So just a broader question around rationalization and new project cancellations. On the rationalization side of things, obviously, the South Korean side, the Japanese side and the European side, you can assign projects. You can see which capacity is being shut down. What's less clear is the anti-evolution side. China, in particular, what cancellations may transpire over there. So I'd really appreciate if you could sort of provide your thoughts around that. And part and parcel with that, I keep hearing that, look, I mean, once China announces new facilities, they never canceled those projects. I mean they have a long track record of that. So is that also changing?

A: James Fitterling said there's line of sight to about 9,300 kilotons of global capacity rationalized, with 4,400 kilotons in Europe, Middle East and Africa, and 4,900 kilotons in Asia Pacific. Speculation on closures of about 13 million metric tons, but 9,300 kilotons more confirmed. On China, no data to counter once announced completed, but might see delays in announced capacity in China due to slow market and certain grades reaching self-sufficiency and not having cost position to export Q: Nice quarter. In terms of PSP, I think you noted global integrated margins could be down $0.01 in the fourth quarter. Can you bifurcate that from whether pricing or cost in the U.S., Europe and export? And then just a quick follow-up. Slide 8, the pretty colors really haven't changed, well, they're not that pretty. But -- if those -- if the global demand backdrop stays similar in the first half of '26, does EBITDA improve? And I know you have more cost savings next year. Can you maybe just talk about what happens in the event that we have this same colors heading into next year?

A: Karen said in third quarter, expected prices to move up but settled flat despite market fundamentals, with ACC data in September showing record domestic and export demand and second largest draw of industry inventories, expecting prices to go up in October with $0.05 on the table. Integrated margins predicted to be down $0.01 due to higher feedstock cost expected based on weather. James Fitterling said main reason for no change in Slide 8 is uncertainty in marketplace with no settlement on all trade deals, industries driving demand are good like electronics, data centers, but Chinese housing market has no support, optimistic things moving in right direction, and if trade deals completed by end of year bode well for next year, else need certainty for people to make investment plans Q: I was wondering if you could talk a little bit more about kind of the range of CapEx as you think about 2026. I mean I think you made the comment that you're not going to make a decision on Alberta or at least you're not going to announce it until the January or February call. But can you help us think about maybe a low end range if you decide that you're not going to do it and bring basically everything down versus the high-end range if you say we are going to kind of continue what that ramp-up would look like?

A: James Fitterling said simple answer is if continue the way are, could see another $2.5 billion next year with about $1 billion of maintenance CapEx, less maintenance CapEx going into next year with some downstream silicones projects, and will come back in January with teams working on triggers and what would cause start of construction on path to 0 Q: One of the things that Dow hasn't really talked about is joint venturing the Alberta cracker. Why wouldn't that make sense and take pressure off the cash flows of the company? And then is that something that you're considering? Or why wouldn't you consider it? And then secondly, what's polyethylene demand been like for you in the third quarter and year-to-date?

A: Karen said polyethylene demand has been stable, packaging has remained relatively stable with shifting from consumer branded labels down to private labels still good for them, and [Polyseven] sold out and expected to continue. James Fitterling said don't have specific to say on joint venturing Alberta, have experience with joint ventures like in Texas, Alberta still a delay not cancellation, has scale and cost position, and brings additional asset cracker and derivatives up into Alberta pocket with cost advantage on ethane over long period Q: I was hoping you could talk a little bit more about some of the moving parts in your polyurethane business. Are you seeing any benefits to U.S. MDI margins from tariff impacts that have reduced imports from places like China. Also on the -- just on the construction end market side, I think you mentioned that rates are coming lower, but is it fair to say that's not really coming through in the market yet. And then finally, do you have any sort of commentary you can provide on the relative strength with your polyols business versus your isocyanates business. Is one holding up a little bit better than the other?

A: Karen said on construction end market, rates need to come down further to mid-5% range for recovery, currently in mid-6% range. On U.S. MDI margins, encouraged by recent rulings on antidumping, U.S. Department of Commerce preliminary finding of MDI dumping by Chinese producers, with Chinese imports accounting for about 20% of MDI market and market for Chinese imports dissipating quickly. On polyols and isocyanates business, didn't specifically comment on relative strength but said packaging demand stable Q: Jim, I was wondering if you could comment or elaborate a little bit more on the here and now in terms of the demand function. How are your October and November order book shaping up relative to normal seasonal patterns? Just trying to get a sense for your fourth quarter guide of $9.4 billion in sales, $725 million on EBITDA. How conservative or not, you think those levels are relative to the normal seasonal year-end movements?

