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The Dow Chemical Company (DOW -2.49%) 2021 Third Quarter Earnings Conference Call October 21, 2021, 8:00 AM Eastern Time

Today is a good day. Welcome to the Dow 2021 third quarter earnings conference call. [Operator Instructions] In addition, today's call is being recorded. At this time, I want to transfer the call to Mr.

Pankaji Gupta. Please go on, sir.

Pankaj Gupta-Vice President of Investor Relations

Good morning. Thank you for participating in Dow’s third quarter earnings conference call. This call can be listened to via webcast, and we have prepared a slide to supplement our comment today. They are published on the Investor Relations section of the Dow website and through our webcast link.

I am Pankaj Gupta, Vice President of Dow Investor Relations. Joining me in the conference call today are Jim Fitterling, Chairman and Chief Executive Officer of Dow; and Howard Ungerleider, President and Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the earnings press release and slides. During our call, we will make forward-looking statements regarding our expectations or predictions for the future.

Because these statements are based on current assumptions and factors involving risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Dow's 10-Q and 10-K forms discuss in detail the main risks and uncertainties that may cause such discrepancies. Unless otherwise stated, all financial data (if applicable) exclude important items. We will also refer to non-GAAP measures.

The reconciliation of the most directly comparable GAAP financial measures and other relevant disclosures is contained in the Dow Earnings Release, the slides supplementing our comment today, and the Dow website. On Slide 2, you will see our conference call agenda. Jim will first review the highlights of our third quarter and the performance of our operations department. Howard will share our modeling guidance and outlook, and then Jim will review the disciplined value growth strategy we outlined at the Investor Day earlier this month and why the Dow Jones Index is still a compelling investment opportunity.

Next, we will answer your questions. Now let me transfer the call to Jim.

Jim Fitterling - Chairman and CEO

Thank you Pankaj, and thank you all for joining us today. Start with slide 3. In the third quarter, the Dow Jones Index achieved year-on-year and quarter-on-quarter top-line and bottom-line growth. Although the U.S. hurricane caused supply disruptions to the industry, I am very proud to provide these results for the Dow team and complete these tasks safely.

Gulf coast. Our active storm preparation allows us to keep the team and the community safe and recover quickly. Our sales increased by 53% year-on-year, and each segment, business and region achieved double-digit growth. Our sales also increased by 7% from the previous quarter.

Driven by the tight supply-demand balance of our key value chains, we have gained strong price momentum. Although supply and logistics are restricted, with the support of continued strong end market demand, our sales volume has achieved 2% year-on-year and month-on-month. growth of. Our operating EBIT increased by more than US$2.1 billion year-on-year, and all departments and businesses have improved, with a quarter-on-quarter increase of US$58 million. The main contributors included a 1,170 basis point year-on-year increase in profit margins driven by price momentum and demand growth, and an increase in the profit margin of our Sadara and Kuwait joint venture, which increased equity gains by US$189 million. Driven by the expansion of profit margins brought about by the price momentum of key value chains, we continue to focus on cash generation and our balanced and disciplined capital allocation, enabling us to achieve US$2.7 billion in operating cash flow, a year-on-year increase of US$958 million.

We returned a total of US$918 million to shareholders through industry-leading US$518 million in dividends and US$400 million in stock repurchases. We also reduced total debt by more than $1.1 billion in the quarter. Our proactive debt management actions for bidding for existing bills have resulted in long-term debt that is not due by 2026, and we have reduced annual interest expenses by more than $60 million. Overall, Dow continues to deliver on its priorities, as we benefit from a favorable macro background and execute our disciplined strategy to reduce our footprint and increase revenue, bringing important value to all stakeholders, we see To the further development in the future.

Turn to market segment performance in Slide 4. In the packaging and specialty plastics segment, operating EBIT was US$2 billion, compared with US$647 million in the same period last year. Subsequently, operating EBIT fell by US$60 million. Rising prices in the business and all regions have led to higher profit margins and increased equity returns in the core business.

On a continuous basis, due to rising raw material and energy costs, operating EBIT margin fell by 300 basis points. The year-on-year increase in net sales of the packaging and specialty plastics business was mainly due to the increase in local prices for industrial and consumer product packaging and flexible food and beverage packaging applications. Due to the planned maintenance turnaround and weather-related power outages this quarter, the supply of polyethylene has decreased and sales have fallen year-on-year. Compared with the previous quarter, due to strong demand for industrial and consumer packaging applications, the business achieved price and sales growth, but was partially offset by hurricane-related power outages.

Turn to the field of industrial intermediates and infrastructure. Operating EBIT was US$713 million, a year-on-year increase of US$609 million, mainly due to the continued tight supply and demand of these two businesses. Subsequently, operating EBIT increased by $65 million, and operating EBIT margin increased by 50 basis points due to the increase in the volume and price of these two businesses. The net sales of the polyurethane and construction chemicals business increased compared to the same period last year, and prices in all regions rose due to the tight supply and demand balance.

The year-on-year decline in sales mainly reflects the planned transition of low-margin co-producer contracts, as well as weather-related power outages and third-party supply restrictions. Subsequently, the business achieved sales growth due to the increase in local prices and quantities to meet the additional supply of flexible demand. Compared with the same period last year, net sales of the industrial solutions business have improved, and local prices have increased in all regions. Due to the strong demand for materials in industrial manufacturing and energy applications, sales increased year-on-year.

