Good day, and welcome to Dow's Q1 2022 Earnings Call. Today's call is being recorded. I would now like to turn the call over to Mr. Pankaj Gupta. Please go ahead, sir.

Good morning. Thank you for joining Dow's first quarter earnings call. This call is available via webcast, and we have prepared slides to supplement our comments today. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. I am Pankaj Gupta, Vice President of Dow Investor Relations, and joining me today on the call are Jim Fitterling, Dow's Chairman and Chief Executive Officer; and Howard Ungerleider, 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. Dow's 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 will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures is contained in the Dow earnings release and in the slides that supplement our comments today as well as on the Dow website. On Slide 2, you will see our agenda for the call. Jim will begin by reviewing our first quarter and operating segment performance. Howard will share our outlook and modeling guidance as well as how Dow's competitive advantages are driving resilient earnings and cash flow while positioning the company for value growth. Jim will then provide an update on how our in-flight actions raise our underlying mid-cycle EBITDA above pre-pandemic levels while also advancing on our path to zero carbon emissions. Following that, we will take your questions. Now let me turn the call over to Jim.

Thank you, Pankaj. Beginning on Slide 3, we entered our 125th year with global scale, a differentiated portfolio, unmatched feedstock and derivative flexibility and a track record of operational excellence, all of which enables us to continue to deliver more resilient earnings and cash flow in a variety of economic and geopolitical environments and positions us to deliver mid-cycle earnings above pre-pandemic levels. This is reflected in our first quarter results. Team Dow delivered top and bottom line growth, both year-over-year and sequentially. We capitalized on end market demand strength across the breadth of our diverse portfolio and mitigated the impacts of rising raw material and energy costs. Year-over-year sales growth was 28% with gains in every operating segment, business and region. Sequentially, sales increased 6%, driven by gains in Performance Materials & Coatings and Packaging & Specialty Plastics. Local price was up 28% year-over-year, reflecting gains in all operating segments, businesses and regions. Price was up 2% sequentially, led by silicones and polyurethanes. Volume increased 3% year-over-year with gains in all operating segments and in the United States and Canada. Sequentially, volume was up 5%, reflecting strong demand for silicones and packaging applications. And we continued our digitalization drive, marking an important milestone for digital sales in the first quarter as we reached a $1 billion monthly run rate. Operating EBIT increased $865 million compared to the year-ago period with gains in all operating segments. Despite rising raw material and energy costs, we effectively leveraged our industry-leading feedstock and derivative flexibility in a very dynamic environment. And higher operating rates compared to the impact of Winter Storm Uri in the year-ago period enabled us to capture better end market demand. We continue to generate significant cash flow of $1.6 billion in the first quarter, up $1.8 billion year-over-year due to increased earnings and no voluntary pension contributions in the current period. Shareholder remuneration totaled $1.1 billion in the quarter, including $513 million through our industry-leading dividend as well as $600 million in share repurchases. Additionally, we recently announced a new $3 billion share repurchase program. This was a direct result of our performance and our balanced and disciplined approach to capital allocation with attractive shareholder remuneration. Before I address our operating segment performance, on behalf of the Dow team, our thoughts are with the people of Ukraine and their family and friends around the world. Dow continues to prioritize the safety and security of our colleagues in Ukraine and Russia by providing evacuation support, financial assistance and shelter as well as humanitarian aid to refugees in the region. From a business perspective, our presence in Ukraine and Russia represents approximately 1% of annual sales and a much smaller percentage on the bottom line. We fully support and are complying with sanctions implemented against Russia, and have significantly reduced our operations and stopped all investments in the country and are only supplying limited essential goods. To help diversify Europe's energy supply, we also recently announced that Dow is taking a minority stake in the Hanseatic Energy Hub, which is developing a new zero carbon emissions LNG import terminal. The terminal will be co-located on Dow's site in Stade, Germany and will satisfy up to 15% of Germany's current natural gas demand, helping enable a stable, cost-effective and sustainable supply of energy to Europe in support of the region's economy, Dow's business interests and our communities and our employees. Moving now to our operating segment performance on Slide 4.

