Dow Inc. (DOW) Earnings Call Transcript & Summary

Hi. Good morning. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan. And this morning, it's my pleasure to welcome Dow Inc. And representing Dow is Howard Ungerleider, who is the Chief Financial Officer of Dow. He's been the Chief Financial Officer of a number of Dow entities, Dow Chemical, DowDuPont and now Dow Inc. And I think he's also President. In Howard's history, he ran the polymer businesses of Dow, some of their electronic materials businesses and even did a small stint in Investor Relations back in the day. The form of our presentation is Howard will speak to a slide or 2, and then we'll do a fireside chat. Howard?

Well, thank you, Jeff. I have to say thanks for having us. Somewhere, my mother is smiling with that nice introduction. So that was a very warm introduction. On behalf of my mother, she appreciates that. So thank you. It really is great to be here in person. It's been -- frankly, it's been too long since we've done this face-to-face. Look, before we jump into the fireside chat, I'd just like to provide a little bit of an update on our outlook, and really, how our differentiated portfolio will enable earnings growth and cash flow resiliency through the economic cycle. And I think importantly, positions us to deliver mid-cycle earnings, and I'm sure you'll want to unpack that in the fireside chat. But I think it's also important to note that the mid-cycle earnings will be above the pre-pandemic levels. And I think that's a really important point. Now on our last earnings call, we outlined our expectations for continued global demand strength. And I would say economic activity through February has continued to be supportive. Just a few stats for you. U.S. retail sales for December through February rose 16% year-over-year. U.S. manufacturing PMI rose above 57 in February with increases in new orders driving growth. Eurozone economic activity, I'm sure we're going to talk about what's going on in Europe right now, but eurozone economic activity actually rose at the fastest pace in 5 months in February with rising business and consumer optimism. And industrial production in China is beginning to ramp following the Lunar New Year. These trends have translated into continued demand strength across our end markets. And I would say our order books for packaging remains strong, including what we see in the export market. Construction demand across the Northern Hemisphere is increasing and really resulting in tight supply, or I would say, continuation of tight supply for durable goods and industrial applications. And the coatings value chain continues to meet the current demand growth that we're seeing, but also really to prepare for the seasonal uptick in architectural demand as the weather turns in the Northern Hemisphere. As a result of that healthy demand environment, we really today see upside of approximately $200 million of EBITDA versus the current First Call consensus for Q1. Going forward, we also see support for demand growth as well. A few stats as the year progresses, consumer spending in the U.S. is forecasted to be 25% higher than pre-pandemic levels. Investments in infrastructure are increasing with accelerated adoption for 5G, for EVs and green or zero-emission buildings. Light vehicle production is expected to increase. Pick your favorite third-party consultant, Jeff, but in the range of, call it, 8% or 10% this year, with EV sales up north of 50%. And I would say, although we see an overall positive outlook, like all of you, we are continuing to monitor, I would say, geopolitical volatility, inflation in consumer and industrial markets, including hydrocarbons, COVID as well as the pace of easing logistic constraints. Now from a geopolitical point of view, as the invasion in Ukraine evolves, we have focused and prioritized the safety of our colleagues above everything else. We're providing evacuation support, financial assistance and shelter to help our people and their families. Dow's exposure to Ukraine and Russia combined is very limited. It represents less than 1.5% of our annual sales. And when you look on the bottom line, it's even a much smaller percentage on the bottom line. We previously had suspended all feedstock and energy orders from Russia prior to any sanctions or military action. And we have now reduced significantly our operations in Russia, only supplying limited essential goods. And as we think about the impacts on the world, while expanding oil to gas spreads will result in higher global chemical prices and will benefit producers in North America, Argentina and the Middle East, where somebody like Dow has a vast majority of our production, those in Asia and Europe are certainly going to experience and are experiencing higher input costs. And that's really hitting margins hard. From a Dow perspective, we will continue to do what we have done, which is leverage our feedstock flexibility region by region, furnace by furnace to help mitigate the rising raw material and energy costs. So for example, and Jeff, I know you know this, but Dow has 2 to 3x more propane flexibility than our European peers, with approximately 2/3 of our regional production in Europe based on LPG. And our operational and our financial playbook will once again help us remain agile as we continue to watch for any potential additional impacts on the broader economy. With that said and against this backdrop, we continue to be uniquely positioned as Dow to deliver long-term value for our shareholders. I'll start with our differentiated portfolio. It benefits from our exposure to attractive end markets. So if you think about our total addressable market as an enterprise is expanding to more than $800 billion between now and 2025, and it will continue to grow faster than GDP. Our innovative product and technology pipeline and our customer collaboration really enables us to capitalize on the sustainable market trends. I think importantly, our Industrial Intermediates & Infrastructure and our Performance Materials & Coatings segments really broadens Dow's reach beyond packaging in a fast-growing market verticals like infrastructure, hub and personal care and mobility. And that's going to continue to drive both earnings and cash flow growth. And then together with our "decarbonize and grow" investments, we're adding more than $3 billion of underlying EBITDA over the next several years, while enabling the transition to a more sustainable and more circular world. And I would just point to a few proof points. So the successful start-up of our cracker expansion in Fort Saskatchewan late last year, plus our FCDh project in Louisiana and our alkoxylation expansions coming on later this year all serve as proof points. And our clear path to deliver earnings growth over the economic cycle, together with our best-in-class operational performance, will continue to drive cash flow growth, which we will continue to deploy in a disciplined and a balanced way. And I'm sure you're going to have some questions on capital allocation. And that will enable us really to execute our growth strategy while targeting more than a 13% return on capital across the economic cycle, while at the same time providing attractive shareholder remuneration. So Jeff, look, 2021 was clearly a record year for Dow. And as we move through 2022, I am confident, as the leadership team is confident, that these mid-cycle dynamics will allow us to do a few things. One, demonstrate once again the resilience of our portfolio; deliver earnings above pre-pandemic levels; generate once again strong cash flows with a continued focus on working capital efficiency; and create long-term and sustainable value for our owners, our customers and our team over the long run. And with that, Jeff, I'll hand it back to you to get into the fireside chat.

