DOW (DOW) Q3 2022 Earnings Name Transcript

DOW (DOW -0.44%)
Q3 2022 Earnings Name
Oct 20, 2022, 8:00 a.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Good day, and welcome to Dow’s third quarter 22 earnings name. Please notice this name is being recorded, and at some point of the decision, your strains can be in hear mode solely. [Operator instructions] I’ll now hand over to Pankaj Gupta, investor relations vice chairman.

Pankaj Gupta — Vice President, Investor Relations

Good morning. Thanks for becoming a member of Dow’s third-quarter earnings name. This name is out there by way of webcast and now we have ready slides to complement our feedback at present. They’re posted on the Investor Relations part of Dow’s web site and thru the hyperlink to our webcast.

I’m Pankaj Gupta, Dow’s Investor Relations vice chairman. And becoming a member of me at present on the decision are Jim Fitterling, Dow’s chairman and chief govt officer; and Howard Ungerleider, president and chief monetary officer. Please learn the forward-looking assertion disclaimer contained within the earnings information launch and slides. Throughout our name, we are going to make forward-looking statements relating to our expectations or predictions in regards to the future.

As a result of these statements are based mostly on present assumptions and elements that contain dangers and uncertainties, our precise efficiency and outcomes might differ materially from our forward-looking statements. Dow’s types 10-Q and 10-Okay embody detailed discussions of principal dangers and uncertainties which can trigger these variations. Until in any other case specified all financials have been relevant exclude important gadgets, we will even seek advice from non-GAAP measures. In a conciliation of probably the most straight comparable GAAP monetary measure, and different related disclosures is contained within the Dow earnings launch within the slides to complement our feedback at present, in addition to on the Dow web site.

On Slide 2 you will note our agenda for the decision. Jim will start by reviewing our third-quarter outcomes and working phase efficiency. Howard will then share our outlook and modeling steering. After which to shut, Jim will talk about how our actions and long-term strategic priorities allow us to ship worth progress in a dynamic setting.

Following that, we are going to take your questions. Now let me flip the decision over to Jim.

Jim Fitterling — Chairman and Chief Govt Officer

Thanks, Pankaj. Starting on Slide 3. Within the third quarter, workforce Dow continued to proactively navigate larger vitality prices and geopolitical uncertainties which are impacting client demand, notably in Europe. As macroeconomic circumstances started to erode within the quarter, we responded rapidly by implementing a set of actions to prioritize sources towards larger return merchandise, aligning manufacturing charges to produce chain and logistics constraints, in addition to demand, and cut back operational prices throughout the enterprise.

As well as, our advantaged portfolio enabled us to capitalize on demand power in higher-value purposeful polymers, and packaging and specialty plastics, and efficiency silicones in efficiency supplies and coatings. Third quarter web gross sales have been $14.1 billion, with gross sales declines of 5% 12 months over 12 months, and 10% quarter over quarter. Native value elevated 3% 12 months over 12 months, with good points in efficiency supplies and coatings, and industrial intermediates and infrastructure. Sequentially, value declined 6% and was down throughout all working segments and areas.

Quantity was down 4% versus the year-ago interval, as declines in Europe, the Center East, Africa, and India, or EMEA greater than offset quantity progress within the U.S. and Canada and Asia-Pacific. Sequentially, quantity was down 3% led by EMEA. Continued power of the U.S.

greenback additionally impacted web gross sales by 4% 12 months over 12 months, and 1% sequentially. Working EBIT for the quarter was $1.2 billion. Our constant give attention to money stream technology and dealing capital administration within the quarter supported money stream from operations of $1.9 billion, or a conversion of 104% of EBITDA, and free money stream of $1.5 billion. We returned $1.3 billion to shareholders within the quarter, together with $800 million in share repurchases, and $493 million in dividends.

And our stability sheet continues to don’t have any substantive long-term debt maturities due till 2027. Turning to our working phase efficiency on Slide 4. Within the packaging and specialty plastics phase, web gross sales have been $7.3 billion, down 5% 12 months over 12 months as value good points in resilient demand and purposeful polymers have been greater than offset by decrease polyethylene pricing. Sequentially, web gross sales have been down 11%, additionally pushed by decrease polyethylene costs with diminished volumes as we decreased working charges in response to continued international marine park cargo, logistics constraints, and decrease demand in EMEA.

Working EBIT for the phase with $785 million, in comparison with $2 billion within the year-ago interval, and $1.4 billion within the prior quarter. These outcomes have been impacted primarily by larger uncooked materials, and vitality prices, and decrease native costs. Shifting to the economic intermediates and infrastructure phase, web gross sales have been $4.1 billion, down 9% from the year-ago interval, with value good points in each companies. Quantity was down as robust demand for pharmaceutical, agricultural and vitality functions, and industrial options have been greater than offset by declines in polyurethanes and building chemical compounds resulting from inflationary pressures in EMEA, decreased client sturdy demand, and the slowing housing market.

Sequentially, web gross sales have been down 7%, and secure volumes primarily in mobility and markets have been greater than offset by decrease native value and forex. Operated EBIT for the phase was $167 million, in comparison with $713 million within the year-ago interval, and $426 million within the prior quarter. As decrease EMEA demand, an elevated vitality and uncooked materials prices have been partly offset by larger costs. Sequentially, working EBIT margins declined by 560 foundation factors on lower cost and better vitality prices.

