Dow Inc. ($DOW)

Hi, good morning. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan. It's my pleasure to introduce the management of Dow Chemical. And to introduce Jim Fitterling, who's been CEO of Dow since 2018, but he's a long-term veteran of Dow. I think he began his tenure at Dow in 1984. I think Jim was 22 then. He's had long tours of duty managing the various businesses in Dow in Asia. He's a very experienced and competent executive. Previous to being named CEO, he was the Chief Operating Officer at Dow. I think Dow is going to do a few slides, and then what we'll do is we'll go into a fireside chat. Jim, welcome.

Thanks, Jeff. Good morning, everybody, and thank you, Jeff, for having me. Before we get into Q&A, I'd just like to offer a few insights just to our -- what's happening in our key markets as well as some of the progress that we're making on our near-term actions and our self-help measures. We remain focused on what's firmly within our control regardless of the situation that's unfolding in the Middle East, in addition to our view on how the macroeconomic landscape is changing for 2026. I'll provide some updates on the items that we're progressing to let -- to get Dow set up for long-term success, resilience and continued industry leadership. As we announced in January, this includes taking a transformative look at our businesses, our cost structure and the ways in which we grow with our customers. First, I'd like to emphasize that our ongoing self-help actions are progressing well. We're continuing to build on the strong delivery and disciplined execution that we demonstrated throughout 2025, and we're realizing the benefits of this momentum into 2026. Turning to the market dynamics. While the underlying demand conditions remain largely unchanged from our update in January, the rapidly evolving supply situation has started to positively impact our order books. We were already beginning to see market signs of improvement in the first quarter before the Middle East conflict began. And now pricing actions and supply dynamics have evolved at a very rapid and constructive pace. Specific to polyethylene. January polyethylene pricing in the Americas provided some encouraging developments and total industry sales volumes reached record highs for the month. Industry inventory also remains well below the 5-year average, reflecting industry working capital discipline and 3 years of destocking. As we enter traditionally what is a busy demand season, we announced a $0.10 per pound polyethylene price increase across the globe in March with an additional increase in April, including $0.15 per pound in North America. And in March already, we've announced price increases in every business in every region. Feedstocks are also rising outside of the Americas, notably naphtha into Asia, which is strengthening the global cost curve -- steepening the global cost curve, I should say. This has led to numerous operating rate reductions and force majeures for industry assets that are high cost or feedstock constrained, and we anticipate further actions could be taken. Global logistics have become uncertain with up to 50% of polyethylene supply either offline constrained or being impacted following the events in the Middle East. In addition, inventory levels are historically low across the value chain. Given these dynamics, we continue to act with urgency and resolve in implementing our announced price increases while running our fleet hard and taking advantage of our geographic diversity and feedstock flexibility. And we're monitoring the post Lunar New Year demand scenario to see the potential for any uplift following a typically low demand period in Asia and early order book patterns look promising. Recent feedstock volatility from a ramp in oil pricing is also expected to support a return to historic oil and gas ratios -- oil-to-gas ratios that benefit Dow's portfolio. And as we have done previously, our teams will continue to monitor these dynamics and remain focused on improving our progress. We will leverage our leading low-cost position, our agile, regional supply chains and our world-class manufacturing sites to -- in every geography to continue to support our customers' needs and the needs of the broader market. In Europe, higher co-product values, which have been depressed for several years, will once again improve competitiveness across the industry, leading to margin expansion in Europe. With all the puts and takes, we're becoming increasingly optimistic about the dynamics that could provide positive conditions as we go into second quarter. And as a reminder, March historically represents an outsized portion of Dow's first quarter earnings and our quarterly performance will largely be driven by the results of this month. Our teams continue to leverage the benefits of our diverse market exposure and strategically advantaged manufacturing footprint on top of the disciplined cost and self-help actions that we've underway. And as we demonstrated in the past, we're committing to taking strong and decisive actions to improve earnings and that starts with pricing leadership. Slide 3 outlines some more details on the levers we're advancing to drive earnings improvements and cash and cost support regardless of the near-term dynamics or a market recovery. The targeted actions that we have in flight to deliver approximately $3 billion of EBITDA uplift over the next few years. We're on track to achieve approximately $500 million in cost savings by the end of this year to complete our previously announced $1 billion program and Transform to Outperform, which is the initiative we announced in January, is expected to deliver at least $2 billion in near-term improvements in EBITDA, including $500 million of that this year. We're also executing a series of strategic moves that will uniquely position Dow to win across the cycle, including further strengthening our global manufacturing footprint. This includes our previously announced plans to shut down upstream high-cost assets where we'll begin to see benefits this year. Taken together, the completion of our cost efforts, the beginning of Transform to Outperform and our in-flight asset actions will provide an approximately $1 billion EBITDA improvement in 2026. Additionally, in late February, the Canadian Court of Appeals denied NOVA Chemicals request to stay the June 2025 infringement in Dow's favor. This reinforced Nova's obligation to immediately pay, and we've already received a substantial portion of the cash payment this month. As we go a bit deeper on Transform to Outperform, we anticipate that about 2/3 of the benefits will come from productivity and about 1/3 will come from growth. The transformation will strengthen Dow's long-term competitive position across the economic cycle, and we're already seeing progress in early wins. For example, we've made changes at the top of the organization, including the consolidation of executive-level roles that will unify working capital ownership and also accelerate innovation commercialization. In addition, with the help of AI and automation, we're redesigning our workflows across functions to reduce cycle times and improve connectivity across our teams and to strengthen how we partner and grow with our customers, we're upgrading our core commercial fundamentals with modern tools while keeping our customer needs at the forefront of every decision. We're also focused on raw material sourcing and have already uncovered some areas where rising costs persist, and our teams are anticipating some upside opportunities to strategically renegotiate new price formulas in those areas. And lastly, this quarter, we began closely evaluating our target sites to uncover additional opportunities for sustainable, leverageable productivity and growth improvements. In summary, our actions represent a cohesive road map and a comprehensive plan to strengthen Dow's near- and long-term resilience, competitiveness and how we deliver for our customers. We remain committed to maintaining operational and financial discipline, executing near-term actions for sustainable shareholder value and navigating the current environment, all to better position the company for higher shareholder returns. And with that, I'm happy to take all your questions. Jeff?