Driven by sales growth, net sales have also increased continuously, mainly due to increased supply in all regions and rising local prices, coatings and industrial applications. Finally, the performance materials and coatings division reported operating profit before interest and taxes of US$284 million, an increase of US$209 million over the same period last year, due to the increase in profitability due to the strong price increase and the recovery of strong demand for silicone and industrial coating products 750 basis points. Subsequently, due to price increases, operating EBIT increased by US$59 million, resulting in a 210 basis point increase in profit margins. With price increases in all regions, the consumer solutions business achieved higher year-on-year net sales.

Due to strong consumer demand for personal care, mobile and electronic products, sales have increased over the previous year. Subsequently, sales fell as price increases in all regions were offset by reduced sales due to planned maintenance and third-party supply and logistics restrictions. Due to rising raw material costs and tight supply-demand balances leading to price increases in all regions, the net sales of the coatings and performance monomer business increased year-on-year. As the recovery in demand for industrial coatings was offset by weather-related power outages and third-party supply and logistics restrictions, sales fell year-on-year.

Subsequently, due to continued strong demand for acrylic monomers and architectural coatings and increased supply, the business achieved local price increases in all regions. Now let me hand it over to Howard to review the modeling guide. 

Howard Ungerleider - President and Chief Financial Officer

Thank you, Jim, and good morning everyone. Go to slide 5. In the fourth quarter, we saw our packaging infrastructure, consumer and mobile terminal market demand continue to grow strongly. The inventory levels of brand owners are still very low.

Therefore, we expect higher seasonal demand to continue into this year's holiday season. In packaging and specialty plastics, we continue to see elastic demand for packaging applications and our differentiated functional polymers. As the industry completes higher turnover activities and the supply chain recovers from weather events along the U.S. Gulf Coast, global polyethylene supply remains restricted.

We experienced higher raw material and energy costs at the end of the third quarter, and we expect this may continue into the fourth quarter. We expect that these costs will in turn bring about US$350 million in headwinds. Dow will continue to leverage our extensive geographic coverage and first-class raw material flexibility to help mitigate these effects. We also expect that as our cracker in Canada completes planned maintenance, this quarter’s turnover will bring a tailwind of US$175 million.

In terms of industrial intermediates and infrastructure, the continued consumer demand for furniture and bedding, electrical appliances, pharmaceuticals and home care is expected to tighten supply in our key value chains. Due to weather-related power outages in the third quarter, some of our planned turnover activities have been transferred to the fourth quarter. Sadara's isocyanate plant will also begin to turn around in the fourth quarter. In total, we expect that this segment will generate US$100 million in revenue due to the impact of the transformation.

The short-term increase in energy costs along the U.S. Gulf Coast and Europe is expected to add US$100 million in headwinds this quarter. We continue to see a continuous recovery in industrial activity, especially in energy applications. We expect that this recovery will continue until at least the fourth quarter as industrial production continues to rise from very low inventory levels to meet demand.

In terms of high-performance materials and coatings, demand for electronics, mobility, construction and construction continues to exceed supply. As inventory levels throughout the value chain continue to be low, the demand for architectural coatings is expected to remain high. Global organic silicon production has been affected by China's recent enforcement actions of dual control policies, and the price of organic silicon metal is almost three times the previous high. We intend to plan the turnover in advance at the silicone factory in Zhangjiagang, China, to cope with the government's actions to reduce electricity use.

Our current estimates for this quarter include USD 125 million from the increase in raw material costs and the impact of turnover. We will continue to work to mitigate the impact of rising raw material costs through our integrated position in these two businesses. Despite the increase in raw material and energy costs in the fourth quarter, Dow will continue to use its global advantages, structural costs and raw material advantages, as well as our wide range of differentiated products, to meet growing demand. In Slide 6, looking ahead, we expect strong economic growth to continue.

As the Delta variant slows the reopening of the global economy, there is still a large amount of pent-up demand worldwide, especially in our industrial and consumer end markets. Due to the difficulty of the supply chain to keep up with strong demand, backlogs of orders in many industries continue to increase and inventory levels are low. These supply chain disruptions are expected to persist, which will certainly extend the inventory replenishment capacity of most value chains. Therefore, we expect that market conditions will continue to be tighter than expected. China’s recent dual-control policies have reinforced this view. This policy has affected both cold olefin and methanol-to-olefin production capacity, which account for 30% of China’s total polyethylene production. above.

The GDP growth forecast for most parts of the world in 2022 is much higher than the historical average, because as the global chip shortage continues to prolong the recovery of the manufacturing industry, the industry accelerates to match the strong consumer demand and further rises. In general, the G7 countries have not yet fully recovered to their pre-pandemic GDP. As the level of vaccination increases, the economy has returned to a more normalized consumption level, especially in Asia, which is still low compared with other parts of the world, indicating that there is additional upside. Move to slide 7.

At the Investor Day earlier this month, we outlined how our differentiated portfolio and our focus on sustainability-driven innovation will achieve more than $3 billion in potential EBITDA improvements throughout the cycle. Our restructuring plan and digital investment will increase EBITDA by $600 million. Both are in progress, and our restructuring plan is expected to achieve a run rate of US$300 million by the end of the year. We also have a set of capital and operating investments with higher returns, lower risks and faster returns. These investments will increase EBITDA by US$2 billion in the short term.

Our decarbonization and growth investment in the Fort Saskatchewan, Alberta, Canada plant is also expected to increase EBITDA by approximately US$1 billion. As we have already shared, we are executing in a favorable macro context, and we expect this to continue to support the constructive market fundamentals of our key value chains. Go to slide 8. You will see a detailed list of these low-risk growth investments.