And within the efficiency supplies and coatings phase, we reported web gross sales of $2.7 billion, up 5% 12 months over 12 months with value good points in each companies and all areas. Quantity was down as resilient demand in mobility, and residential care finish markets have been greater than offset by declines in constructing and building. Sequentially, web gross sales have been down 12%, pushed primarily by decrease demand and decreased native value for siloxane resulting from provide additions in China, in addition to deliberate upkeep turnaround exercise. Working EBIT for the phase was $302 million, in comparison with $284 million within the year-ago interval, as margins expanded by 20 foundation factors resulting from value good points for each silicones and coatings functions.

Sequentially, working EBIT declined $259 million, pushed by decrease costs for siloxane and elevated uncooked materials and vitality prices. I am going to now flip it over to Howard to evaluate our outlook and actions on Slide 5.

Howard Ungerleider — President and Chief Monetary Officer

Thanks, Jim. Turning to Slide 5. Within the fourth quarter, we count on to proceed navigating excessive inflation, provide chain constraints, and the affect of geopolitical tensions. In Europe, excessive vitality and feedstock prices are driving report eurozone inflation, reaching a brand new excessive of 10% in September.

In consequence, we see diminished industrial manufacturing and client spending. In China, COVID-19-related lockdowns proceed to hinder financial exercise with weaker-than-expected regional client spending and infrastructure investments. That mentioned, we’re seeing continued power within the mobility sector, with automotive gross sales are up greater than 25% in September 12 months over 12 months. Within the U.S., wholesome client spending and low unemployment charges have supported resilient underlying demand regardless of excessive inflation.

With U.S. client confidence rising in September for the third consecutive month. Trying ahead, we’re carefully monitoring the affect of rising rates of interest on demand. And in Latin America, we proceed to see sturdy demand for versatile meals packaging and client durables, in addition to transportation, infrastructure, and markets.

To handle these evolving dynamics, we proceed taking actions area by area, and enterprise by enterprise. All through the third quarter, Dow carried out plans to cut back pure gasoline consumption at our websites in Europe by greater than 15% resulting from excessive vitality prices. In August, we additionally briefly lowered our polyethylene nameplate capability by 15%, and have now carried out a chilly furnace idling program at our crackers for mounted and vitality value financial savings. In parallel, we proceed to prioritize higher-margin purposeful polymers to capitalize on continued demand power, whereas working to ease logistics constraints alongside the U.S.

Gulf Coast. We’re additionally decreasing working charges and shifting manufacturing throughout polyurethanes, siloxane, and acrylic monomer belongings in Europe to handle our prices and our stock ranges. And as we plan for subsequent 12 months, now we have further actions targeted on manufacturing optimization, turnaround spending, and reductions in buy companies with the potential to ship greater than $1 billion in value financial savings on a run-rate foundation. Turning to Slide 6, you may see our present expectations for the fourth quarter.

Within the packaging and specialty plastics phase, we see secure demand for consumables and meals packaging functions. We anticipate international vitality markets to stay unstable in response to geopolitical dynamics, in addition to the climate within the northern hemisphere, and proceed to count on decrease client spending primarily in Europe. Whereas decrease turnaround prices can be a sequential tailwind, in complete, we count on $150 million seasonal headwind for the phase versus the prior quarter. Within the industrial intermediates and infrastructure phase, demand for vitality functions, notably within the U.S., and a seasonal improve in deicing fluid demand are anticipated to positively affect the quarter.

Inflationary pressures, nevertheless, proceed to affect client durables and constructing and building demand, notably in Europe. We additionally count on continued stress on propylene oxide and vitality margins resulting from elevated provide from producers in Asia. After finishing main deliberate upkeep exercise within the prior quarter, on a web foundation, we count on related dynamics with a typical seasonality on a sequential foundation. Within the efficiency supplies encoding phase, demand for private care and mobility functions stays secure as customers transfer towards vacation season shopping for patterns.

Nonetheless, we additionally anticipate a seasonal decline in demand for coating functions. Decrease spending on deliberate upkeep exercise will partially offset margin stress from provide of each the siloxane and acrylic monomers from Asia, notably to Europe. All in, we anticipate a $250 million headwind for the phase. So in complete for the fourth quarter, we count on a $400 million web EBIDTA headwind in comparison with the third quarter.

We’ve additionally supplied updates to the full-year modeling inputs within the appendix of the presentation. Fairness earnings have been revised to align with the present market circumstances and the weaker margins in Asia. We have lowered full-year CapEx from $2.1 billion to $1.9 billion, and the full-year tax price is now anticipated to be barely larger than our prior steering as a result of geographic combine and decrease fairness earnings. This upward stress on the full-year price can be anticipated to extend the fourth-quarter tax price to account for the everyday year-to-date screw-up.

With that, I am going to flip it again to Jim.

Jim Fitterling — Chairman and Chief Govt Officer

Thanks, Howard. Turning to Slide 7. On account of our actions during the last a number of years, we have created a streamlined portfolio with distinctive levers to handle by the present macro backdrop. We’ve international scale and main positions throughout a various set of engaging market verticals, geographies, and worth chains.

This offers us important flexibility to rapidly reply to evolving demand tendencies, and seize demand higher than our friends. 65% of our manufacturing capability is in the fee benefit the Americas, and now we have 2 to three instances extra LPG flexibility in Europe versus our friends. Our advantaged value place and unmatched feedstock and by-product flexibility allow us to optimize our margins. And our dedication to operational and monetary self-discipline underpinned by a tradition of benchmarking and a best-owner mindset has resulted in a low-cost working mannequin and robust money conversion.

These benefits have served us effectively since been offering a strong monetary basis that helps long-term worth creation, regardless of the present unprecedented occasions impacting the market. Importantly, our early cycle progress investments and our effectivity packages are enabling us to lift our underlying mid-cycle earnings above pre-pandemic ranges. We have practically tripled our three-year trailing cumulative free money flows and spend throughout quite a lot of macro environments, and can proceed to execute on levers to drive even larger money stream, together with working capital enhancements, three way partnership dividends, and money curiosity financial savings. And our stability sheet is now the strongest it has been in my greater than 35 years with the corporate, making a strong monetary place that gives important flexibility.