Okay. Thank you for that spirited presentation. So Dow earned $200 million more than the consensus thought. You've got 3 segments: packaging, industrial intermediates, performance materials. Where did the $200 million come from? Like if you had to divide it up over the 3 businesses in terms of what businesses outperformed either the consensus expectations, your expectation, where was it?

So we haven't earned it yet, but this is our estimate for Q1. So we still have some work to do. So anybody on the Dow team listening, get back to work and keep delivering those results. But the $200 million increase that we see relative to where First Call consensus is today, it's about 2/3 of that goes into silicones. So it will be in Performance Materials & Coatings segment. We're really seeing -- as I said in the prepared remarks, Jeff, we're seeing really strong demand, inclusive of March, across the entire enterprise. But 2/3 of that $200 million is in silicones. And the balance, the other 1/3 is really in P&SP. And I think the report that you published a few days ago, I think, was spot on relative to some of the margin compression that we're going to see in the near term in the hydrocarbon-related segments. And what really we're seeing though in P&SP, our Packaging & Specialty Plastics, is just continued demand strength, right? And then that feedstock or that raw material, hydrocarbon push together with inflation is also in addition to the demand strength that we're seeing, we're also seeing prices that are continuing to move up because of that cost pressure.

So those are very large increases in your silicones or silicones and siloxanes business. Is there something unusual that's going on there that's delivering, I don't know, in excess of $120 million in extra EBITDA per quarter?

Yes, I would say that, look, silicon metal prices, because of the inflation, and I mean, silicon metal, which is a feedstock, which we have a significant amount of back integration either directly or through some of our joint ventures, that continues to provide strength to be able to drive price higher. I think what we're starting to see with -- in China with the new COVID variant is kind of the rolling shutdowns are crimping supply. There's also the logistics issues of silicon metal being able to get out of China into Europe is also pushing price or allowing price to be up in Europe. But also, I would say, fundamentally, the biggest issue is we're seeing good fundamental solid underlying demand in mobility, in infrastructure and packaging. And we're a leader from a silicone perspective and all of those segments really around the world.