Our capital investment is expected to generate US$1 billion in EBITDA by increasing production capacity, eliminating bottlenecks, and improving the flexibility of raw materials in our operations. We have made good progress. For example, in packaging and specialty plastics, our Fort Saskatchewan expansion project adds 65,000 metric tons of ethylene annually to support growing polyethylene demand, which has now been completed and will be increased by the end of the fourth quarter. Our FCDH pilot plant in Louisiana will be launched in 2022. Compared with other PDH technologies, its capital expenditures are reduced by 20% to 40%, operating expenditures are reduced by 5% to 7%, and carbon dioxide emissions can be reduced by up to 20%.

In terms of industrial intermediates and infrastructure, our de-bottleneck project for adding 60,000 tons of aniline each year will be fully launched before the end of the year. Earlier this year, we signed a memorandum of understanding for the new South China hub to improve local supply and development capabilities to serve the fast-growing Asia-Pacific market. In terms of high-performance materials and coatings, we recently completed a capacity expansion at one of our silicone polymer plants. By the end of the year, we will complete a new silicone sealant mixing device to provide sustainable solutions for high-performance building and infrastructure applications.

We are advancing our 50 kt methacrylate investment in the U.S. Gulf Coast to support global end markets such as inks, resins and packaging materials, which are scheduled to go online in the first half of next year. In addition, as we increase our production capacity and shift our product portfolio to higher growth and higher value markets, our operational investment is expected to generate another $1 billion in EBITDA. For example, in industrial intermediates and infrastructure, we are increasing our capabilities and shifting our portfolio to higher-margin polyurethane systems for mobile and consumer applications.

Our industrial solutions business is improving its ability to supply differentiated materials to the textile market. Our collaboration with Ralph Lauren’s ECOFAST has reduced the energy use in the fabric dyeing process by 40% and the water consumption by 50%. By 2025, the brand's goal is to incorporate this technology into more than 80% of its pure cotton products. In terms of performance materials and coatings, we are expanding our ability to formulate differentiated silicones for many attractive markets, including silicone adhesives for foldable displays in consumer electronics, and thermally conductive organics for electric vehicles. Silicon solutions and silicone solutions for the 5G market are expected to double in the next 10 years.

We have recently collaborated with customers on high-value innovations, such as the use of our award-winning Rhobarr polyolefin dispersion technology and Callaway’s Supersoft golf ball for paper barrier coating applications, which feature Dow’s parallel-line impact modification A new type of mixed covering layer made of agent. In terms of packaging and specialty plastics, we are enhancing our extensive conversion and testing capabilities, through packaging design, accelerating the innovation process and expanding addressable markets to obtain higher profit and more sustainable products, and to commercialize residents. For example, we have already benefited from the nine-layer blown film extrusion line project completed this year. We are also investing to improve asset reliability, which will increase production and expand profits.

We are using digital technology for customer trials and process automation to accelerate the development of catalysts for new resins and processes (such as FCDH). In this case, our efficiency is usually 100 times higher than traditional experiments. Overall, our recent investments will increase basic EBITDA by approximately US$2 billion, and we intend to achieve this growth in a rigorous and balanced way to maintain our cash flow, cost structure, debt reduction, and shareholder compensation. With this, I will transfer it back to Jim.

Jim Fitterling - Chairman and CEO

Thank you, Howard. Go to slide 9. The strategy we outlined on the Investor Day is based on our long-term industry leadership. Our plan enables us to capture the needs of sustainable development drivers, achieve zero carbon emissions in Scope 1 and Scope 2, and achieve meaningful basic income and cash flow growth in the coming years.

Our way to decarbonize our footprint and increase revenue is a phased approach that can transform and replace obsolete assets with low-carbon emission facilities, while also expanding our production capacity. The plan will reduce our carbon dioxide emissions by 30% between 2005 and 2030 through a rigorous method that manages time based on global affordability, macro and regulatory drivers. Our Texas 9 cookies prove that we can do it and do it well. The carbon intensity of Texas-9 is 60% lower than any asset in our fleet, and there is no specific design for carbon capture or hydrogen.

The project’s delivery capital efficiency has increased by 20%, 12 months faster than any other cracker built in this wave. Overall, the conversion cost of the project has been reduced by 65%, and it has consistently operated at more than 110% of the nameplate capacity, and has achieved a return on investment of more than 15% since its launch. As Howard previously outlined, we will use the important experience gained from Texas-9 as we plan to build the world’s first net-zero carbon emission ethylene cracker and derivatives complex in Fort Saskatchewan, Alberta. Facilities, EBITDA is approximately USD 1 billion. This project will more than triple our ethylene and downstream derivatives production capacity at the site, while decarbonizing 20% ​​of our global ethylene production capacity.

We chose this site because it can provide carbon capture, infrastructure, favorable raw materials, and supporting government policies and incentives. On slide 10, when we seize these attractive growth opportunities, we will maintain a balanced and disciplined financial approach since the turn of the day. We are committed to keeping capital expenditures at or below D&A, far below the level before the rotation, and at the same time set the target return on investment capital for the entire business cycle at 13% or more. We will continue to adjust our capital expenditures based on the macroeconomic environment, our affordability and return targets.

Our investments are divided into three categories: First, we will maintain our foundation and maximize the return on our existing assets while ensuring safe and reliable operations. Second, we will execute our pipeline of faster return, low-risk incremental growth projects for downstream and sustainable development-driven applications that are growing faster than GDP. We will invest approximately US$1 billion each year to reduce our footprint and increase revenue. These investments allow us to seize the growing demand for low-carbon footprint products, while reducing the corporate risk of emissions assets.