Thanks, Jim. Turning to Slide 5. In the second quarter, we expect ongoing underlying demand strength across both consumer and industrial end markets. Despite elevated inflation, consumer spending continues to grow and balance sheets remain healthy with household debt service levels at some of the lowest levels in the last 30 years. Industrial activity also remains robust with global manufacturing PMI continuing to point toward expansion. We continue to monitor dynamics impacting the operating environment, including geopolitical activity, inflation, COVID and the pace in which global supply chain constraints are easing. Our talented team and advantaged operating model continued to position us well to navigate these impacts by leveraging our global footprint, scale and differentiated portfolio, combined with our cost-advantaged and secure feedstock and derivative flexibility. In Packaging & Specialty Plastics, our order book remains strong, and we expect continued demand strength for packaging applications. Elevated feedstock costs, particularly for naphtha as well as tighter supply as we enter another turnaround season for the industry in the U.S. Gulf Coast and Europe should continue to support prices globally. That will begin a turnaround at our cracker and aromatics facilities in Louisiana, which are anticipated to be a $125 million headwind in the quarter. We will continue to leverage our advantaged shale positions in the Americas and our leading feedstock flexibility in Europe to help mitigate these costs. In Industrial Intermediates & Infrastructure, we expect strong demand in industrial and energy end markets, coupled with the seasonal increase in construction and infrastructure activity in the quarter. Higher raw material and energy costs and tight supply and demand balances are expected to provide additional price momentum across our key value chains. We're also beginning turnarounds at our Stade and Terneuzen facilities, which are anticipated to be a $100 million headwind sequentially. In Performance Materials & Coatings, we're seeing robust consumer demand strength across our major end markets, including home and personal care, infrastructure and electronic applications. We continue to monitor the recent pandemic-related lockdowns in China and will remain agile to proactively manage the near-term impacts, particularly on local supply chains. In the coatings sector, value chain inventories remain tight, and we anticipate strong seasonal uplift in architectural demand as the Northern Hemisphere enters paint season. All in, we expect the second quarter to be in line with the prior quarter, excluding the total $225 million impact from turnarounds. We have also provided updated full year modeling input in the appendix of this presentation. Most notably and supported by our recent buyback announcement, we have lowered our year-end share count assumption to approximately 715 million shares as we remain committed to delivering attractive shareholder remuneration.

Thank you, Howard. Now turning to Slide 6. Our first quarter results once again demonstrate our competitive advantages, which have enabled Team Dow to navigate the dynamic macro environment, capture end market growth and continue to elevate our earnings potential. Our broad global reach with local presence, which includes the diversified manufacturing footprint, is structurally advantaged and enables low-cost positions in each region. About 65% of our production capacity is based in the Americas where we have a cost advantage from abundant shale-based feedstocks. We also have industry-leading propane flexibility in Europe, ethane and natural gasoline advantages from our joint venture partners in the Middle East and global sourcing capability to support Asia with ethane advantage supply. Additionally, we are continuously leveraging our industry-leading feedstock and derivative flexibility to optimize margins. Region by region and furnace by furnace, we are able to mitigate higher raw material and energy costs. This is particularly relevant in today's environment where Dow has more than 2 to 3 times more propane flexibility than our European peers, and our derivative flexibility allows us to optimize our product mix to capture differentiated prices and margins compared to our peers. At the same time, our consumer-led portfolio and track record of innovation enables us to grow in attractive market verticals of packaging, infrastructure, consumer and mobility, expanding our share and growing with our customers, particularly for sustainability-led applications. Growth across our end markets is expected to remain strong over the next several years with distinct demand drivers of sustainability, efficiency and connectivity, all of which are enabling growth rates above GDP. We're capturing these opportunities with innovative new products across our portfolio that not only feature advantage polyolefins but also silicones, acrylics, cellulosics, polyurethane systems, alkoxylates and elastomers. For example, our DOWSIL carbon-neutral sealants increase design flexibility of smart buildings to reduce the environmental impact of new construction as infrastructure investments continue to ramp. The RENUVA Mattress Recycling Program converts used mattresses into raw materials for new building and home care applications. Our ENGAGE photovoltaic polyolefin elastomers offer improved performance and extended life for solar applications. And Dow's patented ACCUTRACE Fuel Marker technology was recently selected by the European Commission to help facilitate fraud prevention, especially critical for monitoring fuel flows from sanctioned supply sources. Altogether, these advantages enable resiliency, growth and support higher mid-cycle earnings compared to pre-pandemic levels. These advantages have been key to our 125-year history and will remain relevant for decades to come. With that, I'll turn it back to Howard.