So it sounds like those are the kinds of developments or margin developments that are at least lasting for the year. That is if you're outperforming already in the first quarter. And given that the supply-demand balance is tighter, you must be more optimistic about that business through the course of the year.

Look, I will leave that to the experts like you to decide what's going to happen for the rest of the year. I mean, I would say, look, if you look at the first quarter, that puts our first quarter at $2.9 billion, plus or minus $1 billion EBITDA run rate, and The Street estimate is in the $10 billion for the year. So if we can keep that going, obviously, there'll be demand strength or they'll be earning higher earnings through the year. I think the things we all have to watch for is how are the geopolitical conflict, Russia, Ukraine, plus the COVID issue that we're starting to see in China. And then just overall inflation and what that's going to do to demand growth. But at this point, we see strength really across the board, and it continues to be the case in the month of March with the order book. In fact, our orders are up double digit in March versus February month-to-date, right? So on an apples-to-apples basis, you can see that there is good demand strength around the world.

When you look at your volumes in China, what have you seen since the end of the Chinese New Year? In that -- at our conference, we've had very conflicting accounts of what's going on in China where some companies were really quite conservative about it.

Yes. I mean I would say it's been lower than a typical ramp from Lunar New Year, right? So usually, the ramp starts earlier. This year, it's a little bit slower. I do think there's zero COVID policy and the fact that they are kind of going really location by location and forcing assets either down for a couple of days or as much as 5 to 7 days is probably slowing that. But at this point, we see China GDP this year in kind of the 5% to 6% range. And it is ramping. It just came -- it just started -- the ramp started a little bit slower out of the gate after the Lunar New Year.

So if I could just go back to silicones and siloxanes in a moment. What you said was that maybe 2/3 of the $200 million outperformance came from that. And -- but you also said that it -- that the dynamics in the petrochemical markets were tough. So the outperformance of that business is really much larger than, that as it had to offset whatever compression you were feeling in your other operations. So can you quantify the quarterly change in what happened in silicones and siloxanes?

Well, I think it's a little bit hard to break it out because remember, we also in the fourth quarter, we had the turnaround in Zhangjiagang, right? So certainly, when you look at the Q1 print, if we deliver or when we deliver the numbers that we talked about today, you're going to see a larger number. But you have to take into account the turnaround that was hitting the fourth quarter to the tune of about $100 million. So that was a pretty big turnaround for us. But you're right. I mean, look, silicones, I think, is one of the underappreciated parts of the Dow portfolio. It is fundamentally not hydrocarbon-based. It goes into a significant number of applications in a very diversified way. When you think about the trend to sustainable buildings, green buildings, you think about the trend to EVs, there is 3 to 4x more silicone in an EV vehicle than in an internal combustion vehicle because of the need for additional lightweighting, the additional consumer electronics and everything that -- with the semiconductors that are in -- and the IT capability that's in those vehicles and then the battery technology. So it's a significant demand growth, and we're seeing that. We're seeing it in mobility. We're seeing that infrastructure. We're seeing that in a home care as well.

So Howard, what I want to do in our chat is I want to sort of bounce around from topic to topic. And...

Let's bounce, Jeff.

Yes, let's bounce. So what strikes me about historical petrochemical companies, whether it's Dow or Lyondell or even Westlake, is the multiples that they're giving, trading multiples that they're giving in the public markets are surprisingly low. That is these are all companies that generate free cash flow generation on a consistent basis between maybe 10% to 15% of their share price, but they're really not rewarded. So when you think about how Dow will create shareholder value over a longer period of time, is the object of the game to try to -- well, of course, you want to grow EBITDA, but do you want to try to raise the multiple by having higher-quality businesses? Or do you want to develop businesses and then separate them out so that the public markets can put the appropriate multiple on it? How do you envision working with that multiple? Or is the best thing to leave the multiple alone and just repurchase shares and create value that way? Of the 3 options, how do you think about that?