Finally, on Slide 11, Dow is in a good position to provide shareholders with important long-term value. As we achieve an additional $3 billion in basic EBITDA, maintain industry-leading cash flow generation, and promote Scope 1 and Scope 2 zero carbon emissions, we have taken actions to reduce our footprint and grow our business. Our balanced capital allocation method aims to achieve a return on invested capital of more than 13%, keep capital expenditures within the D&A range, and return 65% of net income to shareholders throughout the economic cycle. All of this benefits from our industry-leading product portfolio, cost position and strong innovation record, allowing us to provide differentiated products and solutions for our customers and a more sustainable world.​​

With this, I will turn it back to Pankaj to open the Q&A.

Pankaj Gupta-Vice President of Investor Relations

Thank you, Jim. Now let us continue to answer your questions. I want to remind you that our forward-looking statements apply to our prepared comments and the following questions and answers. Operator, please provide Q&A instructions.

thank you, sir. [Operator Instructions] We will answer the first question raised by Hassan Ahmed through Alembic Global.

Hassan Ahmed - Alembic Global - Analyst

Good morning, Jim. Jim, when I look at your guidance, you seem to be guiding an EBITDA reduction of $500 million. Therefore, US$3.6 billion is reduced to US$3.1 billion. But just by reading the guide, you will not break through the influence of Ida.

So is it fair to assume that you guide EBITDA in the fourth quarter to exceed $3.1 billion?

Jim Fitterling - Chairman and CEO

Thanks, Hassan. This is a very good question. Impact-Ada's total impact is approximately US$100 million, divided into the third quarter and the fourth quarter. So this is how you should look at it.

Most of the remaining content of the guide is only the impact of raw material costs or raw material costs that we expect to enter the fourth quarter. Having said that, I think demand will continue to be strong. I expect that due to the impact of Ada, our operating rate will be higher than in the third quarter. And I don’t want us to have the opportunity to build a large inventory, but our goal is to work hard before the end of the year, because our customers need demand, we need to come out a little bit before then.

Next, we will go to Vincent Andrews with Morgan Stanley.

Vincent Andrews-Morgan Stanley-Analyst

thanks. Good morning everybody. Maybe it's just a little more color in the packaging and specialty plastic sales guide, especially your expectations for continuous sales. Then, do raw materials or hydrocarbons have any effect on the top line? You can obviously tell them that they are trying to overturn your polyethylene price assumption.

Jim Fitterling - Chairman and CEO

Good morning, Vince. I expect the number to be better. St. Charles apparently left in September, and it came back here in early October.

So I expect a strong growth in the fourth quarter. Remember, we also had a fourth quarter shift in the third quarter, and we are over. So four people will be back. We will see some extra ethylene flowing out of the port, because the second half of the expansion has already begun.

And I think you will see higher sales this year. We are considering plastic sales growth, such as 8% and 9% in the industry. I think in the fourth quarter-we managed 2% in this quarter. In the third quarter, I think the fourth quarter will be higher than this number.

I do expect prices to ease at some point. I don't know when the exact time is, because the inventory is very low now. But I don’t think it will drop as sharply as some forecasts.

The next question will come from PJ Juvekar from Citigroup.

PJ Juvekar - Citi - Analyst

Yes. Good morning, Jim and Howard. Can you talk about siloxane and downstream silicon demand? What happened to the silicone merchant market? How is this chain affected by raw materials? I think, Jim, you said that the cost of silicones in China has gone up, so you closed some-closed a factory. Can you expand it? Finally, under the recent dual control policy, what will happen to the new siloxane production capacity announced by China?

Jim Fitterling - Chairman and CEO

Yes. PJ, good question. I will experience several things. I would like to say that in the short term, due to the limitation of dual control, the impact on metal silicon has been in China.

As you know, this is driven by the increase in coal prices, and it has indeed pushed up the cost of power producers. Electricity producers have caps on electricity prices. So some of them did not run, which forced the industry to cut back. Normally, when you enter the cold weather months, the industry will be hit compared to homeowners and consumers.

You try to keep your people warm. So this hit silicon metal. For this reason, things became tense. We have transferred some silicon metal from Brazil to China to offset this, and we will continue until the fourth quarter, but we have decided to postpone the improvement of Zhangjiagang to the fourth quarter.

We initially planned to do it in the first quarter. We decided to do it now. This relieves the pressure of dual control situations. I think this transition will cost us 75 million dollars on slide 5.

I expect we will see a cost increase of approximately US$50 million, but downstream G3 silicone demand and siloxane demand are very strong. Silicone prices have also risen sharply. So I think we will be in this situation throughout the fourth quarter, and I expect the same in the first quarter.

OK. The next question will come from Jeff Zekauskas and JP Morgan.

Jeff Zekauskas - JPMorgan Chase - Analyst

I have a two-part question. The first part relates to your expansion in Alberta over the past ten years. It seems that you have such a big ethylene polyethylene expansion. According to my calculations, this means that in the next 10 years or so, your production capacity will increase by 1% to 2% per year.

Presumably, the industry is growing faster than this. So, is this method an example of your strict capital method, in which you really only want to have high-return projects, and you will sacrifice volume growth to serve higher returns? The second part is Howard. You said that EBITDA's net debt will increase by two to two and a half times. This is very important.