The mix of sturdy money stream technology and a powerful credit score profile permits us to deploy capital in a disciplined and balanced method, as we advance our decarbonizing progress technique, whereas additionally constantly returning money to our shareholders by the financial cycle. Shifting to Slide 8. In 2022, we count on to ship an incremental underlying EBITDA run price of roughly $300 to $400 million, comprised of $300 million from progress initiatives throughout our working segments, in addition to $50 to $100 million from effectivity levers. We’ve two alkoxylation investments coming on-line this 12 months to serve high-value house care and pharma and markets.

Our 60-kiloton undertaking in the US began up within the third quarter, and our 34-kiloton undertaking in Spain is on monitor to begin up within the fourth quarter. Our 150-kiloton FTTH pilot plant in Louisiana can be on monitor to begin up within the fourth quarter. And 12 months up to now, now we have accomplished 13 downstream silicones debottlenecking tasks. Long term, we stay on monitor to develop underlying EBITDA by better than $3 billion by 2030, whereas decreasing our carbon emissions by 30% versus our 2005 baseline.

Our suite of upper return, decrease danger, and quicker payback investments will ship $2 billion in further run-rate EBITDA, whereas we additionally cut back our carbon emissions by roughly 2 million metric tons by the center of this decade. These investments goal higher-value functions that allow us to capitalize on growing demand for extra sustainable and round options. Let me spotlight a few examples. Our Have interaction Elastomers elevated the lifetime of photo voltaic panels and allow over 50 gigawatts of solar energy technology around the globe.

And we lately launched silastic, the world’s first silicone-based self-sealing tire answer that may be simply recycled, which is being commercialized in upcoming Bridgestone tires below the expertise title B-SEALS. We additionally stay on monitor to succeed in a preliminary funding choice by year-end for our Path2Zero undertaking in Alberta to construct the world’s first zero carbon emissions, ethylene, and derivatives cracker advanced, which can develop our international polyethylene provide by 15%, whereas decarbonizing 20% of our international ethylene capability. This undertaking will generate an extra $1 billion of underlying EBITDA by 2030. As we ship on our progress technique, we stay dedicated to the disciplined and balanced method to capital allocation that has served us effectively since then.

Our first precedence is to take care of secure and dependable operations. We proceed to advance our progress investments with CapEx at or beneath DNA, and drive return on invested capital better than 13% throughout the financial cycle. With adjusted debt EBITDA, inside our long-term goal vary of two to 2 and a half instances, now we have the monetary flexibility to deploy money to maximise long-term shareholder worth creation, and we’re concentrating on to return 65% of our working web earnings to shareholders. Since then, we have exceeded this goal, returning a mean of 78%.

Turning to Slide 9. Regardless of near-term macroeconomic challenges, innovating round and sustainable options stays a key facet of our long-term decarbonization progress technique. We see growing demand for these merchandise, which symbolize a big progress alternative for Dow, with engaging pricing that can help longer-term higher-quality earnings. We’ve continued to speed up our actions to capitalize on this chance and create a round financial system.

And we lately introduced a brand new dedication to commercializing 3 million metric tons of round and renewable plastic options yearly by 2030. This new purpose expands our sustainability targets and our give attention to advancing a round plastics enterprise platform to satisfy our clients’ growing demand for extra sustainable and round merchandise, as evidenced within the latest letter revealed by the Shopper Items Discussion board, citing demand for superior recycled plastic materials. To realize this purpose, we are going to exceed our authentic goal to allow 1 million metric tons of plastic waste to be collected, used, reused, or recycled. And we’re effectively on our means as we scale a sturdy pipeline of greater than 20 strategic collaborations to allow recycling infrastructure, to companion throughout the worth chain, to deliver hard-to-recycle waste into the round financial system, and to assist communities tackle waste administration and recycling gaps.

This consists of our most up-to-date and important dedication at present to scale superior recycling with Mura Expertise, which positions it now to be the biggest client of recycled plastic feedstock for polyethylene globally. These collaborations are a novel benefit, as demand for round options continues to develop. When you think about collectively this round and renewable gross sales goal, together with the extra capability from our Alberta undertaking. In 2030, our mixed round, renewable, and nil carbon emissions capability will comprise better than 50% of our international polyethylene capability.

I am going to shut on Slide 10. Our strategic priorities stay unchanged. We’ll proceed to function with agility, as we navigate the present market dynamics, as evidenced by our latest actions to stability manufacturing whereas making certain we stay well-positioned to seize demand as market circumstances enhance. On the identical time, we stay targeted on executing our long-term progress technique, increasing our aggressive benefits, and delivering on our monetary priorities to place the corporate for long-term success.

With that, I am going to flip it again to Pankaj to open up the Q&A.

Pankaj Gupta — Vice President, Investor Relations

Thanks, Jim. Now, let’s transfer on to your questions. I want to remind you that our forward-looking statements utilized to each our ready remarks and the next Q & A. Operator, please present the next directions.

Questions & Solutions:

Operator

Thanks. [Operator instructions] We’ll take the primary query from PJ Juvekar from Citi. Please go forward.