Thanks very much, Jim. You're a very experienced chemical executive. When the conflict in Iran broke out, what did you think? And what were the first steps you took in order to strengthen Dow's competitive position and to limit its vulnerabilities?

Yes. The first thoughts, if you went through the Iraqi-Kuwait conflict, some of the first thoughts were back to those times and how disruptive that was. This is probably even stronger because the Straits of Hormuz are completely shut off and just came to a standstill overnight. And that puts some real immediate pressure on operations because not just oil, but all the petrochemical plants that are in that region get shut in. And pretty quickly, if you can't move product out, you start to tank top all the materials. So supply chain teams swing into action, just like they did during COVID, for example, when you saw disruptive supply chains, they start working on alternatives. The commercial teams become extremely busy talking with customers because you've got customers that are in region, and the question is going to remain whether they can continue to operate or are they going to take demand? Are they able to ship product down? What physical possibilities do you have to open up other routes? Can you truck material to another port? You ever think everybody has heard the story of Aramco moving oil through pipeline over to Yanbu to ship it out, limited what you can do, but you want to do everything you can to try to keep running. Meanwhile, in the rest of the world, the industry at the time was operating, and I'll use ethylene as an example. Global ethylene operating rates were probably in the mid-70s. And suddenly, you take 20% of the low cost -- 20% of the global capacity, which is all low cost out. And the price spike that happened in naphtha takes the top 5% to 10% of the producers out, not physically, but they can't get it. They bid the price, they're underwater and so they decide not to run. They declare force majeure. And suddenly, you go to things being very, very snug. And inventories, as I mentioned in the comments, were already low. That was part of what caused the January price increases to go through was inventories are tight, and they're going to continue to tighten through this period. The second part of it would be, how long can this go on for? And I think that's the question everybody is trying to wrestle with. We see all the messages that people want it to be done sooner rather than later. And I think when you have a volatile conflict like this, you would like to see it resolved. But the reality is we don't have any indications yet that lead you to believe it's going to be sooner. And we shut the straits off almost overnight. We went to 0 moving through there. As you start to reopen, there are going to be the obvious questions about safety and stability to move things through and what rate are things going to open up and what's that ramp-up going to look like. And I think, to me, based on past experience, that's not going to happen overnight. It's not going to open wide open. It's going to ramp, and it's probably going to slowly ramp up. And as these assets, these operating assets get shut in, they're not all going to start up at the same rate. And so you've got all these dynamics on top of each other that make a big impact. I think in the markets, we're also starting to see people that are maybe not used to following the commodities markets are starting to understand the second derivative implication. So we start with oil and 20% of the world's oil supply. And likewise, petrochemical supply comes out of that region. But that oil goes to refineries all over the world. And so you've started to see it manifest. The airlines have been talking about shortages in jet fuel. New refining capacity has all been built in places like China and India. And so that's a source point. In petrochemicals, if you go to Asia and Europe, naphtha is the feedstock, not -- our big advantage in the Americas, Canada, U.S., Argentina, for Dow is light cracking ethane. Like globally, we're close to 85% light cracking. So ethane fundamentals haven't changed, but oil fundamentals have changed dramatically. So that's widened the oil to gas spreads. But what it's done on the high end is even more spreads on the naphtha side because while 20% of the oil comes out of the Gulf, about 40% of the naphtha is sourced out of -- it either comes from the Gulf or it comes from crude out of the Gulf. And so when you think about it, that's an even bigger impact on those high-cost producers. And so that means the naphtha spread has gone up. And that's probably what's going to help Europe with restoration of margins is that higher cost naphtha or in the case like where we've got assets in Terneuzen and Tarragona that can crack propane, the pro-nap spreads will widen and that will be beneficial. And then lastly, I would say there's some positive even on the naphtha side of things at the bottom of the trough, depending on the demand on the certain value chains, a naphtha cracker produces 1/3 ethylene and 2/3 byproducts. And so the byproducts have not had much value for the last couple of years. And so you're looking at potential spreads coming back into the byproducts, which help the overall economics. So I think some of that's factored in to the analyst consensus on what they see happening in Europe. So that's a big improvement. But it's going to have to manifest itself in higher chemicals pricing to realize that. And so that really is going to be dependent on the success in getting prices through in Asia.