Because if your EBITDA is $10 billion, that's a difference of $5 billion. So is it two or two and a half? Will you get there soon? Or are you going to mess around? Because if what you are going to do is to raise debts by another person, I don’t know, 9 billion dollars or 10 billion dollars to buy back stocks or increase dividends, how quickly will you get there? Is it 2022 or 25 or somewhere in between?

Jim Fitterling - Chairman and CEO

Jeff, the first part of the Alberta expansion began in 2007. This brings most of the new cracker capacity. Cookies will be scalable, and it will also bring derivatives. We then retrofit the existing cracking unit to connect the back end to the autothermal reformer, which will be put into use in 2009.

This will be the largest large-scale project we have done. We are indeed investing in eliminating the bottleneck of existing assets in the near term, which will help us from now to 2007. And we also have ethylene capacity to increase some downstream capacity. So this will be slightly more than a 1% to 2% increase.

But our concern for Alberta is clearly to use the situation there to decarbonize and have a good carbon capture location and bring the entire site to zero. Howard, do you want to get EBITDA net debt?

Howard Ungerleider - President and Chief Financial Officer

Yes, of course. Jeff, your view about strict balance in capital allocation, it also applies to debt. I mean, when you think about what we did in the third quarter, it was very balanced. Its dividend is more than 500 million U.S. dollars.

It made another $400 million in stock repurchases, and then we repaid $1.1 billion in debt. Regarding your opinion about the ratio of 2 to 2.5, I would like to say that some of our peers fluctuate 1% between low and high prices, so we have provided you with an opinion that is superior to that of our peers, saying that our range is only half one round. But if you want me to narrow it down further, I would say, use the midpoint. So our long-term average is two to two and a half.

I want to say that in the entire economic cycle, if you want to use two and a half, this is a reasonable proxy for what we want to achieve, but we have channels to recognize that this is a long-term goal. Today is punctual, using the rating agency method by the end of the third quarter, we may be around 2.4, 2.5. So we have about 0.25 turn left to hit the midpoint between 2 and 2.5.

The next question will come from the relationship between Bob Koort and Goldman Sachs.

Mike Harris-Goldman Sachs-Analyst

Good morning. This is actually Mike's endorsement for Bob. I just want to know that you have made some comments on the inventory still tight. I think from a polyethylene point of view, can you quantify the number of days you are seeing inventory and how does it compare to what you think is more normal?

Jim Fitterling - Chairman and CEO

Yes, the industry-Mike, industry inventories and DDI declined. In September, industry inventories fell by approximately 120 million pounds. As a result, inventory days are reduced. The demand is clearly strong.

Exports are greater than domestic, and exports are greater than production. Obviously, the storm also had an impact on this. We see a decline in high-density and low-linear inventory, and a little increase in low-density inventory, but this is not a significant number. So when you look at the five-year trend, I think what we are showing you in the slide is that the backlog of orders has increased by about 30% than normal, and the inventory-to-sales ratio has dropped by about 10%.

I think this will stay in that band for most of the fourth quarter. As capacity recovers from the hurricane, we still have supply and logistics issues, so bottlenecks are everywhere, especially when it comes to packaged goods or exports by sea, and products that are transported by truck. Now it is a small hand-to-hand battle. If the truck driver does not show up, delivery will be delayed.

So I think we will be in this situation for the rest of the year and the first quarter.

Howard Ungerleider - President and Chief Financial Officer

Just give you some downward numbers. Our DSI fell by 7 days in the third quarter from a year ago, and our overall cash conversion cycle is one day better than a year ago. Therefore, we are strictly managing our working capital.

Next, we will go to David Begleiter of Deutsche Bank.

David Begleiter-Deutsche Bank-Analyst

thank you. Good morning. Jim, the consultants had a sharp decline in the profit margin of the vinyl chain before February. Do you agree? Or considering the current market tensions, are they a bit too pessimistic?

Jim Fitterling - Chairman and CEO

Good morning, David. I think I am a bit bearish on the way it is classified. I think they underestimated the upcoming demand because there is still a large amount of inventory replenishment and we expect the upcoming continued strong demand. And I think they overestimated the supply. If I go back to the situation in China, please remember that about half of the CTO, MTO capacity is now out of money.

60% of the new global production capacity is located in Northeast Asia and will remain a net importer for a long time. And they are all based on naphtha or higher cost. So, I think these things will soften this. I do expect the price to ease.

But I think we can see very strong sales in 2022, but the price is slightly lower. The year-round operating rate is always between the high in the 1980s and the low in the 1990s, so I think there is no change there. Remember, the structural advantages of the United States, the structural advantages of Canada, our position in Argentina, and our position in the Middle East will remain strong.

David Begleiter-Deutsche Bank-Analyst

Next, we will head to Frank Mitsch of Fermium Research.

Frank Mitsch - Fermium Research - Analyst

Hey, good morning, good results. In the third quarter, you did repurchase $400 million in stock here consecutively. How should investors view the pace of repurchase in the fourth quarter and 2022?

Jim Fitterling - Chairman and CEO

Howard, are you willing to accept it?

Howard Ungerleider - President and Chief Financial Officer

Yes. Thanks, Frank. Therefore, our guidance for the fourth quarter is 745 million shares outstanding. Therefore, if you look at our position at the end of the third quarter or the average level of the third quarter, that’s about a decrease of 5 million shares, which is equivalent to the addition and subtraction of another $400 million in stock repurchases, so basically the same as the third quarter Synchronize.

Having said that, look, we will continue to maintain discipline and balance in capital allocation, and we will continue to play tricks. We insist on returning 65% of net income to shareholders. In the long term, 45% of earnings growth will be-net income will be in the form of dividends, and then we will use stock buybacks to increase it to 65%.