PJ Juvekar — Citi — Analyst

Good morning, Jim and Howard. With the IRA and CCS going to $85 per ton, are there any tasks in CCS that you might deploy to your current plans, that come into the cash now that weren’t there earlier than? After which secondly on Europe, would you speed up CapEx within the U.S. given the scenario [Inaudible], after which if Europe isn’t producing a lot chemical compounds, how did that affect in your thoughts kind of downstream, automotive, constructing, and building companies in Europe. Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Good morning, PJ. Two actually good questions. I feel after we have a look at the IRA, which has loads of good components in it for our sustainability agenda, each hydrogen and CCS, in addition to superior nuclear. The problem proper now could be the place do you’ve gotten the provision of the present pipeline infrastructure to get carbon of an current asset right into a CCS class.

That is why we put the undertaking in Terneuzen, and the undertaking in Alberta first, as a result of now we have current capability there. I ought to say in Terneuzen, not but, however Terneuzen a couple of plan in place to get it in place. That is going to assist us get some infrastructure in place within the U.S. Gulf Coast to make that potential.

And as that turns into obtainable, we’ll have a look at accelerating deployment right here within the U.S. Gulf Coast. And I’d say $85 a ton, we predict long run these numbers are in all probability going extra towards $100 a ton or larger, and that ought to actually assist speed up hydrogen and CCS. On CapEx within the U.S., the way forward for chemical compounds in Europe, third quarter, the 2 huge challenges we had have been the most important was primarily electricity-related, and third quarter we noticed European electrical energy value go as excessive as 400 euros a megawatt hour.

They’ve come off a bit bit now as a result of pure gasoline has come off. About half of our footprint in Europe has advantaged electrical energy. So we did within the quarter was deliver down charges to the advantaged positions. We’re type of run break even in Europe and clearly lowered different belongings with that demand.

I feel within the brief time period you are seeing extra product stream into Europe from the Center East, and a few proper now from China. I feel long term we’re working with the governments by vitality coverage adjustments which are going to assist. One of many causes we introduced the undertaking in Stade, one of many 5 floating regas models that can be put in Germany. To actually assist Germany diversify away from simply solely Russian gasoline.

To make the European query, long-term can be in entrance of us by subsequent 12 months. However within the brief time period, we have got a very good recreation plan to navigate the winner and to navigate subsequent 12 months, and that is why we introduced $2 billion value of value reductions for 2023.

Operator

We’ll now take the subsequent query from Hassan Ahmed from Alembic World Advisors. Please go forward.

Hassan Ahmed — Alembic World — Analyst

Good morning, Jim and Howard. I am simply attempting to reconcile the This autumn steering you guys have given. It appears to me you are guiding to an EBITDA of roughly $1.4, $5 billion. If that’s the case, I am simply attempting to kind of perceive what kind of polyethylene pricing you are baking into that steering as a result of it simply appears that, you understand, there’s some value hikes on the desk.

You understand, some consultants are on the market kind of doubting a few of these value hikes going by. So, in case you might present any coloration on that.

Jim Fitterling — Chairman and Chief Govt Officer

Thanks, Hassan. Good query. Clearly, we noticed pricing in polyethylene by the third quarter decline. It began to stabilize initially of the fourth quarter.

Most of what is in that fourth quarter outlook is extra secure pricing in polyethylene, however you get the greenback averaging that occurs by the quarter. So we begin the decrease pricing within the curious by the quarter. Inventories got here down on the Gulf Coast, stepped down from the excessive ranges that they have been within the third quarter, and in order that’s serving to. And we have seen some higher marine-packed cargo logistics.

We had good volumes out within the third quarter. We might have achieved extra, and so we’re persevering with to attempt to work on the logistics constraints. And so most of what is in there may be greenback averaging, extra stabilized pricing, after which a bit little bit of tailwind as a result of now we have decrease turnaround prices within the fourth quarter for polyethylene. The opposite factor I’d point out is that enter prices are beginning to look extra favorable.

We began to see a bit little bit of enchancment within the ethylene chain. Oil is clearly, oil inventories proceed to be low and pure gasoline manufacturing continues to be larger. And in order that’s positively skewed. I would say the estimates skewed to the upside if oil and gasoline proceed on these tendencies.

Operator

We’ll now take the subsequent query from Jeffrey Zekauskas from JPMorgan.

Jeffrey Zekauskas — JPMorgan Chase and Firm — Analyst

Thanks very a lot. Two questions. Are you able to discuss MDI costs and volumes sequentially, and your basic expectations? And secondly, in efficiency supplies, there appears to be a good quantity of stress in siloxane costs. Or are we coming into some type of cyclical downturn in that enterprise? And so what we must always count on is a comparatively.

Stage of earnings from the fourth quarter going ahead.

Jim Fitterling — Chairman and Chief Govt Officer

Yeah. Good morning, Jeff. Thanks for the query. On MDI in industrial means an infrastructure.

You understand the availability demand balances by the center a part of the last decade look good on MDI, the place we have seen market weak point is in client durables mobility’s held up fairly effectively. Electrical automobiles are actually in all probability the shining star on progress in that house However its housing and building have been the place we have seen the most important weak point, after which in fact home equipment carefully associated to that. I’d additionally say, the place do you see within the numbers and what you see within the information, do not forget that now we have fairly a little bit of footprint in Europe. And so with the vitality scenario there, that simply actually compresses the margins and I feel it is much less of pricing and fewer that subject than it’s the enter value subject.

In order that’s why we have introduced charges right down to low ranges in Europe. China additionally seeing housing and building sluggish, and I feel we’ll see what occurs after we come out of this occasion congress and whether or not we see a change in COVID restrictions which may sign that 2023 can be higher. And so I am saying the capability has come on in China, and that is actually what’s introduced the costs down. And we’re actually again to the type of long-term mid-cycle common costs for therefore our claims within the market and sure, we count on that can proceed into 2023.

