Dow Inc. 2026 Q3 Earnings Call

Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I am Andrew Riker, Dow's Investor Relations Vice President. Leading today's call are Karen S. Carter, 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 risk 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 that is posted on our website. On slide 2 is our agenda for today.

Karen and Jeff will begin with a review of our third quarter performance and the progress we are making through our self-help actions. We will cover the near-term operating environment and fourth quarter outlook, as well as details about how our priorities are building a more competitive Dow. Throughout the discussion, you will hear a consistent theme. We are acting decisively on levers we control to strengthen earnings, cash generation, and long-term value creation. As always, we will ensure ample time near the end for your questions. With that, let me turn it over to Karen, starting on slide 3.

Thank you, Andrew. Our solid third quarter performance reflects the discipline and focus of Team Dow as we build a stronger company while navigating a dynamic market environment. We continue to partner with customers in attractive growth markets while also improving productivity and strengthening cash generation. Our collective self-help measures, which include the completion of our $1 billion 2025 cost savings program, the beginning of our previously announced European asset shutdowns, and our transformation, are all delivering tangible results. In the third quarter, that execution translated into meaningful progress and strong performance in many areas of our portfolio. Net sales were up 13% year-over-year, with growth in every operating segment. Operating EBITDA was more than $1.5 billion, as pricing actions and self-help measures more than offset higher raw material and logistics costs to drive year-over-year growth.

Together, our actions and the results they are delivering help reinforce Dow's earnings power. They strengthen our financial position while also enabling us to build a more competitive company for the long term. Transform to Outperform continues to deliver benefits ahead of our initial schedule, and we remain on track to achieve approximately $700 million in growth and productivity improvements this year. We also completed significant planned maintenance during the third quarter, which will support stronger production and earnings performance heading into the fourth quarter and beyond, and we are optimizing our working capital and actively prioritizing debt reduction with excess cash. This reinforces our continued focus on financial discipline and operational execution. Next, turning to the portfolio, let me highlight the greatest areas of strength.

First, in the Packaging & Specialty Plastics segment, we're maintaining higher pricing for polyethylene and functional polymers in all regions, and we delivered sequential volume gains. In the Industrial Intermediates & Infrastructure segment, increased demand for energy applications and AI infrastructure is supporting improved pricing and margins. We are seeing growth in the Performance Materials & Coatings segment, driven by consumer, electronics, and home care applications. This quarter, we also saw volume gains in Europe as well as in Latin America and the U.S. and Canada, all while the macro conditions remained dynamic. Moving forward, our focus remains on improving shareholder returns through self-help actions, better cash generation, and a stronger balance sheet. With that, Jeff will share a more granular look at the quarter and our near-term outlook.

Thank you, Karen. Starting with our Packaging & Specialty Plastics segment on Slide 4, net sales were $5.8 billion, up 18% versus the year ago period. Operating EBIT was approximately $585 million, which represents an increase of more than $385 million compared with the same period last year. This was primarily driven by higher polyethylene prices, improved integrated margins, and benefits from our self-help initiatives. The Packaging & Specialty Plastics business delivered higher net sales driven by polyethylene and functional polymer price gains in all regions. Polyethylene prices rebounded in the second half of the quarter, supported by elevated feedstock costs, and demand remained resilient, as evidenced by year-over-year volume growth, excluding supply constraints related to the Middle East conflict. Polyethylene volumes were notably strong in pipe applications, led by gains in infrastructure-related applications in Europe, the Middle East, Africa, and India.

Higher net sales in the Hydrocarbons & Energy business were driven by increased pricing. We also saw increased olefins volumes after restarting our lowest cost, most flexible cracker in Terneuzen following an idling due to plant maintenance. As a result of having this asset back online, we delivered record LPG consumption in Europe in the third quarter, capitalizing on feedstock dynamics. Next, I'll turn to Slide 5, which outlines the strong year-over-year earnings improvement in our Industrial Intermediates & Infrastructure segment. Net sales were $3.1 billion, up 8% versus the year ago period, driven by a 16% increase in local price. This reflects gains across both businesses and all regions. Operating EBIT improved to $176 million, reflecting an increase of $223 million versus the same quarter last year. This was driven by higher margins and benefits from our self-help initiatives.