OK. For the next question, we will go to John Roberts with UBS.

John Roberts-UBS Investment Bank-Analyst

thank you. We saw all the container ships leaving the port, all the containers were stacked on the dock, and the warehouse was crowded with drivers waiting to deliver the products to the final customers. Your previous comment was about the inventory of polyethylene producers. Are you worried about the content of downstream products? Or it seems that there is a lot of inventory in the channels downstream of the converter.

Jim Fitterling - Chairman and CEO

Yes. This is-now it is difficult to track visibility. I do think that some of the government’s recent initiatives to keep large ports operating 24/7 will help resolve the backlog. What usually happens is that when these ports are backlogged, it will overflow to other ports.

We don't use Long Beach much, but when the traffic from other ports overflows, we will be hit. What I want to say is that almost every value chain will be affected in some way. The biggest impact we see is being able-it's a place to stop material from flowing out. So we are beginning to see some congestion and some competitive demand.

Products come in. Sometimes it is faster to reload an empty container to ship it back to China. Therefore, this competes with other upcoming materials. We have not seen this in every port, but it is certain that on the west coast, we have seen it now.

I would say that almost every value chain we have, every application we have is a short product. And I don’t think there are enough materials in all floating stocks or warehouses to ease demand or meet current demand. I still think that consumers are strong, and we have other economies that have recovered from COVID, and these economies will increase this demand.

Next, we will go to Michael Sison with Wells Fargo Bank.

Michael Sison-Wells Fargo Securities-Analyst

Hey guys, good morning. Nice quarter. Just curious, when you think of 22 years, your three basic market segments tend to have such good small market fundamentals, just curious—anything—I know you think demand is strong. Any thoughts on natural gas pricing, raw material costs? Oil is on the rise.

Just curious about how you accepted these types of inflation numbers in that prospect.

Jim Fitterling - Chairman and CEO

Yes. As a result, we are beginning to see some improvements in production, drilling and completions. With the end of winter, we will bring more NGL. I believe what we are seeing in the short term is a chain reaction, because China's coal prices have indeed risen a lot.

The first fuel you use that can replace coal in the fuel network is natural gas. Then LNG apparently rose immediately after coal. Then the next fuel is oil, and oil comes out. So this brings us to $80 per barrel.

I think we will see things stabilize a bit. As we enter the winter, the inventory is slightly lower than the five-year average entering the winter. But you have seen the price in the forward market drop by about $1 million BTU, because the weather is an important factor. Therefore, we will usher in a warm autumn, which will have some impact on natural gas prices.

Even so, the oil-gas ratio, but more importantly, the oil-gas spread is very good. So I think this will continue. If we spend the winter without a real, real cold snap, then I think you will see a slowdown in prices. In the long-term or mid-term, I want to say that the US 250 to 450

Production. In the long run, natural gas is about 275 million British thermal units.

Your next question will come from Duffy Fischer of Barclays Bank.

Mike Leithead-Barclays-Analyst

great. thanks. Good morning. This is Mike Leithead of Duffy.

Perhaps Howard's question is divided into two parts. I want one-just a clarification of Jeff's earlier question. Is the target of the two to two and a half debts the total debt and EBITDA indicators, that is, net debt? Because if I heard your answer correctly, it sounds like you still want to pay more debts from here. Secondly, if we maintain this state, call it the annual operating cash flow range of about $6 billion in the past, for example, about 24 months, we roughly know how much the capital expenditure will be next year.

It seems that there should still be a considerable amount of excess cash. I know that you emphasize a balanced approach. But how should we consider the priority of excess cash? I think that is the gold bar on your chart, but is the repurchase a flywheel?

Howard Ungerleider - President and Chief Financial Officer

Yes. -At a debt-to-EBITDA ratio of 2 to 2.5, this is the net debt and EBITDA target adjusted by rating agencies. So this is long-term. Usually, the rating agency will look back at the current year two years ago, and then put forward a forecast for the next two years.

So when we consider the range of 2 to 2.5 or when I am targeting the midpoint, when answering Jeff's question on 2.25, it will take 5 to 10 years. As I mentioned, Jeff, we are slightly today-we are at the high end of the range. So you will-you should expect that in the next few years, we will continue to titrate this number to the midpoint of 2.25. According to the development of the situation, we may fall to the lower limit of this range, we will wait and see.

As far as the priority of capital allocation is concerned, we intend to continue what you have seen from us, which is a disciplined and balanced approach. Our first priority is to operate our factories safely and reliably. Then there is organic investment.

Therefore, if we have low-risk, high-return, and fast-return projects that can help us continue to achieve a corporate full-cycle average return on capital of 13% or higher, we will do so. Dividends will be next. Therefore, as net income increases, dividends should be in line with 45% of net income during the cycle. Then stock repurchase.

We-like I said before, we will use stock purchases to at least make up for the dilution, but we will also compare opportunistic-and any other cash-use opportunistic stock repurchases. In the long run, our goal is to do things that maximize value.

Next, we will go to John McNulty of BMO Capital Markets.

Bhavesh Lodaya - BMO Capital Markets - Analyst

Hi. Good morning, Jim. This is John's Bavesh. Regarding the equity income you receive from the joint venture.

It seems that each of your II&I and P&SP departments is expected to achieve approximately $500 million in revenue. Now, many unique regional dynamics and material arrangements come into play here. But broadly speaking, can you discuss the position of these businesses in the cycle and your views on the earnings of these businesses next year?