So naphtha values in Japan, maybe they're up $400 a ton and polyethylene prices in Asia, maybe they're up $300 a ton. So the naphtha values are much, much higher. And when we talk to our colleagues in Asia, what they say is prices are going up, but they're not going up at the rate that raw materials have gone up, and so the margins are negative. So for Dow, do you get more -- a sense of greater demand from your Asian customers? And do you think that there will be more Dow shipments to Asia over the coming quarters?

Demand has been -- we're booked out as much as we can supply into Asia right now. So I see that. To your point on naphtha, and this is something that I think on the commodity markets, everybody has to understand, when the cost rise, they rise immediately. When you're getting the price in the market, that typically has a lag effect. And ethylene has a pretty immediate pass-through. Like in the first month, it will recover 70-plus percent of that pricing. So you're going to see, as we go into April, for example, you'll see a bigger impact in April than you'll see in March, but you'll see some impact in March as well. Where you've got a big advantage like naphtha crack or ethane cracking like in the U.S. Gulf Coast, then it's what does the order book look like for the exports? Because about -- about 30% of the U.S. capacity for polyethylene is export out of the United States. That's been in the money for some time. But with these spreads increasing, it's going to even be more in the money. And so those players that have that ability to export and can see that pricing move up in the global market are going to see an immediate impact of that as they move more product into those regions. So we're seeing prices go up everywhere. Like you say, Asia hasn't moved up as much, but Asian spot prices change on a weekly basis, a little more dynamic in those markets, still a little bit more of a trader mentality in those markets than in the U.S., where you tend to have bigger contract customers that tend to get a month notice when prices go up.

Is Asia a better return geography now for Dow going forward in the next quarter than Europe is?

I think that remains to be seen, right? I mean, with the cracker complex improving in Europe and the fact that there hasn't been much -- there's been no new capacity. There's been some rationalization of capacity. If the demand is there in Europe, you could actually see Europe come back to levels that we haven't seen for a while. Asia, a lot will depend on demand post Lunar New Year. But typically going into this time of the year, it's strong. And as we've seen China, that material is consumed to make finished goods that are then export around the world, and China has been strong on the reexport business. So I would assume that the demand will be there. There hasn't been -- when the markets get volatile like this, like in a normal predictable market, you would see traders taking positions. This market is so volatile. You kind of see traders taking a step back because they don't want to take physical delivery of something and then be underwater it next month, and they can't exactly predict where this is going to go. So that dynamic has changed as well. So that could lead to Asia actually seeing a bigger market improvement.

So I think Dow has said that it has 25 billion pounds of advantaged integrated ethylene in the Americas. Is -- and you can begin each...

You're not going to do CEO math on me or... .

Well, no, I won't do CEO math on you. But every $10 change in a barrel of oil is $0.04 or $0.05 a pound, historically, in price change. Are there subtleties about Dow where we should be looking at something other than those 25 billion pounds of advantaged integrated ethylene pounds to see how Dow would perhaps benefit in this new environment that we're in?