Polyurethanes and Construction Chemicals recorded higher sales, driven by stronger pricing in MDI and propylene oxide derivatives across Europe and the U.S. and Canada, reflecting constrained supply dynamics in the period. Additionally, volume and EBITDA growth in Industrial Solutions was fueled by robust demand for AI infrastructure and energy applications, where favorable trends continued to support the segment's momentum. Moving to Performance Materials & Coatings on slide 6, we saw solid top line and EBITDA growth in the third quarter. Net sales were $2.3 billion, up 8% versus the same quarter last year. This included volume improvements in both businesses, which was led by downstream silicones. Operating EBIT was $154 million. The team delivered both price and volume gains, as well as benefits from our self-help initiatives, including cost savings associated with the second quarter shutdown of our Barry siloxanes unit.

Consumer Solutions had double-digit sales and EBITDA growth in the Americas. This was largely driven by downstream silicones volume gains in all regions. The Coatings & Performance Monomers business delivered higher sales across all regions, led by price and volume gains in both acrylic monomers and architectural coatings. Next, I'll move to slide 7. Here, we're providing a new view of how the benefits from our intentional actions are flowing through the P&L to ultimately strengthen Dow's underlying earnings power. We delivered a sequential improvement of more than $150 million in self-help benefits in the third quarter. This includes the Barry siloxanes unit shutdown, cost savings actions, and the growth and productivity benefits from our transformation. While self-help is structurally improving Dow's underlying earnings base, the benefits in the third quarter were mainly offset by margin pressures, primarily in Packaging & Specialty Plastics.

More specifically, while the situation in the Middle East drove significant second quarter price hikes and subsequent declines in July, we began to see signs of stabilization as the quarter progressed, including a price increase in September. Looking specifically at our transformation, we have already delivered approximately $450 million of year-to-date improvements, including approximately $250 million in the third quarter. Importantly, and I want to really emphasize this, everyone at Dow owns self-help. It has become a part of our everyday mindset, and we remain focused on our commitment to implement approximately $1.3 billion in net benefits this year, as well as $1.3 billion in 2027. We are holding our teams accountable for maintaining this mindset, ensuring we continue to be relentless in driving growth, productivity, and efficiency, all to reinforce Dow's competitive advantages while also improving our earnings and our cash position.

Next on slide 8, I'll walk through some details that support our overall view that underlying demand is steady while the macroeconomic environment remains challenging. We continue to see resilience in packaging globally, as well as electric vehicle growth in Asia and Europe. At the same time, higher interest rates and weaker consumer confidence continue to pressure demand for products tied to housing. Across regions, Dow's footprint in the Americas remains advantaged, supported by our favorable feedstock position and continued high operating rates in the U.S. Gulf Coast. In Europe, persistently high energy costs continue to challenge industry economics, and broad-based petrochemical closures are accelerating. In Asia, demand remains mixed. Strength in electronics is helping offset softer consumer spending and real estate markets.

Lastly, in the Middle East, while all supply concerns have eased from levels we saw earlier this year, risk to trade flows in energy markets remain elevated, as do freight and other transportation costs with increased pressure on tanker and diesel prices. Against this backdrop, slide 9 provides details on our fourth quarter expectations, including both our market assumptions and the contributions we expect from the actions within our control. As we look ahead, there is still quite a bit of uncertainty in the market, including the situation in the Middle East that I just mentioned. Therefore, forecasting the quarter continues to be more challenging than usual. As always, we will monitor conditions closely and provide updates if external factors change meaningfully or affect our initial guidance. For the fourth quarter, we expect EBITDA of approximately $1.5 billion. Recent polyethylene price gains should improve our margins.

This builds on the momentum we saw late in the third quarter, and we expect those higher prices to take effect before the impact of increased raw material costs. We anticipate the seasonality that we typically see in the fourth quarter will be largely offset by more than $100 million of lower sequential turnaround spending. Additionally, we expect to deliver approximately $100 million of sequential uplift from our self-help actions, including our transformation and ongoing benefits from the closure of our Barry siloxanes unit. In Europe, we expect energy costs to remain elevated as we head into the winter months. In addition, regional supply chains and logistics are still experiencing significant disruption, including the impacts from record low water levels on the Rhine River. These supply constraints are creating additional pricing opportunities for Dow, which should help offset some of the headwinds.