I would say, look, I think probably, Jeff, you've been doing this a long time, and I'm sure every CEO and CFO you've ever spoken with believes their multiple is too low, regardless of what sector...

That's true.

I think that, that's probably true, right? So look, I mean, the way I think about it is, look, we are going to be disciplined and balanced in our capital allocation priorities. We are going to continue to, as we outlined at our Investor Day in October, decarbonize and grow the company, while at the same time, being focused on delivering that $3 billion of increased earnings from an EBITDA basis over the economic cycle. So really, if you think about it driving earnings growth and cash flow growth over the economic cycle, improve the return on capital, and I would say, look, we've done a really good job in the last several years on all 3 of those. The long-term metric that we haven't done as well on is return on capital, right? So look, I think I'm probably the fifth CFO of some version of Dow that's had a target of a 13% return on capital, to be fair. And by God, we're going to do it this time, okay? And we are on a good trajectory, but it will take some more time, I think, to prove to you and to the market that we actually will be able to deliver that. But grow earnings over the cycle, grow cash flow, improve our return on capital and then give 2/3 of that back to our owners in the form of shareholder remuneration, primarily dividends, but also stock buyback. So to that point, I know you and I haven't spoken since the fourth quarter earnings call. But on the call, you asked me some pointed questions on stock buyback, and I think you were fishing around for -- look, the cash flow seems like it's...

I was just puzzled.

Yes. I think Jeff's seemed puzzled, which I respect greatly. So look, in addition to making the announcement on the $200 million increase in EBITDA, I will tell you that we have already covered dilution this year with our purchases in the first quarter. So we purchased $600 million of stock in Q1, and then we'll see how the rest of the year goes. But yes, we're already through spin. I think we're at now 74% of our net income has gone back to shareholders in the form of dividends and stock buyback. And our goal, as you know, our long-term goal is at least 65% of that. And then we'll use the balance, the other 35%, to decarbonize and grow the enterprise.

So over a longer period of time, Dow plainly has a focus in Western Canada for its new capital projects and -- which is a logical place to invest in. It's very, very low feedstock costs. You can make blue polymers. And what we've learned from Eastman in -- they're doing their presentation, is the consumer products companies want a different makeup. Does it make sense to create another Dow entity? In other words, to have Dow Blue Polymers located in Western Canada, where you get blue polyethylene and have maybe a little bit different price point, it will be more focused. And maybe it's one of the ways that you can lift your multiple over time? Or is it turns out that it's really better for the whole thing to remain under one big umbrella?

Look, well, I would say this that, look, one of the values of the new Dow is really to always consider whether or not we're the best owner, right? So -- of the portfolio. We worked very hard over a series of transactions over more than a decade. You've been with us through all of them. And we believe today, we're the right, best, natural owner of our entire portfolio. But we challenge ourselves with that every year. And so that's what led a couple of years ago to do the marine divestiture and to do the rail divestitures. So we're looking today -- we continue to look more at our infrastructure assets, the assets that are non-product reducing, to challenge ourselves whether we're the best owner or is there somebody else out there that would value those assets more than us? Relative to our product producing assets, I just don't see that as a pathway for us today. Always avoid the use of the word never, so I'm not going to say never. But as I see it today, that is the destination of our company. We are all extremely excited about that decarbonize and grow pathway. You look at our Texas-9 investment that we made, and that project, a few stats on that project. Project to date, that is a north of 15% return on capital project. We built it 12 months faster than the average of the last wave of production. We built it at a 15% better capital efficiency. It is 60% lower carbon intensity and 65% lower cost. And we are taking that as our baseline, and then we're putting that in a bigger decarbonized way up in Alberta with our decarbonize and grow project. So I will be disappointed, frankly, if that project is not at least a 15% return on capital. It will cost more than the Gulf Coast because of the extra decarbonization, so we've got to do the tie-in of the carbon capture trunk line. And then we also have to build the autothermal reformer. We'll be working with the Canadian government for additional subsidies. And obviously, we're working from an engineering and a design and construction perspective to try and get more efficiency from what we learned with our Texas-9 asset. Plus your points of I firmly believe we will be able to monetize polymers coming off of those assets at a premium to the market because they will be zero-carbon polymers. So I mean that's -- look, that gets the entire organization and our customers very excited that we can do that, and that really does represent the new Dow and where we're heading as an enterprise.