Jim Fitterling - Chairman and CEO

Yes. good question. In terms of II&I and polyurethane, I do believe that the demand and operating rate of isocyanates will continue to be strong next year, and the operating rate of polyols may decrease a bit, but the key demand driver and value driver will be these systems and solutions. Enter areas such as mobility, construction, electrical appliances, etc., to some extent, furniture and bedding, and things driven by consumer growth. This will continue to be strong.

The only thing we will encounter that will hurt these earnings is that we have improved in terms of isocyanates and Sadara this quarter, but this is planned. They will do it. They have been running very well. I hope to see them in good shape next year.

As you know, their fixed costs are very low. So I think we will have a good source to meet this demand.

Howard Ungerleider - President and Chief Financial Officer

Maybe in terms of cash flow, in terms of equity gains, if you remember that dividends usually come from the previous year’s gains, then as you pointed out, with this year’s equity gains rising, this will drive the cash flow for us next year Good luck, it may be at least between 200 million and 300 million U.S. dollars when we sit here today, and maybe even more.

Next, we will go to Laurence Alexander with Jefferies.

Lawrence Alexander-Jefferies-Analyst

Good morning. Two questions. In a period of tight supply constraints, do you see the net positive or negative value of the entire portfolio? In other words, when supply constraints ease, how do you see things develop? Secondly, in terms of decarbonization, as long as you can see a way to solve the barriers to return on capital, on what scale would you consider vertically integrating the decarbonization platform?

Jim Fitterling - Chairman and CEO

In terms of mixing, I think that whenever you encounter such a tense situation, there will be a natural gravitational force to move the mix upwards. However, I would also like to say that we have been working hard-customers are communicating closely. Obviously, we are working hard to keep everyone running. There is a lot of juggling going on.

There are some special grades of products that are difficult to mix, because the situation is very tight now, especially in some of our elastic products. Regarding decarbonization, I think it will depend on the situation in the region we are considering investing in. In Canada, we do not need to make reverse investment in carbon dioxide capture and storage. I think there are many players who have the ability to do this.

Therefore, if we can focus our investment on assets that generate revenue for us and bring us growth with zero carbon emissions, I think there is enough room for third parties and others to help us deal with carbon dioxide.

Lawrence Alexander-Jefferies-Analyst

Next, we will use KeyBanc to go to Aleksey Yefremov.

Aleksey Yefremov - KeyBanc Capital Markets - Analyst

thank you. Good morning everybody. I have a question about Slide 8, in which you elaborated on the $1.7 billion and $2.1 billion in-flight investment, thank you. Good morning everybody.

EBITDA contribution. In my math, this means a fairly high single-digit growth compared to your basic EBITDA. So can you explain from a high level why investors can be confident in this goal? What are you doing differently from the traditional Dow Jones index growth rate? So, what can explain at a high level why this growth is achievable?

Jim Fitterling - Chairman and CEO

Yes. I will start, I will ask Howard to add one point, but I will start with silicones, because this is a field that is growing twice as much as GDP. If you look at mobility, if you look at electronics, if you look at consumer applications, they will continue to grow, and we have expanded silicone products to building sealants for large skyscraper windows. This is the high growth of GDP, and this situation will continue.

Among industrial solutions, not only ethylene has the highest value return, but also high-value downstream growth driven mainly by consumer applications. To some extent, we are seeing a recovery in oil and gas. I know that we have many, many cases. Our oil and gas products help people reduce carbon dioxide emissions in midstream production. Then there is ECOFAST Pure, which is a partner with Ralph Lauren. We just open-sourced the technology to use the product. This will enable cotton-based textile mills to switch to products that use 90% less chemicals and 50% less Water, reducing energy by 50%.

I think this is a huge driving force to achieve more sustainability in an area with severe environmental problems. Then, if you go to PM&C, our downstream system will continue to grow, with an annual growth rate of over 11% for a long time. We will continue these investments. We have set high growth targets for the downstream coatings business to continue to meet demand, especially transportation demand.

Howard mentioned the paper demand for paper cups, replacing other paper cups with our scroll bar dispersion and construction needs, which is our growth leader in this field. Then you go back to packaging and specialty plastics. Their growth continues to exceed GDP, which is about 1.4 times GDP in our forward-looking forecast. It is very scattered. So when we talk about $3 billion in EBITDA growth, it is divided fairly evenly among all three parts, next year you will see about $200 million to $300 million, and this is the ones that have been completed and will be completed by the end of the year.

OK. Your next question comes from Arun Viswanathan of RBC Capital Markets.

Arun Viswanathan-Royal Bank of Canada Capital Markets-Analyst

great. Thank you for your question and congratulations on the strong quarter. So I just want to return to the discussion of polyethylene. I think we have heard something contradictory because we see that the ACC number for days of supply is in the mid-1940s, which may be 47.

Then, it seems that the growth of polyethylene also stagnated in September and October. That is-are these the correct characteristics? Or would you say that the market is really tight, and do you really expect it to increase further as we go through this year? thanks.

Jim Fitterling - Chairman and CEO

I think the inventory days in the mid-1940s are an average. But remember, sometimes inventory numbers are things that are locked and can be shipped out. So I think this is the main increase in some of the data I have shared with you. I want to say that I think demand and production will be strong in the fourth quarter.

I also think that as we go through this quarter, some shipment delays will ease. I think it will help. But for the polyethylene business, 40-40 to 45-day inventory is not a lot of inventory.

Your next question will come from Christopher Parkinson and Mizuho.

