Greetings, and welcome to the Dow first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Andrew Riker, Dow's Investor Relations Vice President.
Jim and Karen will start with a summary of our first quarter performance, including details on each of our three operating segments. Karen will then provide an update on current industry dynamics, including how global supply disruptions are influencing market conditions.
Thank you, Andrew. I'd like to first take a moment to step back and recognize our colleagues, neighbors, customers and partners in the Middle East who are facing significant turmoil and uncertainty. Our thoughts are with everyone affected by this conflict, and we wish for their safety and wellbeing during these difficult times.
We delivered 3% sequential volume growth, net sales of $9.8 billion, and operating EBITDA of $873 million. With our self-help actions well underway, we delivered approximately $193 million in period cost savings.
We also anticipate impact to future investments, including potential delays or cancellations of planned industry capacity additions, as well as increased pressure for capacity rationalization. Lastly, we expect that the higher global oil and naphtha prices will steepen the global cost curve.
Lastly, we are building a Dow that is more agile and resilient through any cycle, a company that delivers through periods of volatility, and one that focuses on capturing upside, improving margins, and outperforming our peers to effectively reset the competitive benchmark.
This transition comes at the right time as we transform our company for its next phase of growth. I have full confidence in Karen's leadership, her deep operational experience, and her ability to drive performance and value creation.
Thank you, Jim, and good morning to everyone joining today. I'm honored to step into the role of CEO of Dow. Having spent my entire career with the company, I have a deep appreciation for our people, our innovation capabilities, and the critical role we play in enabling our customers' growth.
As Jim mentioned, Team Dow remains focused on disciplined execution in every business throughout the first quarter. As the situation in the Middle East unfolded in March, we continued to manage costs and cash tightly while also prioritizing our customers.
Polyethylene volumes increased in all regions, both versus the prior year and last quarter, supported by continued global growth in flexible food and specialty packaging applications. Polyethylene volume gains were offset by lower merchant olefins sales following a turnaround in the U.S. Gulf Coast and lower licensing revenue.
Next, turning to our Industrial Intermediates and Infrastructure segment on slide five. Net sales were $2.6 billion, down 8% year-over-year. This was largely due to lower prices in both businesses, as well as lower volumes in polyurethanes as a result of impacts from the Middle East conflict.
Moving to the Performance Materials and Coatings segment on slide six. Net sales were $2.1 billion, which is flat compared to the same period last year, with higher volumes in both businesses.
This capacity represents approximately 25% of European siloxane industry capacity. Next, on slide seven, I'll take a step back to frame further details on the current macroeconomic environment. The headline is this: demand across many markets is steady. At the same time, supply is short, and arbitrage is increasing.
Moving to supply dynamics, we anticipate that shutdowns, feedstock limitations, and logistical constraints will continue to reshape polyethylene product availability across regions. These conditions are creating ripple effects well beyond the Middle East, including significant impacts to logistics costs and transit times.
In addition, U.S. Gulf Coast NGLs, including ethane, continue to be largely unimpacted. All of these factors underscore the benefits of Dow's cost-advantaged footprint in the Americas. Next, on slide eight, we'll unpack some of the current regional and industry impacts in more detail.
The disruption has been amplified across Asia and Europe, tightening feedstock availability and pushing producers to reduce production or increase prices to cover the rapidly escalating costs occurring from the conflict. Looking across regions, a large portion of Middle East capacity remains offline, with increasing risk of lasting infrastructure damage.
Lastly, it is not likely that the pricing impact of these events will be temporary. We expect rising global production costs and a steepening global cost curve to continue influencing pricing and spreads. Next, I'll turn to slide nine, where we will discuss how Dow's specific advantages drive near-term value.
Our consistent focus on investing in the Americas gives us reliability, feedstock security, and cost stability at a time when global supply chains are strained. In Europe, our feedstock flexibility remains a critical differentiator.
The structural advantages we have deliberately built over time give us confidence in Dow's ability to manage through volatility while capturing value at any point in the cycle. In addition to these portfolio advantages, slide 10 outlines the key areas where we remain committed to self-help actions that will strengthen Dow's earnings power.
As a reminder, we expect approximately two-thirds of that to come from productivity gains and the remaining one-third from growth. Next, I'll share a few examples of early opportunities that we have identified and are taking action on.
Pilot efforts in these areas have meaningfully improved the quality, size, and value capture from new opportunities. Learnings are quickly being scaled to support and accelerate targeted growth across the portfolio.
We remain confident that our collective efforts in Transform to Outperform will ramp sharply to $400 million in the second half of the year, creating a Dow that is more resilient across the cycle while consistently delivering growth, customer success, and improved shareholder value.
Thank you, Karen. As we look ahead, I'd like to provide some context around our earnings expectations for the second quarter and for the remainder of the year.
This sequential improvement is driven by pricing gains, expanding margins, increased asset utilization, typical seasonal demand improvement, and our continued focus on reducing costs, all of which are expected to more than offset rising feedstock and energy costs, plant maintenance activity, and expected sequential decreases in licensing revenue.