So the theory behind the decarbonization at Dow is that it accelerates your growth and you think you can get a higher return on capital, in part because of the assets that you're choosing to develop and the demand for those products.

Yes, exactly right. And I think -- and you said it well about Alberta. We've been in Alberta for a very, very long period of time and it served us well. You think about -- people talk about the U.S. shale advantage, which is real, and we're certainly seeing that now with everything that's going on with the hydrocarbons around the world and Brent and naphtha. But the Alberta advantage, which is also structural, is actually even better than the U.S. shale advantage and has been an advantage for a much longer period of time, and we -- it is bigger. So I think that's going to serve us well. And where it's positioned allows you to service North America but also allows you to export from Alberta to the rest of the world as well.

So one of the ways it seems to me that Dow is a little bit different from Lyondell or Westlake or Celanese or any number of companies is Dow has chosen really not to acquire over the last several years in any size. And in fact, it's gone a little bit in the other direction by finding businesses that are nonstrategic and divesting them. Now Dow's net debt-to-EBITDA is always a little bit of a puzzle to me because there's off-balance sheet this and off-balance sheet that. And when you look, you think that the net debt-to-EBITDA should be pretty low, but it's -- somehow it's pretty high and there's pension. So was your disinclination to acquire strategic? Or was it more force of circumstances because of Dow's unique financial structure so that it was more constrained and Dow needed to be on a firmer financial footing before it acted. Can you talk about your thought process or Dow's thought process?

Yes. I mean, I think, look, we -- I certainly agree with you that we have done a fair amount of divesting, and that really was around focus, right? When you think about the operating model, you think about the old Dow, we had a range of operating models, very, very fast cycle where electronics, where you had to -- if you didn't reinvent your product mix every 3 years, you'd be out. And very long cycle with ag, where you -- there was like big pharma, you were making 10-year R&D bet. So really, if you think about all the transactions, it was really focused. And to be fair, we did acquire, right? We acquired the 50% ownership of Dow Corning that we didn't own from Corning. And that also was a best owner mindset transaction. We were talking to Corning for a long time. And we were moving a lot closer to the Dow Corning business model and Corning was moving away, and so that made a lot of sense for us to do that acquisition. So we've done divestitures. We've done acquisitions. It's all in the spirit of focus, in the spirit of similar operating model and are we the best owner. So every one of those transactions -- and improving our return on capital, right? When -- if you think about the Corning transaction, that was our lowest return on capital business and our highest need for capital. And we were never going to invest in that business versus some of the other opportunities we had across the portfolio. And so that made sense for us to do that. So that's really has been and will continue to be our focus.

You were speaking about chlorine for a moment. I think that your supply, your chlorine and caustic by another company. And if I remember, it wasn't quite attractive financial terms when the split occurred. Is Dow going to get back into the chlorine business in the United States? Or what you're going to do is find a way to get the chlorine and caustic molecules that you need?

We are not making any new announcements, Jeff. We have no intention of getting back into the business. Look, we've got -- I think we have a series of mutually beneficial agreements. But we also have lots of different alternatives. So we'll do what's right for Dow over the long term, but that does not include going back into the upstream chlor-alkali chain at this point in time, no.

Okay. And like if you think about what DuPont has done over time, what DuPont did is it separated off titanium dioxide and then separated agriculture and then its mobility business, and it's bought more electronics. And so what it seems to be doing is discarding and then drawing from the deck, thinking that he can get a higher card. When you think about Dow, are you content with your sort of the 3 legs of the Dow stool? And do you see those legs as connected together to form a stronger and more consistent Dow over time?