Kieran De Brun——Analyst at Mizuho Securities

This is Kieran for Chris. I just want to know if you can touch a little bit between II&I and PM&C, you mentioned third-party supply restrictions. Can you talk about what you have seen in terms of these third-party supply restrictions, and do you think they will ease from the fourth quarter to the first half of next year is something you continue to expect to continue until 2022? thank you.

Jim Fitterling - Chairman and CEO

They are mainly-third-party supply restrictions are mainly industrial gas suppliers. Earlier this year, due to the freezing weather in Texas, their ranking was very high, and then they were hit hard by the hurricane in Louisiana. It is improving. I expect it will continue to improve throughout the quarter.

And I think they are working hard. I know they are working hard to improve reliability and restore assets. We are also working hard to ensure that we have the redundancy of these supplies. Therefore, we will take similar actions after such incidents and ensure that we also have supply redundancy, but this is the main impact.

OK. Next, we will turn to Steve Byrne of Bank of America (Steve Byrne).

Matt DeYoe-Bank of America Merrill Lynch-Analyst

Steve is Matt Deyo. It's just a question about polyurethane. I think you have touched on this, but where do you think we are in the cycle? Because even earlier this year, some of our colleagues were talking about excess income. I know we have a lot of power outages, but the demand is still very strong.

Inventory is light. So how will this affect 2022? Then, when you push downstream into the system, how much do you expect the profit margin to increase? What is the difference between business and SG&A strength?

Jim Fitterling - Chairman and CEO

I think the balance of supply and demand will be very favorable by 2026, because the demand for durable goods has been surpassing the growth of supply, and the impact of durable goods on the operating rate of MDI and TDI is great. Therefore, I think you will see a profit peak in your business that we have never seen before. They also caused considerable capacity delays or rationalizations. Obviously, we are also seeing an increase in the profitability of polyurethane systems in this area.

OK. We will ask our last question from the route of Matthew Blair with Tudor, Pickering, and Holt.

Matthew Blair - Tudor, Pickering, Holt & Co. - Analyst

Hi, good morning. Thank you for squeezing me here. Howard, I think you emphasized the flexibility of your biscuit ingredients. Considering the turbulence in the energy market, do you have any specific examples of the changes you have made? For example, are you moving away from propane in the United States?

Or in Europe? In addition, if you have any thoughts on the recent widening of the price difference between ethane and natural gas, I think it is about $0.08 per gallon. Do you think this is a short-term flash in the pan, or maybe it is something more medium-term? thanks.

Jim Fitterling - Chairman and CEO

Howard Ungerleider - President and Chief Financial Officer

Jim is looking at me, so I will accept it. Look, I just want to say that, as you have seen in the past few years of our annual benchmarks, our raw material flexibility is indeed a key driving factor for us to consistently outperform our peers. It includes what I want to say about raw material flexibility that is unmatched for most of our fleet. So we have the ability to maximize ethane in the U.S.

Gulf coast. We also have propane. If we need to be in Europe, we can make minimal naphtha. We also have the ability to make the largest liquefied petroleum gas.

As far as you are concerned, I mean, propane is not necessarily on the slate now, so you won't do it in Europe. But you have to look at the point Jim made earlier, that is, we have the advantage of Canada. We have the raw material flexibility of the U.S. Gulf Coast.

We have the advantage of Argentina, and we also have the Middle East. And I also think that when you talk-a lot of people talk about raw material flexibility, but most of the time, it means they have three furnaces that can crack at this speed, and two furnaces that can crack at this speed. Raw material flexibility when we talk about furnace flexibility. So we have the ability to switch in the furnace, and we can do it-frankly, we can do it every day.

Usually, we do this every week. Do you have anything to add?

Jim Fitterling - Chairman and CEO

I will only add two things. When you switch from ethane cracking to propane cracking, it is not always a linear equation. At these propane prices, some people might think that propane is unique. In fact, we have been cracking a considerable amount of propane because we have produced more by-products from it, and we need them.

So it is more than you think. I think that as natural gas prices slow down this year, we will see the advantages of ethane and propane on the US Gulf Coast continue to exist.

Pankaj Gupta-Vice President of Investor Relations

very good. I think this is all our Q&A time. Thank you everyone for joining our conference call. Thank you for your interest in Dow.

For your reference, a copy of our transcript will be posted on Dow's website within the next 24 hours. This concludes our call. thank you.

Pankaj Gupta-Vice President of Investor Relations

Jim Fitterling - Chairman and CEO

Howard Ungerleider - President and Chief Financial Officer

Hassan Ahmed - Alembic Global - Analyst

Vincent Andrews-Morgan Stanley-Analyst

PJ Juvekar - Citi - Analyst

Jeff Zekauskas - JPMorgan Chase - Analyst

Mike Harris-Goldman Sachs-Analyst

David Begleiter-Deutsche Bank-Analyst

Frank Mitsch - Fermium Research - Analyst

John Roberts-UBS Investment Bank-Analyst

Michael Sison-Wells Fargo Securities-Analyst

Mike Leithead-Barclays-Analyst

Bhavesh Lodaya - BMO Capital Markets - Analyst

Lawrence Alexander-Jefferies-Analyst

Aleksey Yefremov - KeyBanc Capital Markets - Analyst

Arun Viswanathan-Royal Bank of Canada Capital Markets-Analyst

Kieran De Brun——Analyst at Mizuho Securities

Matt DeYoe-Bank of America Merrill Lynch-Analyst

Matthew Blair - Tudor, Pickering, Holt & Co. - Analyst

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