Thanks, Jim. Moving to Slide 7, we have a clear road map to advance our decarbonization and growth strategy, which we expect will deliver greater than $3 billion in additional run rate EBITDA, while reducing carbon emissions by 30% by 2030. This begins with our continued investment in renewable energy, asset efficiency improvements and innovative carbon-efficient technologies like electric cracking and carbon capture. Licensing our technologies will further expand our value pools, decarbonizing our assets and the industry. For example, our FCDh unit will reduce CO2 emissions by as much as 20% compared to other leading PDH technologies. And as we advance our electric cracking project in collaboration with Shell, we will incorporate even more renewable energy into our network. In Alberta, we're progressing engineering and development activities for the world's first net zero carbon emissions ethylene and derivatives cracker complex. This year, we plan to complete our partner agreements, which will put us on track for regulatory approval and a final investment decision in 2023. We're also advancing plans to reduce CO2 emissions at sites in both Europe and in the Americas. A key part of our decision to advance profitable projects will be ensuring competitive subsidies and commercial contracts before final investment decision. These projects will provide the low to zero emission products that our customers increasingly demand to reduce their own carbon footprint. This is another demonstration of Dow's leadership in the transition to a sustainable world while driving earnings growth.

Turning to Slide 8. To that end, our near-term actions to decarbonize, grow the company and continue to improve our return on capital are well underway. In 2022, our in-flight growth programs remain on track to deliver a run rate of more than $300 million in underlying EBITDA with a focus on targeting downstream and sustainability-led applications across all operating segments that will generate strong returns. In Packaging & Specialty Plastics, our FCDh unit in Louisiana is on track to start up in the fourth quarter of this year and will contribute more than $75 million in run rate EBITDA with a return on invested capital greater than 15%, giving us the key proof point to accelerate the licensing of our technology. In Industrial Intermediates & Infrastructure, our alkoxylates capacity and other efficiency investments are also on track to start up this year and in total, are expected to generate more than $50 million in run rate EBITDA with returns greater than 20%. In order to support the accelerating demand growth across pharma, cleaning and energy sectors, today, we're proud to announce another series of alkoxylate investments in the United States and Europe. These expansions maintain our current carbon emissions levels and are backed by supply agreements with leading consumer brands across fast-growing end markets. All combined, these investments represent a 70% increase in our industry-leading downstream alkoxylates capacity over the next several years, targeting high-value applications where we're delivering 10% to 15% annual growth rates. Lastly, in Performance Materials & Coatings, we're also executing a series of incremental downstream debottlenecking projects with more than 20 projects expected to be completed this year, collectively contributing approximately $100 million in run rate EBITDA with a return on invested capital of more than 20%. All in all, by 2025, we're projecting a cumulative underlying EBITDA improvement of approximately $2 billion, driven by projects like incremental high-margin polyethylene and functional polymers capacity to serve growing demand for flexible packaging, debottlenecking projects to enhance our mix toward polyurethane systems serving mobility and consumer applications, and new capabilities to formulate differentiated silicones, including silicone adhesives for next-gen electronics, mobility and infrastructure applications. At the same time, we continue to decarbonize and deliver on our sustainability commitments by increasing our use of renewable energy, optimizing our assets to be more carbon efficient and driving continuous emissions reductions throughout our global asset base. Just one example, we will reduce our CO2 emissions by more than 350,000 tons, which is more than 15% of our 2025 emissions reduction target, when we replace end-of-life steam and gas turbines at our Plaquemine, Louisiana site, with less capital-intensive, higher efficiency and lower operating cost systems. Overall, we expect these near-term actions to deliver $2 billion in additional underlying earnings while reducing carbon emissions by approximately 2 million metric tons by the year 2025. And importantly, we'll do this while maintaining CapEx within D&A and continuing to target a return on capital of greater than 13% across the economic cycle as we invest in higher-return, lower-risk projects across the enterprise. Turning to Slide 9. Dow has unique and resilient competitive advantages, a clear strategy to decarbonize and grow earnings, cash flow and return on capital combined with top quartile operational and financial performance. Our annual benchmarking update is published in the appendix of this presentation and demonstrates once again that we continue to deliver better results relative to our peers across many key financial performance metrics, including top quartile EBITDA margins, return on capital, free cash flow yield, shareholder remuneration and debt reduction. Our commitment to industry-leading cash generation and shareholder remuneration have resulted in an attractive free cash flow and dividend yield above both our benchmarking peers as well as the broader S&P 500. Furthermore, strong execution against our higher return growth projects over the past several years has resulted in 3-year EBITDA growth and return on invested capital that is well above the peer median. And as we've outlined, our in-flight growth investments will deliver additional incremental earnings and cash flow upside with high-quality return on invested capital across the economic cycle. To close on Slide 10, Dow continues to be well positioned to deliver higher mid-cycle earnings and cash flow above pre-pandemic levels in both the near term and over the economic cycle. With our flexible and advantaged operating model, we're also able to effectively manage in a wide range of macro environments. We continue to deploy our industry-leading cash flow in a disciplined and balanced way to maximize long-term value creation. Case in point, our new share repurchase program reflects the strength of our performance and confidence in our ability to continue delivering industry-leading cash flow. We're making good progress on our decarbonized growth strategy, delivering incremental earnings by capitalizing on fast-growing demand for more sustainable solutions. Our in-flight actions are elevating our underlying mid-cycle EBITDA above pre-pandemic levels, all as we advance our return on capital. Over the past 125 years, Dow has transformed from a small science start-up to the company that we are today, an industry leader with global scale, a differentiated portfolio and sustainable solutions that enable us to tackle some of the world's greatest challenges. Our ambition, purpose and capabilities continue to make Dow a great place to work for PhDs, engineers, chemists and leading talent from many different disciplines. For the second year in a row, Dow has been recognized as the only material science company on the Great Place to Work and Fortune 100 Best Companies to Work For list. These advantages enable us to capture value growth while continuing to focus on delivering for our customers, advancing our ambition and creating value for all stakeholders.

