Dow Inc.

Good day and welcome to the Dow second quarter 2020 earnings call. You may signal to ask a question by pressing star 1 at any time during today's presentation. Also, today's call is being recorded. I would now like to turn the call over to Colleen Kay, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us to discuss the second quarter financial results for Dow. We're making this call available via webcast, and we have prepared slides to supplement our comments during this conference call. They are posted on the investor relations section of Dow's website and through the link to our webcast. I'm Colleen Kaye, investor relations vice president for Dow, and joining me on the call today are Jim Fitterling, Dow's chairman and chief executive officer, and Howard Ungerleiter, president and chief financial officer. Please read the forward-looking statement disclaimer contained in the earnings news release and slides. During our call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Dallas Forms 10-Q and 10-K include detailed discussions of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all financials, where applicable, exclude significant items. We'll also refer to non-GAAP measures. Our reconciliation to the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release in the slides that supplement our comments today and on the Dow website. On slide two, you'll see our agenda for the call. Jim will begin with the second quarter highlights and discuss the operating performance of the segment. Howard will provide a financial overview of the quarter and an update on SADARA. He will share the additional actions we are taking to address current market conditions and then move into modeling guidance. Jim will close with some remarks on our outlook and Dow's competitive advantages for growth. Following that, we will take your questions. With that, I'll turn the call over to Jim.

Thank you, Colleen, and thanks to everyone joining us this morning. On behalf of the Dow team, we hope that each of you and your families are healthy and safe. Starting on slide three, despite the impact the COVID-19 pandemic had on Dow's financial results this quarter, the Dow team continued to stay focused, prioritizing cash and maintaining our financial strength. We electively lowered our operating rates to meet demand, reduced inventory, and focused on cash to deliver on our priorities. Importantly, we generated $1.6 billion in cash flow from operations, up more than $600 million year-over-year, and free cash flow of $1.3 billion, up more than $800 million year-over-year. Our disciplined focus on cash generation has resulted in an improved cash flow conversion every quarter since spin delivering 110% conversion on a trailing 12-month basis. Once again, we ended the quarter with approximately $12 billion in cash and committed liquidity, and we continue to see additional cash flow upside. From a top-line perspective, net sales were near the high end of our guidance range, driven by solid demand in pandemic-related applications and in geographies that are leading the economic recovery. We delivered volume growth in consumer staples including packaging, health and hygiene, home care, and pharma end markets. However, it was more than offset by declines in consumer durable end markets. We achieved notable improvements in Asia Pacific with 3% year-over-year volume growth and 13% quarter-over-quarter, largely driven by China as Asian economies continued to reopen and gain momentum. And while Europe and North America were generally slower to restart, especially with the delay in key industries like autos and construction, we are now seeing positive demand indicators across most of our segment. In line with our focus on cash generation, we maintained our financial and operational strength and flexibility. In the quarter, we released $526 million of cash from working capital, driving our cash flow from operations higher in yet another quarter. consistent with the expectations that we shared at our first quarter earnings call. We continue to deliver on the expense reductions we previously committed and strategically idled assets to balance production to demand. And we're taking additional actions to maintain our strength and flexibility by increasing our expense savings target and initiating a restructuring program to ensure our competitiveness while the economic recovery gains traction. Howard will talk more about this in a moment. Our strong cash generation enabled us to also deliver on our capital allocation priorities. We maintained safe and reliable operations, returned $516 million to shareholders via our industry-leading dividend, and paid down $600 million in debt during the quarter, with net debt reduction of approximately $740 million year-to-date. And finally, we continued to advance the key pillars of our ambition for long-term value creation, which you'll see on slide four. We stayed close to our customers to manage through this historic period, introducing GPS shipment tracking to help customers better monitor their delivery and plan their operation, something that has proven to be exceptionally valued by our customers. We launched our new mobility science platform to enable easier and better access to our solutions for the transportation sector. And as the transportation industry recovers, our expertise, relationships, and unmatched product portfolio enable us to innovate across the value chain, increasing our competitiveness. We also launched an ambitious set of new sustainability targets, as well as a set of actions that Dow will take to advance anti-racism, inclusion, and diversity. We believe these actions are the right thing to do, and they will further drive long-term competitive advantage and value for Dow and all of our stakeholders. I'm proud of the Dow team for their disciplined execution and their focus on operational excellence and cash generation, which are critical to navigating in this challenging environment. As the economy gradually returns, we will continue to leverage our financial and operational flexibility, deliver differentiated value and advance our ambition generating superior shareholder return for the long term. I'll close my comments on the second quarter with a review of our segment results on slide five. Across the company, we took action early in the quarter to idle certain assets and adjust operating rates to match supply-demand dynamics caused by the pandemic. Packaging and specialty plastics operating EBIT was $318 million, down $450 million from the year-ago period. We saw a strong demand in consumer staples like packaging and also benefited from the targeted expense reductions announced last quarter. However, these gains were more than offset by weaker demand in consumer durable end markets as well as lower integrated margins. In the packaging and specialty plastics business, total volumes were flat as gains in EMEA and double-digit gains in Asia Pacific were offset by declines in the U.S. and Canada where the market was impacted by both weaker demand and excess supply. Total business volume is up year-to-date, and sequentially, the business reported 7% volume growth in packaging applications. We saw margins begin to improve at the end of the quarter with improved price in June and the return of the U.S. Gulf Coast ethane advantage. Industrial intermediates and infrastructure operating EBIT was down $374 million due to reduced demand. margin compression, and increased equity losses. This segment experienced an almost 20% volume decline based on its broad exposure to COVID-impacted consumer durables markets. Our urethanes and construction chemicals reported reduced volumes due to weak demand for consumer durable applications, including construction, furniture embedding, and automotive, as a result of the pandemic. The team responded quickly to the evolving market challenges lowering operating rates to match production to demand, reducing inventory, and operating assets to maximize cash. As the quarter progressed, the business did see double-digit volume improvement in June off of the May lows, including volume growth in Asia Pacific, and the business order book through July is also up double digits. Industrial Solutions reported volume growth as gains in pharma and home care were more than offset by declines in industrial and oil field applications, as well as consumer athleisure apparel. In response to the pandemic, the business strategically shifted its focus to capitalize on pockets of consumer demand strength, including materials for cleaning and disinfection. And finally, performance materials and coatings reported operating EBIT of 27 million, down 187 million from the year-ago period, primarily due to margin compression and xyloxane, and lower demand primarily as a result of the COVID-19-related lockdown. Consumer Solutions reported lower volumes as 8% demand growth in home care was more than offset by declines in automotive construction and personal care end markets, with consumer activities limited by COVID-related government mandates. Despite the workplace challenges through the quarter, The business continued to commercialize new, innovative products, which will enable growth as the U.S. and European economies continue to recover. Coatings and performance monomers also saw volume declines due to slower global construction activity as a result of the lockdown, which was partially offset by growth in architectural coatings in the United States and Canada as consumers spent more time on do-it-yourself projects at home. The decline in professional contractor demand due to the pandemic resulted in demand shifting into the do-it-yourself segment, benefiting Dallas Coding's business.