I feel it is extra the timing of the availability approaching, it is put that stress on.

Operator

We’ll now take the subsequent query from David Begleiter from Deutsche Financial institution.

David Begleiter — Deutsche Financial institution — Analyst

Thanks. Good morning, Jim and Howard. Howard, simply the modeling steering, does the $4 million of sequential EBIT headwinds totally seize the seasonality in This autumn? And if any profit within the steering from $1,000,000,000 of value financial savings you spotlight at present as effectively? Thanks. 

Howard Ungerleider — President and Chief Monetary Officer

Good morning, David. So, yeah, the outlook at an enterprise degree, the brief reply to your query is it does. So the $400 million web of actually EBITDA decline, I’d name half of that’s enterprise-level seasonality or typical Q3 to This autumn seasonality. And the opposite half is the averaging impact of the margin decline that we noticed by the third quarter.

And you then’ve acquired two items which are type of offsetting one another. The upper the extra favorable turnarounds or the decrease turnarounds that Jim talked about which are getting offset by some forex headwinds that we’re seeing sequentially. Embedded in which are a few of these interventions that we listed within the slide which are within the earnings deck. So we’re already and have been intervening for the reason that starting of the third quarter.

So we’ll see that proceed by the fourth quarter, after which clearly in an even bigger means subsequent 12 months.

Operator

We’ll now take the subsequent query from Vincent Andrews from Morgan Stanley.

Vincent Andrews — Morgan Stanley — Analyst

Thanks, and good morning, everybody. Simply questioning in case you can speak a bit bit extra about kind of the delta between what you suppose underlying demand is versus possibly some destocking that is occurring, simply given all of the macro uncertainty on the market? And a part of what I am getting at is you have clearly, made some seasonality assumptions sequentially from 3Q to 4Q. And simply attempting to grasp how a lot of what we have seen already when it comes to weak demand might need been a pull ahead of what we would have beforehand thought might have occurred extra historically in November and December. So simply kind of any feedback you’ve gotten serving to us a bridge, and serve the weak quantity with destocking versus underlying demand can be useful.

Jim Fitterling — Chairman and Chief Govt Officer

That is a very good query, Vince. Clearly, the retail sector noticed loads of larger inventories and pulled again. I’d say in automotive, issues are nonetheless restricted primarily by the availability chains of all of the totally different numerous elements coming collectively, so the auto firms could make their deliveries. That in all probability reveals up extra on inner combustion engine automobiles, considerably on EVs, however EV progress within the U.S.

and EV progress in China have been actually, actually robust. So I feel that is going to proceed to be good. Our outlook for automotive subsequent 12 months is 86 million gentle automobiles, up from 80 million projection this 12 months. I feel that is good.

Packaging, I do not suppose we noticed loads of destocking in packaging available in the market. I’d say we noticed adjustment to decrease working charges due to the slowdown of demand in EMEA might have been off 12% was a big slowdown. Shopper pressures in EMEA are a lot stronger than even the patron pressures right here and there, and so they’re important. The sturdy items and the patron electronics is a tricky one to name.

It fairly tightly related to the housing. China’s housing is down 38%. Their housing begins to down 38% 12 months over 12 months. In order that’s a fairly low degree.

I would say there’s alternative for upside going into subsequent 12 months. The U.S. has slowed down, however we’re nonetheless working off of the finishes of homes which are below building. And so I feel the overall consensus calls for a bit bit slower for 2023 on housing right here.

The opposite vibrant spot is infrastructure, and so for these companies which are tied to infrastructure, we nonetheless see superb infrastructure spending.

Operator

We’ll now take the subsequent query from Michael Sison from Wells Fargo.

Unknown Speaker

Hello, that is Richard on for Mike. Simply needed some coloration on the $1 billion in value financial savings for 2023. Is any a part of this embedded within the $3 billion to $3.9 that you just’re concentrating on to extend kind of your earnings ranges by the cycle? And likewise is that additionally consists of the non permanent 15% reductions in polyethylene, and possibly further reductions in capability doubtlessly, and possibly II and I.

Jim Fitterling — Chairman and Chief Govt Officer

Yeah, that is a very good query, Richard. So our goal is to give you greater than $1 billion in value saves. I’d break it down into just a few totally different buckets for you. One is what we will do with optimizing our combine or flexing the belongings throughout geographies, and product, and software combine to truly enhance margins.

The second can be what you talked about when it comes to plan islands or shutdowns. Proper now we do not have something lined up for shutdowns, however we clearly have diminished charges for higher-cost plans, and we’ll proceed to do this, particularly in Europe, whereas vitality prices stay as excessive as they’re. After which we’re engaged on at all times issues to drive operational excellence. And the opposite huge shifting half subsequent 12 months is we’ll cut back turnaround spending.

We’re beginning to see commodities come down and enter prices come down and a few aid on freight and logistics prices. We have a giant effort on bought supplies and freight and logistics to get prices down and likewise on buy companies, together with contract labor. After which we have been implementing digital and acceleration of ending these tasks ship backside line margins and productiveness too. So these are actually the 5 huge buckets that we’re engaged on.

The goal right here, in case you have a look at the earnings hall that we revealed again in Investor Day, our 2023 decrease finish of the hall is about $7.2 billion. So our efforts listed here are actually pushed to guard that earnings hall that we put on the market. A number of the Path2Zero undertaking progress in that earnings hall, the Alberta undertaking, which is $1 billion of underlying EBITDA progress. Begins in 2027, that undertaking will come on in two phases between 2027 and 2030, however the different 2 billion comes on by the years as we deliver on these smaller, larger return, decrease danger tasks.