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.

We will now take our first question from Hassan Ahmed from Alembic Global.

A quick question around the Q2 guidance. As I look at the different moving parts, it seems you're guiding to an EBITDA north of $2.9 billion. So first part of the question is, is that correct? And second part is that it seems that the $0.04 a pound April polyethylene price hike stock, you guys seem to have a May price hike on the table as well. So does the guidance factor in these polyethylene price hikes sticking?

I'll have Howard walk through the guidance. On polyethylene, our expectation is we'll see about $0.04 to $0.05 coming through here in the near term. For the Americas, we've got $0.07 out there in April and $0.07 out there in May. A little bit less in Europe and Asia Pacific. So we are expecting to see prices continue to move up in Packaging & Specialty Plastics through the quarter. With that, Howard, maybe walk through the guidance for second quarter?

Yes. Sure, Jim. Thanks for the question. But you've got it right. Basically, what we're guiding to is to take the first quarter EBITDA actuals, subtract the $225 million of turnaround headwinds in P&SP and Industrial Intermediates & Infrastructure and that's our best estimate today of what we see with all the puts and takes of where second quarter EBITDA is likely to land.

We will now take our next question from P.J. Juvekar from Citi.

And congratulations on your 125 years of history. Jim, I have a broad question on sort of the future of the European chemical industry, given what seems like a long-term step up in energy prices there. And then specifically on Dow in Europe, how are your crackers performing there? I know you use more LPGs there. And what about II&I and PM&C? How are the margins holding up in Europe in those segments?

Thanks, P.J. Great question. I think, obviously, there were questions about Europe's competitiveness at different times in history and what's happened with Russia entering Ukraine and what that's caused has created more concerns on Europe's ability to, one, decouple from Russia and to compete longer term. That's one of the reasons we made the announcement about the project in Stade, to basically host that LNG import terminal to help that happen. I would say the crackers right now are operating well. We're able to still have margin in Europe under these circumstances. Obviously, we have to pass a lot of that along. But the thing we have to work on is longer term, getting them to a more competitive feedstock and energy cost position. Europe has been higher energy cost than the United States for quite some time, and we've been able to be profitable there. We did announce some expansions there in alkoxylates for some of our brand owners. We've made expansions there in Spain previously. This will be in Terneuzen. And as you know, we're going to convert Terneuzen to be a net zero ethylene facility over time. So I do think there will be a chemical industry in Europe, but I think we have to continue to look at how it evolves and how we're going to continue to make Europe more energy competitive to support that industry longer term.