Yes. I would say propane to naphtha spread in Europe is something that we watch very closely because propane is less affected by what's going on in the Middle East. So there's quite a large supply that comes out of the U.S. and northern parts of Africa. And so you'll see propane availability and probably lower relative prices to naphtha, so that could give us some advantage in Terneuzen and also in Tarragona. That's incremental to what you would see happening in the overall complex in Europe. I would say we'll feel the same pressure in Asia as everybody because our exposure there is our Thai JVs through naphtha cracking. But we see an almost immediate positive impact on all the exports that we move. Our advantaged position in Argentina, we crack ethane in Argentina. We're the largest producer there. Argentina has returned to relative stability. And the Mercosur region into Brazil from a trading standpoint, that's the advantaged source point. So we supply Latin America, Brazil out of Argentina, and we supply Mexico out of U.S. Gulf Coast. And so those will both see the impact, the positive impact of the price increases.

So I think over the past 3 years, Dow's growth in specialty plastics in volume terms has turned pretty flat. What about this year? If you look at your operating rates now and you look at where global demand is, what are the -- how would you frame the possibilities for volume growth for Dow and specialty plastics this year?

Specialty plastics, predominantly, the things that I think are going to continue to deliver good volume are anything into the wire and cable business. And so you see the demand for data centers, electrical infrastructure, which is continuing to ramp up. So that pull for both high and medium voltage for telecommunications applications, it puts a direct demand on us. And so those assets are running hard, and we're looking at ways that we can incrementally expand those assets. If you look at high-pressure pipe, when you get into bimodal polyethylene for high-pressure pipe, whether that's for gas transmission or water distribution systems, that business is continuing well. When you get into specialty elastomers, when it goes into compounded applications that are in good spaces, I feel okay, where it goes into construction. Elastomers will go into things like roofing membranes and some other areas like that. With housing being slower, that slows down demand a little bit. So I haven't seen a signal yet on housing globally, I could say. Europe, China, United States, all in the same kind of position, but some modest increases in what we see in residential housing. And that can sometimes drive a good demand for elastomers.

Well, if maybe Dow's operating rate in its ethylene derivatives in -- globally was 80%. Shouldn't you go up to 90% or above 90%?

It's going to be -- everything that we've got running is going to be flat out for the rest of the year. I mean it -- already in the Americas, every asset that we had was running full out. The demand for the export is going to be strong. So any increment that was in the U.S. Gulf is going to be there. Canada has been running flat out for quite some time. Cracker rates, I would say, on average, the Americas, our cracker rates were 90-plus percent.

Prewar?

Yes.

90.

So that's what I mean when you see this impact on taking out the low-cost producers in the Middle East and putting a really big spike on naphtha on the high-cost producers in Asia. The incentive is there for everything else in the fleet to run exceptionally hard, and the volume is there to move. And so what we're trying to do is make sure that we can keep up with the customers' demand. We're typically not like force majeure is the last thing that we like to do. It's not a customer-friendly move. We have other ways to allocate volume like we have contracts with customers, and we have allocation methodology based on those contracts. We're going to try to keep up with the customers' demand to keep them satisfied and keep them moving.

So when you think about the way Dow will perform this year, obviously, as a base case, there will be a tremendous price lift.

Right.

But in North America, because you're running already at very high rates, the actual volume growth will be smaller?

The volume growth will be small. We had good volume growth last year. Our ethylene machine hit a new production record last year. So we produced another record in a bottom of the cycle year. That's probably a lot of people wouldn't think that. So we'll continue to run the assets hard and sweat the assets and get as much increment as we can, but it's all going to be core margin improvement. It will be integrated margin off the crackers from the low ethane cost and the higher oil spread. So that spread is going to improve, and that's across the entire base of business. And then you'll have the integrated margin above that for the polyethylene because of the operating rates that you mentioned, that will improve as well. We had a -- for our base plan going into this year, we had $1 billion of improvement in EBITDA, which was up based on self-help actions like the ones that I mentioned. That is there. We're seeing that come through. We can see that on a monthly basis in the costs coming through. And so on top of that, then you'll see these margin improvements. And I think people are starting to get their head around it. Our near term -- internally, our near-term objectives are to get ourselves to $1 billion a quarter of EBITDA. And then the next cab off the ranks would be $1.5 billion, $1.5 billion a quarter would be mid-cycle earnings from trough earnings. So I think we have line of sight to get to that kind of a run rate this year. And then obviously, the other thing that people ask questions about is on cash flows. And so our view is that as we get to $5 billion of EBITDA generation, applying a conservative 50% move of that to cash flows and keeping our CapEx where it is today at the $2.5 billion should get us to a free cash flow breakeven standpoint. So that's what the team and the management team is doing on a daily, weekly, monthly basis is to drive to those objectives. And I think the current supply constraints are just going to help us get there, hopefully, a little bit sooner.