So look, the short answer is never content, right? I mean, always, you know me, I'm a very competitive individual. So we're constantly striving to deliver even more results. But we do like the portfolio that we have today. We do believe that we are the right natural owner. We published benchmarking every -- one of the big changes, we had many changes as we were spinning the new Dow out. One is having a lot more transparency, right, publishing our capacities. We also did market-based transfer of ethylene as opposed to cost based. And then we also do an annual benchmarking. Now internally, we're looking at that every quarter, but we publish it externally. So in April, we'll publish the next round. And so we're constantly striving to have at least first quartile performance on the benchmarks. And if not, if it's possible, we will certainly always strive to be best-in-class. And if you look at what we've been able to do with our earnings and our cash flow, even if you look at -- you talked a little bit about the balance sheet, we were one of the few companies to exit 2020, which was a very tough year for our industry, with a stronger balance sheet than when we went in because of all the cash flow interventions that we've been focused on. I think that's another big change of the new Dow. In the old Dow, only really the CEO and the CFO managed cash. In the new Dow, every business leader around the world has a P&L, they have a balance sheet, and they have a cash flow statement. And if you sum all of those cash flow statements, that adds up to the cash flow statement, that Jim and I and the leadership team manage. And I think you -- as a result, you've really seen and you should continue to see a step change in performance in our cash flow. And I think some of the analysts who cover our stock are probably still under-appreciating the amount of cash flow that we can generate over the next several years.

Well, the thing about cash flow is like sometimes it sounds like Dow wants to spend $3 billion on CapEx. And sometimes it sounds like they want to spend $2 billion on CapEx. And do you have any commentary about where that normal line is and what the important capital projects are exclusive of the Alberta project?

Yes. I think we've been pretty clear. So I'm not sure why people would be confused. But in the spirit of clarification, Jeff, I will be happy to clarify. So look, our D&A is $2.9 billion. The new Dow, we've clearly said we're not going to spend more than D&A. As we spun out, we clearly said we're going to spend significantly less than D&A. We had committed to that for at least 3 years, and we delivered that. In fact, we ratcheted CapEx in 2020 even below where we had talked about at spin to $1.3 billion. We said we were going to deliver -- we were going to spend $1.6 billion in CapEx. Last year, we delivered that, we spent $1.5 billion or we invested $1.5 billion. This year, we've said we're going to spend $2.2 billion. And then over the next 3 years, depending on how the markets evolve and how the projects look, we will likely ramp that number from $2.2 billion this year up to $2.9 billion, as long as they're good quality projects, low execution risk, high return on invested capital projects. And of the $2.9 billion, what we've also said, $1 billion of that will be focused on decarbonize and grow. And so that's how you should think about us. The plan is we can continue to grow the enterprise. We can decarbonize the enterprise and we can drive our return on capital over the cycle north of 13%. And we're well on our way.

So when I look at that large project that you have, I think it's supposed to come on in 2028. It doesn't seem to me that Dow is expanding its overall ethylene polyethylene capacity at a rate that's at or above the market. It seems to me that it's at a rate that's somewhat below the market. Where does that conservatism come from? Now I understand that it's in the direction of a much more profitable set of assets, but it seems that Dow was a little bit more conservative when it looks out over a longer period of time as to how it wants to expand this part of its asset footprint.

Yes. I mean, look, I think -- look, our long-term philosophy is to always be a little bit net short on that last increment from an ethylene perspective. And I would say, as we look at our decarbonize and grow investments, it really -- it will -- every project, will look a little bit differently. Why are we starting with Alberta? Well, we talked about all the good reasons that Alberta makes a lot of sense. Look, we have deep customer as well as brand owner relationships that are long-term relationships, and we're going to continue to develop products and sell to those premium brand owners. We're not necessarily just focused on market share, though, right? It is -- we have to get a good return on our invested capital. We believe that we can do both. We believe we can grow with our customers, we can decarbonize our company or our enterprise, and at the same time, improve our return on invested capital by doing things in a disciplined and balanced way, which is what we've been really focused on since prior to spin.