We will now take our next question from David Begleiter from Deutsche Bank.

Jim, Howard, can you talk about PMC, a little bit about the doubling of earnings sequentially? And how sustainable is this pricing realizing right now in the silicones business?

PM&C had a great quarter. Last year, PM&C faced some challenges due to various outages and the effects of Winter Storm Uri, which significantly impacted year-over-year performance. Volume has been very strong. The coatings and silicones sectors had a remarkable first quarter in demand, particularly in construction and personal care, which has shown a robust recovery. Coatings experienced one of its best first quarters ever, leading up to its typically strongest second quarter. Not only did volume increase, but pricing also rose. We successfully managed the situation with COVID in China. Despite facing some challenges in the Zhangjiagang area, we maintained plant operations, and that facility is now returning to full capacity. Overall, we navigated that situation effectively. Silicon metal pricing saw a slight spike this quarter, but as conditions normalize, I expect it to decline somewhat, although it contributed to the pricing we experienced in the first quarter. In summary, we had a very strong performance, and I believe this year will continue to be strong for PM&C, with demand rising in electronics, industrial, mobility, and personal care. The only segment that has shown a slight decline in 2022 compared to 2021 is home cleaning, as we transition out of the pandemic.

We will now take our next question from Jeff Zekauskas from JPMorgan.

It's a two-part question. Your consolidated volumes were up 1%, which is a slower rate than global GDP growth. In general, what do you make of that? And secondly, Jim, you've been running Dow Chemical now for 3 years. Has your concept of how you create shareholder value changed over that period? And if you had to summarize it, what would it be?

Jeff, good questions. I would say volume, year-over-year, up 1% consolidated basis is one way to look at it. I would say also sequentially, remember, we were up about 5%. We had a very strong operating rate in hydrocarbons and energy in the first quarter. And so we took advantage of the spreads between oil and natural gas, and that was a big underlying support for all the businesses. Some of the businesses that are the big volume generators had a pretty strong first quarter last year, and more of their impact from the freeze happened in the second quarter. We were able to manage first quarter last year by selling out of inventory, but second quarter really saw the stronger volume impact from Winter Storm Uri. In terms of shareholder return, the first 3 years post spin, we were faced with quite a few issues. Right after spin, we were moving into really a declining market, which led into COVID and all the issues we had to deal with. And so our focus during that time frame was to make sure that we navigated that, protected that dividend and made sure that we came out with the best balance sheet in the industry when we came out of the pandemic. I believe we did all those things. A great company is not always a great stock. The actions we took on share buyback were meant to reflect that we think we are undervalued and there's better total shareholder return ahead. And I think we're starting to see that show through in the marketplace.

We will now take our next question from Chris Parkinson from Mizuho Bank.

Just very quickly on the free cash flow side, buyback activity is obviously robust to say the least, including the recent addition. Can you just give us a real quick update on your thoughts for uses for cash, '22 perhaps through 2024, just anything on CapEx, some of the growth investments you've been looking at, just anything else investors should really be considering?

Sure. Howard, you want to take a walk through cash priorities?

Yes. In terms of our capital allocation approach, our top priority is to safely and reliably operate our plants. This year, we have approximately $1.3 billion allocated for turnaround expenses, while our capital expenditures are expected to be between $2.2 billion and $2.3 billion, an increase from $1.5 billion to $1.6 billion last year. We are committed to maintaining 65% shareholder remuneration relative to our operating net income across the economic cycle. As you noted, Chris, our share buyback program is gaining momentum, with $400 million completed in the fourth quarter and $600 million in the first quarter, along with a new stock buyback announcement of $3 billion. There is about $700 million remaining in the current program, which is expected to be completed by mid-year, leaving us with considerable financial capacity from the full $3 billion program going forward. We are also focused on managing our net debt, aiming to maintain a rating agency adjusted net debt to EBITDA ratio of 2 to 2.5. We anticipate a net debt reduction of between $500 million and $1 billion by the end of the year, depending on cash flow performance. On the cash flow front, as Jim mentioned in his comments, our cash flow yield significantly outpaces our peers at 50%, which is 20% higher than our closest competitor. This advantage arises from everyone at Team Dow having access to not just a profit and loss statement but also a balance sheet and cash flow statement. We are actively enhancing our working capital, which has improved by 3 to 4 days compared to the same quarter last year or the previous quarter. Additionally, we are working on over $1 billion of unique cash tailwinds specific to Dow that are still pending and are expected to materialize over the next three quarters.