However, rising propylene costs are likely to delay seasonal demand uplifts that we would normally see across building and construction end markets. On equity earnings, several factors will impact Dow's sequential earnings expectations.
In summary, predicting global macroeconomic and end market dynamics in this period will continue to be difficult, but we expect more potential upside to these projections than downside. All of this represents our best assessment during a period of rapid change.
On capital deployment, we remain focused on high-quality organic investments, with capital expenditures expected to be at or below depreciation and amortization across the cycle. This includes prioritizing advantaged assets, regions, high return projects, and investments that strengthen our cost position and earnings durability.
This includes the remaining $600 million from our 2025 program, as well as $500 million in growth and productivity improvements from Transform to Outperform. As we mobilize the teams and complete several assessments in the immediate term, we expect to demonstrate a significant portion of the end-year value in the second half of this year.
Our revolving credit facility was recently renewed through 2030, and our committed accounts receivable securitization includes the recent renewal of our European facility through 2029. We also ended the first quarter with over $4 billion of cash on hand.
Thank you, Jeff. As I look at slide 13, it really captures how we position Dow, not just for this quarter or this year, but for long-term value creation through the cycle.
This annual process provides important insights into our performance and that of the broader industry, and it is what ultimately led to Dow's actions to effectively reset the competitive benchmark through Transform to Outperform, which is underway.
We are acting thoughtfully but decisively to improve the quality of our portfolio and improve our long-term earnings, and we are not backing off. Transform to Outperform is already driving new value that is additive to near-term market upside.
We remain confident that Dow can capture outsized growth in these markets for years to come, which will create additional value for shareholders. Lastly, foundational to everything we do is the financial discipline and flexibility that we have built.
They've adapted quickly to changing market signals while staying focused on cash generation and improving margins. Thank you for your continued interest and support of Dow. Now, I'll turn the call back to Andrew to get us started with the Q&A.
Thank you, Jim. Now let's move on to your questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have dialed in and you'd like to ask a question, please press star followed by the number one on your telephone keypad.
Morning, Jim and Karen. First of all, congratulations to both of you on your new roles. A question around just the timelines associated with the normalization of supply chains, in a let's hypothesize sort of post-peace declaration sort of an environment, and also the sustainability of some of these pricing initiatives, particularly for polyethylene that you guys have announced.
Would love to sort of hear your views about the sustainability of pricing timelines associated with this normalization. Particularly, as I sit there and see consensus estimates for you guys, some of your competitors and the like, they seem to be just factoring in a V-shaped sort of normalization of these supply chains. Would love to hear your thoughts around that.
Morning, Hassan. I'll take a shot, and then I'll ask Karen to talk about the pricing. When I was at CERAWeek, really at the very beginning of the conflict, early March, I mentioned that we did some modeling at that time that it would be 275 days or longer for the supply chain disruption to unwind.
The Straits moved over 130, probably close to 150 cargoes a day, and very different cargoes, very large crude carriers, LNG cargoes, marine-packed cargo for moving plastics, bulk chemical shipments, refined fuel shipments.
I don't think it's very likely that petrochemical and plastic shipments will be prioritized first. I think it's more likely that crude oil, fuel, fertilizers would be prioritized first because those affect national security, those affect food security for a lot of countries.
We were going into this in March, at the end of February, low inventories, pricing momentum, good order books. We had 3% volume growth sequentially in first quarter, and now we're seeing a tick up. I think everything is poised for strong demand and really tight supply, and I think that bodes well for pricing outlook.
Yeah, exactly, Jim. On the pricing side, Hassan, thanks for the question. I think we should go back to January and remember that you were at $0.05 in January, and then in March, in relation to the Middle East crisis, there was another $0.10 settlement.
If you look at the announcements for the month of April, we have $0.30 per pound on the table, and then we have another price increase out there for the month of May of $0.20.
Your next question comes from the line of Michael Sison from Wells Fargo. Your line is live.
Hey, good morning. Congrats as well to Karen and Jim. When you think about the $1.75 billion for P&SP in 2Q, can you sort of frame, do you think that's kind of a mid-cycle EBITDA? Is it a peak EBITDA? When you think about the sustainability of these integrated margins into 2027 as supply chains come back, where do you think we could sort of end up post all this? Thank you.
Karen, do you want to take it?
Sure. I'll go back to the $0.26 per pound integrated margin improvement that we expect to get here in the second quarter. That's mid-cycle, perhaps a bit above mid-cycle.
Again, as I indicated in my last answer, we expect that this environment is going to continue in alignment with the duration of the recovery that we believe is going to take six months anywhere to 18 months to resolve.
Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is live.
Thank you. Good morning, and I echo the sentiment on the leadership transition. Could I ask Jim if you think if we get to the other side of the conflict, do you think there could be any changes in the cost curve on a sustainable basis? In particular, do you think Europe's position can improve at all on the other side?
Yeah. Good morning, Vince. I think on Europe, a couple of things that are having an impact on Europe right now, the tightness in the marketplace from the shutdown of the Straits is not just the inability to move the product, but it's the magnitude of the impact.