When you talk to your largest shareholders, what do they want from you? Or are they the ones that have looked at Dow in the past and looked at Dow and the present, in the future, do they see the current administration as different from the past? Do they see you on a different path? What path do they want you to be on?

Look, I would encourage you to ask them. I think it's dangerous for me to speak on behalf of our largest owners. But I would just say that when we talk to our owners about decarbonize and grow, drive earnings and cash flow and higher over the economic cycle, that focus on cash has been critically important. And improving our return on capital and decarbonizing the enterprise, that always has been resonating with our owners. And the focus on being disciplined and balanced in our capital allocation, right? So not spending more than D&A and then having that 65% of net income going back to our owners. That's resonating with our investors.

So Howard, to come back to the present for a moment, can you talk about some of the cost pressures Dow is under or the sources of the cost pressures, maybe the magnitude of the cost pressures and how you've been able to overcome them in having an optimistic view for the first quarter?

Yes, sure. Look, the cost pressures, Jeff, and I think, hopefully, you'll give me credit that as far back as a year ago, I was very public saying that I didn't think the inflation was transitory. And I think it's still going to be with us for a while. And I think it was the move that the Fed made yesterday where the quarter point is in the direction of goodness, but I think they still have more work to do. And actually, if you think about Dow in that macroeconomic environment, if you go back, we've looked at this in the last 5 cycles of increasing interest rates. Where Dow sits in our sector, we tend to outperform. We have outperformed in every one of those sectors as the Fed starts to move interest rates. Why? Because you've got an inflationary environment that typically coincides with higher hydrocarbons environment. And that, as long as demand is healthy, which demand is still healthy, that allows us to raise price. So look, inflation is real. Our costs were up 20% last year. They're in that same range in the first quarter. Even worse from a hydrocarbon's perspective, given the naphtha world and what's going on with energy costs in Europe. But as long as you've got good fundamental underlying demand, you're able to drive price. And so you're -- that's why look, we're seeing good price increases in March. We've got price increases pretty much in every region of the world in almost every value chain already scheduled and out there in the marketplace for the month of April. So we'll see. But that's how we have to do it. And just continue to stay focused and be operationally excellent and really sweat the assets. I mean those are the things that you've got to really focus on.

When I think about -- of course, China is a gigantic market for ethylene and polyethylene. What do you think of the profitability of those crackers at this point in time in this very high naphtha environment? And how might that affect the pricing of global polymers, global polyethylene?

Yes. So well, I would say a couple of things. One, we're fortunate that we don't have any assets in that country today because basically, pretty much the vast majority of naphtha-based crackers, frankly, in Asia Pacific are negative cash margin and have been for quite a while now. And it only has gotten worse in the last few weeks and it came off in the last couple of days. And I saw this morning, Brent is back up again 7-plus percent. So look, that's underwater, negative cash margin. And I would say, and look, we have both been doing this for a very long time, 1 of 2 things has to happen because it will not be a negative cash margin for the next 4 to 6 quarters. So either pricing of derivatives has to move up or production rates will come down. And already in the last 2 weeks in Asia, you've got a dozen crackers that represent, I think, around 10 million metric tons of capacity that are trimming rates between 10% and 20%. Then you've got Russia, which is a few percent of the world's ethylene market that they're going to struggle with producing or certainly exporting.

Shipping.

Shipping. And then you've got Western Europe, which is also dealing with the same things. You probably have 10% of the world's -- well, 10% of the world's ethylene, all of it really based on either naphtha or coal that's trimming rates. So you're already starting to see what's going to play out. And it likely will continue. So my gut says prices are going up, unless you're really bearish on demand. And if you are bearish on demand, then more assets will come off over the next, call it, 3 to 6 months to rebalance.

Okay. Well, that sounds like an environment where Dow should fare well. We very much appreciate your presentation. And we hope you come back next year in person.

Well, definitely, and great to see you, Jeff.

Okay. Likewise. Thank you.