We will now take our next question from Vincent Andrews, Morgan Stanley.

Can you clarify your comments on polyethylene prices? I believe you mentioned expecting a $0.04 to $0.05 increase for the second quarter. I'm unsure if that was a global statement or how it compares to the $0.14 you have projected for the next two months in the U.S. My actual question is for Howard regarding the pension. Given that rates have already risen significantly this year and considering expectations for the Federal Reserve's actions for the remainder of the year, how does that impact your pension? What opportunities might this create for you to significantly reduce that liability?

Yes. So if you look, Vince, good question. If you look at our polyethylene numbers quarter-over-quarter, the IHS markers that are out there right now call for the Americas to be up $0.05; Europe and Asia Pacific to be up $0.04; and the global weighted average to be up about $0.05. Our current nominations that are out there in the marketplace today are $0.07 in April and $0.07 in May for North America; there's $0.07 on the table from Latin America, which is a carryover from late March; we've got EUR 400 in Europe; and we've got $0.05 in Asia Pacific. So those are the current nominations. So I would say, I think we're going to land somewhere between our nominations and where that IHS data is coming in. Days demand and inventory on PE inventory has decreased about 9%. U.S. and Canada, demand was strong in the first quarter. So that was part of the decrease. But the other part was a product that was sitting, waiting to be exported from the United States. The export channel is moving better. It's not back to where it needs to be, but we're seeing weekly and monthly improvements in the export channel and that's helping us out. And we're starting to see that roll through in the inventory data.

The second question was about our pension. When we look at our underfunded pension, we've seen a significant decrease. Since the end of 2020, that number has fallen by $6 billion. At the end of last year, it stood at $6 billion, which includes both pension and OPEB. Due to recent rate movements, that figure has now dropped by $2 billion, bringing our total underfunding for pension and OPEB to $4 billion. It would take roughly another 75 basis points of rate increases and one more year of EROA for us to fully close that gap. We have a systematic plan in place; as rates continue to change and as each pension plan reaches full funding status, we are working to immunize each plan individually without needing to add additional cash for immunization. The approach will be influenced by the regulations in each country and the EROA of each pension plan. I would estimate that over the next three years, depending on how rates and EROA evolve, we should be able to fully fund and immunize that plan, and that is the path we are currently pursuing.

We will now take our next question from Stephen Richardson from Evercore ISI.

Jim, I was wondering if you could talk a little bit about your outlook for U.S. natural gas. I appreciate all the discussion on feedstock and all the flexibility that Dow enjoys. We have seen a big move in the back of the forward curve, talk about accelerating LNG exports, some more global linkages at least seasonally. So curious, does that make you want to expand some of your joint ventures and some of your access further upstream? Or how is your outlook kind of changing as a big downstream consumer of domestic natural gas?

Natural gas prices have remained persistently high. They were elevated even before the Russian-Ukraine situation, which pushed them even higher. Currently, the main challenge for natural gas pricing is freeze-offs in the U.S. and production levels that have not returned to the 98 billion cubic feet per day needed to restore inventories to the five-year average. We're currently producing around 95 billion cubic feet daily, leaving us roughly 3 billion cubic feet short. This shortfall is partly due to winter freeze-offs and a lack of significant recovery. However, we are beginning to see a shift towards increasing natural gas production, and it is likely that production will ramp up faster than LNG export capabilities, which are already at their limits. If we can restore inventories to the five-year average by fall, I expect natural gas prices to stabilize within a more normal range. In the medium term, I anticipate prices will return to $4 to $6 per million British thermal units, and in the long term, settle around $3 per million British thermal units. We will also need to monitor how many new export facilities are built and the additional import capabilities in Europe to lessen reliance on Russia. I believe natural gas will attract more investment and has a more favorable outlook in the near term compared to oil. Oil has not seen the necessary investment in new capacities for several years. If oil were to catch up on needed investments, it would take a few years before we see any supply increase. In contrast, I think natural gas supply will respond more quickly, likely within a six to twelve-month timeframe rather than two to three years.

We will now take our next question from Kevin McCarthy from Vertical Research Partners.