Europe has a little bit closer access to some naphtha, and they have some refining capacity. I'd say the biggest help on margins right now has been the tightness in byproducts. You're starting to see positive byproduct credits in the crackers.
I think it's logical to expect that countries are going to step in and make some changes like we saw after Russia, Ukraine, when the Germans worked hard to diversify and get five LNG facilities going to diversify their natural gas supplies.
Yeah. Demand for our assets definitely has moved up. The propane-naphtha spread has widened, and we have more flexibility from a cracking perspective than any of our peers in the region.
I think Europe will be under pressure when the Middle East supply comes back because with that being shut in now, obviously it has to be supplied from domestic Europe. When that comes back, I think obviously the cost position in Europe will move back.
Your next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is live.
Thanks very much. A two-part question. The export price of polyethylene from Houston today is about $1,775 a ton FOB, but the delivered price to Asia for polyethylene is less than $1,300 a ton.
Yeah. Wendy, you want to touch on what's going on with Asian prices of polyethylene?
Yeah. Jeff, thanks for the question. What I can say is that our prices around the world are going up. The export price is the indication of real demand, not local price. As Jim just indicated, in China in particular, they are starting to restrict the feedstock that is going to pet chem production. We continue to expect prices there to go up as well.
Jeff?
Yeah, Jeff, on the cash side of things in terms of operating EBITDA relationship, couple of things I would mention there. We entered and exited first quarter with a very strong cash position at slightly over $4 billion.
With that, we would expect our cash conversion rate to steadily improve as we go from one quarter to the next year. We're in a really good position to see that EBITDA, the cash flow and free cash flow increase from a cash conversion perspective.
We have approximately $100 million related to our revolving credit facility, and then approximately another $100 million related to our letter of credit. Specific to your question around the cash commitments for 2026 and also through 2038, that would be approximately $100 million per year.
Your next question comes from the line of Kevin McCarthy from Vertical Research Partners. Your line is live.
Thank you, and good morning. Jim, one of the most common questions that we field from investors is along the lines of assessing the durable supply-side impacts from the conflict.
Yeah. Good morning, Kevin. Look, I don't have all of the insight to what has happened there, but I can go based on the incidents that I'm aware of and the things that have been shared that are public.
What it got hit there was a very critical piece of equipment that takes 2.5-3 years to rebuild, and then, of course, it's got to get installed. That's the most significant attack that I've heard of, and there's not a lot I think they're going to be able to do to fix that.
Your next question comes from the line of Patrick Cunningham from Citi. Your line is live.
Hi. Good morning. Thanks for taking my question. Could you perhaps walk through any impacts of the conflict on maybe the 10%-15% of non-polyolefin derivatives that are exposed to some of these tightening market dynamics? Where you might see the biggest potential for additional export opportunities or advantage footprint taking advantage of some of the higher margins?
Well, ethylene, polyethylene, ethylene glycol has probably been the biggest impact of all of it. You see that already showing up in the market response and what's happening. Those should be able to repair quickly.
I think in polypropylene, you had a little bit different situation in downstream demand dynamics, auto being slow, appliances being slow, kind of takes a little demand pressure off of polypropylene. We haven't seen
MDI
the same kind of dynamics there.
Mm-hmm
Similar. Other things you want to bring in, Karen?
No, I think you're absolutely right. I mean, on the EO side, in particular, MDI working to get those prices up above the cost increases. MEG, as you referenced, those prices are moving up as well.
Your next question comes from the line of Frank Mitsch from Fermium Research. Your line is live.
Thank you, and also let me offer my congratulations to Jim and Karen. Coming back to Sadara, I was just curious if you could speak to the future of what your expectations are for Sadara over the next couple of years.
Yeah, Frank, I'll take the first part. One of the things I will continue to do, as Karen takes over the CEO role is finish up these negotiations with Saudi Aramco on the restructuring of Sadara and trying to address some of the challenges that we face there.
It's more of a leverage issue and a balance sheet issue that we've got to get right, and that's what we're working through with Aramco. As I promised, I'll have more of an update for you mid-year when we come back for earnings then. Jeff, you want to comment on that last part?
Yeah, Frank, in terms of looking at first quarter specifically, you're spot on. The equity loss impact there was $115 million. If you're looking on a full year basis, we would estimate that to be in the approximately $400 million range, from a Sadara impact perspective for Dow.
I hope we get the Royals and Mets back into the World Series, Frank. We have unfinished business.
The next question comes from the line of David Begleiter from Deutsche Bank. Your line is live.
Thank you. Good morning, and again to Jim, Karen, congrats on the new roles. Karen, just back to Q1 guidance. What does that $0.26 of global margin expansion imply for the $0.30 you have announced for April and the $0.20 for May? Does that include a portion of those or all those? That would be helpful. Thank you.
It includes our April price increase that's on the table, but it does not include May. May would present upside to the guide that we have in second quarter.
This concludes our question and answer session. I'll now turn the conference back over to Andrew Riker for closing remarks.
Thank you everyone for joining our call, and we appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within 48 hours. This concludes our call.
This concludes today's conference call. You may now disconnect.