INTERVIEW: Dow sees extended runway for growth with recovery in early stages - CFO

Author: Joseph Chang


NEW YORK (ICIS)--US-based Dow expects an extended period of growth with the global economic recovery still in the early stages, its chief financial officer said on Thursday.

“We continue to see increasingly positive macros and are in the early stages of an economic recovery. That recovery will be different in different regions of the world and certainly the Delta variant may hinder that recovery in certain places,” said Howard Ungerleider, CFO of Dow, in an interview with ICIS.

“But vaccination rates continue to be higher this quarter than last quarter, and if anything, perhaps that Delta variant, in the areas where there are lower vaccination rates - that will be the push that people need to really convince themselves and each other to go and get vaccinated,” he added.

Along with vaccination rates expected to rise in the next 4-8 quarters, the executive cited tailwinds in US industrial production rising 20% from a year ago but still not back to pre-Covid levels, retail inventory-to-sales at its lowest level in 30 years, rising US housing starts against a backdrop of a decade of underbuilding, increasing business travel and climbing consumer confidence.

Worldwide residential housing is expected to grow around 7% in 2021, with non-residential up 3%, he pointed out.

“I’m not suggesting it’s going to be a straight line from here, but all those data points continue to point to an extended runway for economic growth,” said Ungerleider.

Auto production continues to be constrained by the semiconductor shortage but automakers are working to boost production and expectations are for production to rise in Q3, he noted.

“Typically the industry would see a slowdown in Q3 because of model year changeovers, but I doubt we will see that to any large degree this year because of the chip shortage and because demand continues to be so high,” said Ungerleider.

Coming off a bumper Q2 that saw the Packaging & Specialty Plastics (P&SP) segment posting sales growth of 17% from Q1 on 1% lower volumes constrained by the US winter storm and a 19% surge in pricing, Dow is modeling Q3 guidance of flat to 2% sales growth sequentially for the segment.

Dow will have its heaviest plant maintenance period of the year in Q3, which would contribute to some softness on the top line, said the CFO.

Polyethylene (PE) demand continues to be strong, he noted, citing American Chemistry Council (ACC) data showing that even as producer inventories in June rose around 2%, days of demand in inventory (DDI) actually fell 8%.

“You’ve got robust demand, customers reporting backlogs of between 45 and 60 days, and then certainly in Q3 you’ve got a lot of assets that are down for planned maintenance,” said Ungerleider.

“Let’s hope nothing happens with hurricane season as it will be peak season on the US Gulf Coast. So we have pretty strong demand coupled with reduced supply, [which] would bode well for continued margin strength,” said Ungerleider.

Dow’s P&SP segment in Q2 saw operating earnings before interest and tax (EBIT) surge 64% from Q1 to $2.01bn on sales of $7.12bn, with operating EBIT margins jumping to 28.3% in Q2 versus 20.2% in Q1.

The wide gap between lower Asian PE prices and higher US prices should start to close with Asian prices rising, he noted.

“If you look at the integrated chain margins right now in Asia, they are plus-or-minus zero... With oil being high, and Asia largely cracking naphtha, if oil continues to be strong and demand is healthy, then the Asia price will have to move up because people are not going to run assets to be breakeven on an integrated cash margin,” said Ungerleider.

Higher China coal prices for coal-to-olefins (CTO) should also pressure prices higher, he added.

“A lot of folks will look at US prices and say US prices have to come down, and that could be, but I think more likely, with demand strength and cost push, you’re going to see Asia prices move higher,” said Ungerleider.

On the capacity side, Dow is adding ethylene capacity Fort Saskatchewan, Canada under a 130,000 tonne/year expansion project it is pursuing with a regional customer.

Dow's share of the ethylene comes to 65,000 tonnes/year.

The project's new furnace has already started up, and the remaining work should be completed by the end of the year, Dow said in April.

The additional ethylene should feed into existing PE capacity. That should result in an additional 65,000 tonnes/year of PE production, said Ungerleider.

Dow posted Q2 operating EBIT of $2.83bn on sales of $13.89bn, up substantially from year-ago pandemic levels. Compared with Q1, sales were up 17% while operating EBIT gained 82%. Cash generated from operating activities surged to $2.02bn, and Dow reduced gross debt by $1.1bn in the quarter. Underlying earnings per share of $2.72 beat Wall Street estimates of $2.30.

“This was the strongest quarterly earnings performance in Dow’s nearly 125 years of existence as a company, period – meaning pre-spin (from the combined Dow/DuPont) and post-spin,” said Ungerleider.

Interview article by Joseph Chang

Thumbnail image shows Howard Ungerleider, Dow CFO