Jim, if I look at Slide 8, where you provide some helpful detail on your various capital projects, a few of them relate to silicones. And so I was wondering if you could expand on your near-term and also longer-term outlook there in terms of supply demand and also educate us a bit on where you're adding capacity, how much, and the returns look awfully good at north of 20%. So curious to understand what kind of pricing you're embedding in that as well.

Sure. We've got quite a bit of downstream silicone capacity coming on. A fair amount of it is in China. It's in a wide range of markets. It's in construction markets, in electronics and mobility, it's in personal care markets. Silicones is used in such a wide variety of applications. And those markets are all growing substantially. Electric vehicles use 2 to 3 times more silicones than traditional internal combustion engine vehicles, and EVs' growth rates right now are relative. Year-over-year growth rates are super strong. So I think both return of internal combustion vehicle sales as the semiconductor chip issue is alleviated and the EV growth is going to really drive a lot of demand there. Autonomous vehicles, 5G capabilities, all require more silicones. We have to eliminate the crosstalk in all those areas. And you've got to put up a lot more infrastructure in cities for 5G to support absolute continuous coverage in those areas. And that's really, really strong. There are about 20 debottlenecking projects that are in those total projects. They're anything from new vulcanized products to lower viscosity fluids for personal care applications, all kinds of gels for electric vehicles, electronics, mobile optics for automotive lighting. So think about the headlamps in a vehicle, not being polycarbonate anymore but being moldable optical silicone. Those are some of the biggest growth areas in that sector.

We will now take our next question from Mike Sison from Wells Fargo.

Nice start to the year. Just curious, if you do happen to get sort of this $0.09 increase in the second quarter, yes, I think polyethylene prices will be back to October's peak. Where would integrated margins be if that was achieved? I understand energy costs clearly are higher now versus they were in October. So would you be close to the past peak margins? Or would you need to get more price increases to get there? And could you bifurcate that between North America and Europe?

If we were to achieve $0.09, we would likely be near the peak in North America, perhaps slightly below the peak in Europe, and much lower than the peak in Asia Pacific. The Asia Pacific region has faced significant challenges due to much higher costs, and cash margins there have been very sluggish. Additionally, there have been noticeable declines in rates in Asia. However, for North America, we would be close to that peak, possibly just a few cents shy, and the same holds true for Europe. So, your perspective seems valid. If we were to receive the entire $0.09, it would likely allow us to cover the turnaround costs in P&SP, preventing it from negatively impacting the quarter. While this scenario is not currently included in our forecast, it remains a possibility.

We will now take our next question from Frank Mitsch from Fermium Research.

And let me also offer my congratulations on the 125. Jim, you just talked about some of the difficulties in Asia in terms of margins. And I was wondering if you could expand a little bit more on what you're seeing on the ground right now in terms of demand relative to the shutdowns that are going on with COVID zero in China? And how do you think that plays out?

Demand has been relatively stable. I would say, we don't have as much of a footprint in plastics in China as we do in Performance Materials & Coatings, and we do in silicones, and we do in Industrial Solutions. And so for plastics, a lot of what we would move in would be from the U.S. Gulf Coast or obviously from our partners in the Middle East. Having said that, our demand was still pretty strong year-over-year going into China. We're seeing a lot of accelerated turnaround activity right now in China. So you're seeing crackers not just in China, but in Southeast Asia and North Asia, lowering operating rates, you're seeing them take turnaround time now instead of just slowing rates and continuing to operate. We've seen a lot of pressure on coal-to-olefins and methanol-to-olefins. And so I think that will continue. And obviously, I do believe that China is seeing some advantage of being able to buy feedstocks probably from Russian sources at discounted rates. So that may be helping a little bit, but it certainly isn't making them positive cash margins. And I think we're going to be in that kind of environment for the next couple of quarters.

We will now take our next question from Steve Byrne from Bank of America.

I have a couple of energy-related questions for you. In Europe, do you have gas hedged? And any hedges that roll off to note here? And with respect to what Germany is mulling over, whether they cut off Russian gas and/or need to pay in rubles, how do you manage that risk? Is it a concern for you? And then maybe one other energy-related question for you, Jim. You talked through the ambitious decarbonization targets and one of the projects is to try to develop these e-crackers. My question for you on that is, are you seeing some demand pull for greener sources of polyethylene that might enable you to sell those products at a higher price? I.e., do you think you can get a return on such projects like that?