Operator

We’ll now take the subsequent query from Kevin McCarthy from Vertical Analysis Companions.

Cory Murphy — Vertical Analysis Companions — Analyst

Hello. Good morning. That is Cory on for Kevin. Turning again to a query on the outlook, you had talked about advantages within the ethylene chain.

What are you baking into your 4Q outlook because it pertains to ethane prices? And what’s your view in gentle of at present’s pure gasoline market backdrop? After which for the chilly furnace idling program, are you able to speak by or quantify what affect you count on that to have on mounted value absorption at your diminished plans? Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Proper. That is a very good query on ethylene. I discussed pure gasoline earlier, so gasoline manufacturing continues to be excessive. Greater than half one million barrels a day of ethylene in rejection.

That’s actually introduced the frac spreads down. And so we have seen frac spreads come again right down to about $0.33 one million BTU. So off of a few of the highs that we noticed in first, second quarters, and I feel our projection is it’ll proceed to be that means. Pure gasoline manufacturing at 100 BCF a day proper now, and the outlook for subsequent 12 months is 110 BCF a day.

There can be loads of ethylene obtainable. And I feel our feeling is we count on by winter, $0.40 to $0.60 a gallon on relying on what occurs with winter gasoline demand. That is actually the place it was, $0.35, $0.65 in third quarter. And I feel subsequent 12 months we’ll see continued availability and lower cost in all ethylene.

When it comes to the chilly furnace idling, I haven’t got a very good quantity so that you can estimate what that’s. Primarily, the apply traditionally would have been to maintain these belongings on scorching standby and able to go. However with the slower demand, there is no want to do this. And with these larger gasoline prices, taking them chilly after which warming again up isn’t going to penalize us within the market.

Operator

We’ll now take the subsequent query from Steve Byrne from BOA.

Matthew DeYoe — Financial institution of America Merrill Lynch — Analyst

Thanks. It is Matthew DeYoe for Steve. Can we speak in regards to the development in purposeful polymers a bit? I feel value was up 12 months over 12 months however seems like possibly down sequentially. Did margins in that enterprise enhance quarter over quarter with base commodities deflating? And after we have a look at 4Q.

Did that efficiency catch you up on the draw back, or do you continue to suppose issues ought to maintain in fairly effectively?

Jim Fitterling — Chairman and Chief Govt Officer

Thanks. Good query. Costs sometimes are fairly resilient by the cycle in that house. We noticed.

Costs are flat actually from quarter to quarter. And so web margin declined a bit bit due to the upper vitality and uncooked materials prices. However the demand continues to be good on demand. And in areas like industrial building, which is holding up comparatively effectively, mixed-use, each residential and industrial buildings are going up fairly robust around the globe and that takes a good quantity of fabric.

Clearly, merchandise into automotive are holding up fairly effectively. After which vitality, vitality infrastructure takes so much from the wiring cable enterprise and that continues to carry up effectively. So I feel what you may see is the margins can [inaudible] and stream a bit bit, however the volumes and the worth tendencies are very robust.

Operator

We’ll take the subsequent query from John Roberts from UBS.

Matt Skowronski — UBS — Analyst

Good morning, Jim and Howard. That is Matt Skowronski on for John. A number of the consultants have reported that polyethylene storage ranges are very excessive in North America. Would you take into account taking working charges decrease than the 15% discount you have already taken if demand weakens additional? After which sitting right here at present, do you suppose it is potential that additional reductions in manufacturing might want to occur both by the top of this 12 months or early 2023?

Jim Fitterling — Chairman and Chief Govt Officer

Thanks for the query. I feel the storage ranges primarily on the ports, are ready for ships to reach to get the product out. A number of the product was packaged for the export market, so it’s simply that that product goes to magically flip round into the North American market. And with what we have seen with demand progress within the North American market, I do not see a cause to cut back working charges any additional.

I would additionally say Latin American enterprise is holding up comparatively effectively, so that provides us some alternative as effectively. I feel it’ll be labored out as we get higher ship arrival instances and higher loading. I feel you are going to see these numbers deplete fairly rapidly.

Howard Ungerleider — President and Chief Monetary Officer

I’d simply additionally add the newest ACCD knowledge says that stock ranges really decreased by 7% or about 4 days month on month. So I imply, I feel you continue to see basic demand in the US and Canada hanging in there.

Operator

We’ll now take the subsequent query from Christopher Parkinson from Mizuho.

Christopher Parkinson — Mizuho Securities — Analyst

Hello, good morning. I used to be simply questioning in case you can go out a bit bit about what finish markets and areas you noticed the most important shift in demand vs type of your authentic expectations within the second quarter, and the way these areas are trending into the fourth quarter? Is there any space the place you are extra optimistic or extra involved as we head into the top of the 12 months in 2023? Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Yeah. Good query, Chris. So areas of power are industrial electronics. And take into consideration telecom, 5G infrastructure, and knowledge facilities, and that continues to be fairly good.

There will be some provide chain constraints there, however they’re fairly robust in industrial options. We make intermediates and shipments for the pharma trade. That demand has been robust, we’re taking a look at better than 7% compound common progress charges by 2026. And in order that’s I feel that is going to proceed industrial options normally, I’d say has good progress tendencies and silicones downstream.

Silicones and Joe, have good progress tendencies. Automotive, we’re seeing some provide constraints easing. And despite the fact that gross sales this 12 months, deliveries this 12 months are flat 12 months over 12 months, actually sturdy progress, particularly in China. When you have a look at China, EVs are up 90% 12 months over 12 months, and automotive in China is up 25% 12 months over 12 months.