A: James Fitterling said U.S. economy growth excluding data centers and related investments was about 0.1% GDP for the year, manufacturing sectors under pressure, China's domestic GDP under pressure, September was strong month, October order books look good, early to call November, and so far so good on order books, not too conservative or optimistic, kind of right down the middle with experience year-to-date Q: Jim, on Slide 10, we can all see that the cost curve is pretty steep when it gets to the third and the fourth quartile and we continue to see some of the rationalization of the asset footprint, presumably in the fourth quartile on an ongoing basis. But at the same time, that means certain third quartile assets become the operational fourth quartile assets. And the cost curve, the perceived cost curve could actually be a little bit flatter than previous estimates. How, if any way, whatsoever, does that filter in to your return assumptions, your longer-term term resumptions on Alberta? And how does that help you triangulate your decision-making process over the next 6 to 12 months? Or is it simply just too early to tell?

A: James Fitterling said cost curves change over time, recent moves at naphtha and propane have brought some things down, Canadian asset will be low-cost and first quartile asset, focus in Europe on rightsizing to European market, big question mark on how long European market will stay at that size and China trade regulation, timing of demand to come back, with 10% of global capacity either announced or talked about in terms of coming out, polyethylene demand has been good volume but no pricing power yet, and world not going to stay at slow growth forever, so capacity coming out and demand rate kicking up will benefit investors Q: First of all, 2 questions maybe. So one, just to be explicit, your guide for Q4, what are you baking in for ethane pricing doing in the U.S.? How much of that $0.05 do you have baked in and then your sequential operating rates, do they stay flat, would be question one, just around the fourth quarter. And then second question is, have you guys done work or do you have a view on what you think happens with natural gas pricing in the U.S. as we start to export more natural gas. So a view on where '26 natural gas price goes?

A: James Fitterling said on ethane, got $0.04 in the quarter, ethane moving as seen, natural gas production good in U.S., weather a big factor, September and October warmer helping strip cool off a little bit now, inventory levels biggest factor, near-term moves on gas positive, and ethane could be in middle of trade negotiation between U.S. and China as China is big receiver of ethane exports Q: You talked quite a bit about volume gains from new investments in the U.S. Gulf Coast and reference picking up share in better markets. I guess, first, can you help quantify the run rate earnings contribution from some of these growth investments? And are there any other incremental investments or tailwinds we should be aware of that gives additional uplift next year?

A: Karen said the 2 growth assets now up and running are the Polys unit and [indiscernible] capacity in U.S. Gulf Coast, expect full run rate annualized to deliver $100 million to $200 million, with ~$40 million in third quarter and expected to continue into fourth quarter. James Fitterling added we're balanced now on ethylene in the marketplace, allowing to capture full integrated margin on that ethylene versus selling merchant ethylene Q: I appreciate the view that PE demand is going to grow in excess of GDP. But as we look across -- a lot of the chemical chain and trends you're seeing in China. Is it possible that multiplier has been diluted because domestic sales year-to-date are up 1%, which is below expectations on GDP, but I know there's a lot of noise and just to put in context, I guess, a higher level rate, inventories are down in September for polyethylene, but that's because the industry took rates down. But how do I rationales the plan or the expectation for that to keep going at lower rates? Because I know there's also the view that the U.S. will run harder. And I guess I asked this because it reflects a larger question that we have. It's like if we're still going to be adding capacity in things like MDI and polyethylene, is it possible that U.S. assets just have to derate if we can't take capacity out in Europe anymore?

A: James Fitterling said domestic sales and production are different, U.S. GDP ex data centers has been relatively low but multiplier still there around 1.4x GDP multiplier, product mix factors in with geared more towards elastomers and flexible packaging, world has enough isocyanates capacity, and supply chain is more hand to mouth with not a lot of inventory build, but GDP multiplier hasn't shifted