What's happening at Sadara? In that -- is Sadara continuing to produce at high rates? Its production is locked in. Can you talk about the situation there?

Sadara, like anybody that's located on the Arabian Gulf is slowing down rates because we're filling up inventory. So we essentially have to get down. And it's somewhere in the ballpark of being almost down because we can't move anything out. And so it will be that way until we see the straits open up, and we start to see products flowing again. So the first indication that things are resolving will be the flow of oil tankers and then the flow marine pack cargo and other shipments out of the straits. And then the rate of that will determine what the ramp-up rate will look like on Sadara.

So there -- Sadara has various financial issues and Dow has various financial responsibilities toward Sadara. Do you have an idea of how those responsibilities might play out in both 2026 and in 2027?

Yes. We've been working very constructively with Aramco on dealing with the broader financial structural issues. I would say from a cash flow operating standpoint, like an operating margin standpoint, Sadara is a low cash cost asset. When you get into the fixed cost, which it brings in the financing on top of it, that's where you have some challenges, and we've been working with Aramco through that. Our goal for the year for ourselves is to not have to put any cash into Sadara, no. And then Sadara has modest debt repayments, which they've been funding on their own this year. So we'll have to watch with the reduced rates, we'll have to watch the debt refunding and what does that cause Sadara to have to do to make those payments. So far, they've been able to manage through it. And a lot will depend on how quickly things reopen in the Middle East.

So in your 10-K, I think it said potentially Dow was responsible for $1.3 billion in Sadara liabilities. Is that -- is that cash out -- a possibility of cash out the door for Dow? Or it's something that Dow guarantees? How does that exactly work, Jim?

Yes. There's a tranche of lending that goes into Sadara and both Dow and Aramco have parent guarantees on that. And so we're a 35% owner, and our guarantees on that are $1.2 billion.

So it wouldn't be cash out for Dow.

No.

It's a responsibility that you would have in the event that...

It's a liability on our balance sheet.

It's a liability on your balance sheet.

And Sadara has not breached any covenants with its lenders. So it's been able to continue to meet its covenants. And that's the framework that we're working under with Aramco is to continue operations, but also to resolve the longer-term issues. And we're making good progress. And I promised in January when we had the earnings call that we'd have an update by midyear, and I still feel comfortable that we'll have an update then.

And you have these very, very large cost reduction programs. And historically, Dow has had large cost reduction programs where maybe the benefits have been less tangible. Why might the benefits be more tangible this time around?

Yes. I think one of the questions that we get asked, and I think it's a legitimate question is our costs don't all show up in the same place on the P&L. So what gets highlighted a lot of times is SG&A cost, and you can see what kind of controls we have there and what kind of ability we have to keep those competitive. But when you get into cost of goods sold, that's kind of part of the whole margin calculation. If you look at last year, our EBITDA performance last year was down $2 billion. Pricing was down $3 billion. So everybody says, "Well, where is the $1 billion of cost savings?" It's in there. If you didn't have it, the pricing -- the EBITDA would have been down even more. So it's hard savings when we go through it, like our financial people and our auditors can track it and trace it back. And it's a lot in cost of goods sold and manufacturing. So I talked a little bit about raw material purchasing, maintenance and MRO, although we still do $1 billion a year of maintenance. But we also have made asset decisions. We shut down 23 small satellite sites and businesses like polyurethanes and others brought some of that demand back to larger integrated sites. That removes a lot of costs and CapEx that can be deployed against other value-creating assets and keep the franchise whole. So we continue to make moves like that. And the $1 billion that I talked about going into this year, last year, we saw $430 million of the $1 billion hit the bottom line. That was largely people reductions. But you have ongoing costs that take a while to get out like supply chain costs and other things that will come through. Working capital tends to need a quarter or 2 to start to see momentum on working capital. So that takes a while to come out. And that's what will be coming in this year, that other $500 million. And then as Transform starts to ramp up, you'll see $500 million of that at the end of this year, and you'll start to see bigger impacts in 2027.

Well, Jim, I very much look forward to seeing those cost reductions come through. Thank you very much.

You will. Thank you very much. I appreciate the time.