I feel that is a vibrant spot. We count on to proceed. EVs in the US are additionally robust and I count on that to proceed. That is good for us as a result of 2 to three instances extra silicone supplies in EVs, and related quantity of supplies that we might have in an inner combustion engine for issues like controlling noise, vibration, and harshness.

Infrastructure goes to proceed to be robust. There are stimulus packages on the market, many governments around the globe, and that are inclined to put so much in purposeful polymers, which we simply talked about. It should pull some polyurethanes and building supplies that can pull some in coatings and that infrastructure house and a few in Dow Industrial Options. In plastics, it tends to tug in issues like water pipelines, pure gasoline pipelines.

I feel we’ll proceed to see that develop. Regular markets, I’d say can be oil and gasoline. We’re beginning to see an uptick in oil and gasoline manufacturing that pulls amines from our Industrial Options enterprise. Private care has been very resilient.

Cosmetics have come again after a tender second quarter in China and packaging for meals. And so the problems of packaging are actually extra not demand, however actually extra the upper vitality value and slowing financial exercise in Europe. After which locations, the place I discussed earlier than, are weak, are associated to housing and massive ticket gadgets. So home equipment, meals and beverage, actions like furnishings and bedding, I imply, not meals and beverage, home equipment and furnishings and bedding slowed down, third quarter and within the fourth quarter, after which client electronics slowed down as effectively.

Giant TVs, massive house PCs, and digital units. Our residential softening right here within the U.S., Europe, additionally in China. However industrial building has been comparatively good, combined residential and industrial buildings, particularly in huge cities. I feel subsequent 12 months, India, U.S., Canada, and Latin America can be vibrant spots.

We’ll nonetheless must handle by Europe and the scenario with Russia, Ukraine having a greatest affect there. After which China, we had one of the best quarter in China, we have been up 13% quarter over quarter, and seven% 12 months over 12 months in quantity, and will have been higher with the flexibility to get extra plastics out of the Gulf Coast. So, I feel there’s been loads of concern about what they’ve reported or not reported. However our view is that demand has been good.

Operator

We’ll now take the subsequent query from Josh Spector from UBS.

Josh Spector — UBS — Analyst

Yeah, hello. Good morning. So simply curious if there’s a means to consider the prices you guys are absorbing in Europe from larger vitality. So we take into consideration 3Q and 4Q expectations versus the extent of 2Q.

Is there any approach to quantify how a lot you are feeling such as you’ve needed to take in and never be capable to type of shift away from flexing or manufacturing or by pricing or different means? So if pricing or vitality costs have been to maneuver down with demand setting stay related, how would you suppose that will play out? Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Easy reply, two-thirds of the full EBITDA decline in third quarter, whether or not it was versus earlier quarter or final 12 months was in EMEA. And that is the affect of excessive inflation, elevated vitality prices on our uncooked supplies, after which what that top inflation has achieved to client demand in EMEA. Quantity was down 12% within the quarter in EMEA.

Operator

We’ll now take the subsequent query from Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan — RBC Capital Markets — Analyst

Nice. Thanks for taking my query. Good morning. So my query is round North America and potential outlook there.

I do know Europe was accountable for two-thirds of the weak point in Q3, and that is doubtless been the case for a short time now. Are you in any respect involved of a weak point that might emerge in North America, as North America is just a bit bit behind Europe and China within the weak point that you just’re seeing there? I imply, I suppose you are not seeing indicators of weak point, however on Europe. And what are a few of the elements that will differentiate and hold North America a bit bit extra resilient? Perhaps you may contact on inventories or provide demand or anything. Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Nicely, the fee place that now we have within the Americas may be very advantaged. And so I feel that is crucial factor to remember. The patron demand has been robust, particularly client non-durables, client discretionary has been good. I’d say huge ticket gadgets like I discussed have already slowed this 12 months.

So if something, there’s an opportunity for upside subsequent 12 months. I feel that very same is true on automotive. Automotive actually been provide constrained, and so we get by a few of that, we’ll begin to see that transfer up. We’re beginning to see, and right here I am not speaking nearly Dow’s enterprise, however we’re beginning to see costs come down in bulk commodities.

It takes these costs some time to work by the fabrication outlets and get themselves into the worth of a product {that a} client would purchase within the retailer. So these costs have come down by the 12 months, and I feel you may begin to see these present up within the client markets subsequent 12 months, and which will really assist issues enhance. European vitality scenario is completely totally different than the US, and proper now we’re attempting to work by how we can assist the federal government get to a greater vitality coverage that can assist them. I feel that’ll be the most important enchancment globally that’ll assist the financial system transfer.

Operator

Will now take the subsequent query from Aleksey Yefremov from KeyBanc Capital Markets. Please go forward.

Unknown Speaker

Hello, that is Paul on for Aleksey. As we first winter, how are you guys managing the fee on each the U.S. and Europe? And do you see the potential for any idling of belongings in Europe? Perhaps not your belongings, however simply broadly within the trade? Thanks.

Jim Fitterling — Chairman and Chief Govt Officer

Yeah. I feel now we have seen an energy-intensive trade in Europe like metal and aluminum already idling of belongings. Rather a lot, possibly not full closure, some energy-intensive industries’ full closure might jeopardize the long run. You understand, likelihood of beginning them again up by loads of stress on smaller producers in Europe, particularly having some scale issues and having good benefit value positions issues.

About half of our vitality footprint in Europe is advantaged, and so we have nailed again to these charges to benefit from that value layer. After which we have loaded that demand onto different places which are extra value benefit. We’ll proceed to do this. I feel the opposite reply to shutdowns goes to be whether or not we see a means by the vitality coverage scenario.

The longer we keep on this scenario, the longer the Russia-Ukraine scenario final. It’s going to put extra stress on the trade to check out rationalizing. And so they’ve already acquired loads of stress there. They want authorities assist greater than something.

Operator

We’ll take the subsequent query from Laurence Alexander from Jefferies.

Laurence Alexander — Jefferies — Analyst

Good morning. So are you able to describe the way you’re fascinated with CapEx flexibility over the subsequent couple of years given the credit score cycle in prior cycles, downs type of extra to take a look at retrenching? However as you have a look at the investments required for the round financial system initiatives, might you pull ahead or be opportunistic in increasing kind of what you do in that worth chain? As different folks retrench.

Jim Fitterling — Chairman and Chief Govt Officer

Good query, Laurence. And clearly, we’re attempting to have the monetary flexibility to maintain shifting on these tasks, as a result of I do not suppose long run any of these tendencies are going to alter, which both client demand all year long despite what is going on on within the international macroeconomy. Shopper has come again to us constantly wanting increasingly and extra of each mechanical, recycled, superior, recycled merchandise, and merchandise made with bio-based components, increasingly renewable merchandise. And that is what we’re investing in.

A few of it is our capital, a few of it’s joint capital along with companions. Like I discussed, with neuro applied sciences, now we have about 20 tasks in plastics at present. We had a 1 million metric ton goal, and now we have a very good line of sight to have the ability to ship the 1 million, and we simply elevated it to three million metric tons of round and renewable options by 2030. Primarily due to these model house owners who’re telling us the demand is there for these merchandise, and so we are going to hold these tasks shifting ahead.

We’ll hold our decarbonization and Path2Zero tasks shifting ahead. Clearly, we’ll be disciplined about it. A lot of the cash that we spend on Path2Zero proper now could be engineering {dollars}, and we is not going to pull the set off and begin these tasks till we see the majority contracts for metal and fabricated merchandise and lengthy lead time gadgets in the precise vary. And after we see that, I can be able to go.

And I feel on this subsequent wave we’ll have first mover benefit with the Canadian undertaking, identical to we did with the U.S. Gulf Undertaking that began in 2017.

Operator

We’ll now take the subsequent query from Jaideep Pandya from On Area Analysis.

Jaideep Pandya — On Area Funding Analysis — Analyst

The primary is on the silencing worth chain. Might you simply inform us what’s the present value French of between Europe versus the U.S. and China on a lended value foundation, in case you embody the vitality value? And on condition that important provides coming in China within the subsequent 12 to 18 months, particularly in Xinjiang and Yunnan, what do you count on for siloxane utilization exterior of China? That is my first query. And the second query actually is across the ethylene oxide [inaudible] chain.

This chain has achieved extraordinarily effectively for not simply yourselves, however loads of your friends as effectively. And once more, we’re beginning to see as freight charges normalize merchandise come out of China. So what do you count on for the [inaudible] chain in 2023 and 2024? Do you count on a normalization, or do you suppose that demand goes to proceed to be good? Thanks so much.

Jim Fitterling — Chairman and Chief Govt Officer

So I say costs, their obtainable there in China have grow to be obtainable in all of the areas around the globe already. So I feel it is already at that spot. Silicone metals market costs are down a bit, primarily simply because demand and a few larger quantity functions are down. Larger quantity functions associated to constructing and building.

However that I feel, goes to steadily enhance. I’d count on it to be on this degree in 2023. After which as we see, inflation comes down, which I do imagine it would. I feel you may see the demand begin to choose again up once more, and issues will tighten again up.

And that is put extra stress on Europe, I’d say North America. And that is why we took some slower charges in our U.Okay. facility. On EO, demand was on the second half of the query.

Jaideep Pandya — On Area Funding Analysis — Analyst

MEG

Jim Fitterling — Chairman and Chief Govt Officer

MEG is the weak spot. And in case you have a look at our industrial options technique, it’s to maintain investing in high-value EO functions. And so all of our [Inaudible] investments that you just see investments in our oil and gasoline franchise stays, these are persevering with to do very, very effectively. And we’ll proceed investing there to attempt to improve the quantity of enterprise that goes to these larger worth functions for purified EO and away from MEG.

MEG costs have been really in a low spot within the third quarter and have improved a bit bit since due to falling inventories. I feel a giant half goes to be depending on larger China exercise after they’ve stopped zero COVID lockdowns.

Pankaj Gupta — Vice President, Investor Relations

Yeah. Thanks, everybody, for becoming a member of our name. I feel that is on a regular basis now we have for at present. We recognize your curiosity in Dow.

In your reference, a replica of our transcripts can be posted on our web site website inside roughly 24 hours. This concludes our name. Thanks as soon as once more.

Operator

[Operator signoff]

Period: 0 minutes

Name contributors:

Pankaj Gupta — Vice President, Investor Relations

Jim Fitterling — Chairman and Chief Govt Officer

Howard Ungerleider — President and Chief Monetary Officer

PJ Juvekar — Citi — Analyst

Hassan Ahmed — Alembic World — Analyst

Jeffrey Zekauskas — JPMorgan Chase and Firm — Analyst

David Begleiter — Deutsche Financial institution — Analyst

Vincent Andrews — Morgan Stanley — Analyst

Unknown Speaker

Cory Murphy — Vertical Analysis Companions — Analyst

Matthew DeYoe — Financial institution of America Merrill Lynch — Analyst

Matt Skowronski — UBS — Analyst

Christopher Parkinson — Mizuho Securities — Analyst

Josh Spector — UBS — Analyst

Arun Viswanathan — RBC Capital Markets — Analyst

Laurence Alexander — Jefferies — Analyst

Jaideep Pandya — On Area Funding Analysis — Analyst

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