Yes. Good question, Steve. I would say, in general, on hedging and both in the United States as well as in Europe, we've increased our hedging positions on natural gas, just based on what we've seen over the last couple of quarters. And we've moved those positions over time, whether it be oil or natural gas. And we've had higher positions on both over the last couple of years. Our biggest move is just based on our usage and our usage of natural gas and other feedstocks is so consistent that the physical demand that we create is where we play most with the hedging. So what we can do with physical positions, what we can do with feedstock flexibility around cracking probably is our biggest bang for the buck bottom line. And then the paper strip and the physical are the financial hedge is next after that. When it comes to e-cracking, the biggest challenge on e-cracking right now is finding the right materials of construction to make an electric coil for a cracker furnace that can withstand the heat that you need to be able to crack hydrocarbons and have any kind of life. And so I would say before we start thinking about what the return on that will be, we've got to just see if we can get the materials of construction right and be able to have a furnace coil that will have any kind of life to it at all and that can operate at a high operating rate and have good reliability over a long period of time. And that's the biggest proof point on this pilot project. And then we can work ourselves into do we have the renewable energy at the right cost to be able to make that happen. We're doing that work in the Netherlands. I think it's important to note that the Netherlands has 6 new nuclear plants on their long-term plan. And I think that's a great sign in terms of what they see in terms of the need to basically decouple. They're going to have to rely a lot more on nuclear power to have high reliability, low-cost power. And that's going to be especially important for our industry as we move forward. And we need to look at that same thing. We're looking at that here in the U.S. in terms of small modular nuclear reactors.

We will now take our next question from Josh Spector from UBS.

Just want to follow up. From your release, you guys talked about functional polymer pricing was up, while commodity polyethylene pricing was down. So I'd be just curious, is that normal that you would see that kind of divergence? And if you can give us some perspective of what that spread is today on that functional polymer over commodity. Is that higher or lower than where you would say it's been on average? And where do you see that going?

Yes, that's a good question. About 25% of our product mix is in functional polymers when you look at P&SP downstream. Typically, the way you would think about functional polymers is they would typically hold their price through the cycle. They typically have less price dynamic movement compared to the commodity side of the business. But they're up quite a bit this quarter, and I would say that's because demand has been strong on the downstream for them and there hasn't been a lot of new capacity added there. So just a tighter supply/demand balance on some of those functional polymers than we've seen. And I think some of that will continue because some of the markets that they go into are infrastructure-related. They can go into wiring cable markets, they can go into things like geomembranes and roofing for commercial buildings. And so as you see more infrastructure-related projects, I think you're going to see that strong demand last longer here for functional polymers and that will probably keep the prices of those materials up. Also, some higher input costs for some of the monomers to make functional polymers is going to have to pass through as well.

We will now take our next question from Arun Viswanathan from RBC Capital Markets.

So I guess, two questions real quickly. So could you just give us a quick outlook on MDI? And then also maybe if you could discuss the certain situation that you see as far as inventories in polyethylene. We know that there's some tied up in supply chain, but do you see that alleviating over the next couple of months?

Yes, that's a good question, Arun. For MDI, the balances are looking strong through 2026. Demand is expected to continue exceeding supply during that period, which is a positive sign for MDI. Regarding polyethylene, in the U.S. Gulf Coast, we've noticed a decrease in inventories. In March, inventories dropped by about 200 million pounds, and the days of demand fell by roughly 9%, bringing it down to about 46 days. This is fairly consistent, as last year averaged around 45 days. There is still some congestion at the ports affecting the export channel, which will continue to apply upward pressure on DDI by about 3 to 4 days. Half of this is due to third-party congestion, while the other half relates to inventories that were accumulated for the heavy turnaround season expected in the second quarter. However, we are observing gradual improvements in export flows from the Gulf Coast every month. If this trend continues, we hope to return to a more stable and predictable rate by the end of this year.

We will now take our next question from Aleksey Yefremov from KeyBanc.

I had a question on the LNG import terminal in Europe. I think, in general, you've been selling midstream energy assets. Is this one an exception because it's so strategic? Or could you, in the long run, also maybe monetize this one?

That's a good question. I think it's unlikely that we are entering this just for monetization. Our contribution is relatively low, as we provided land and access to our infrastructure services for the site in Stade, which is about 40 minutes upstream from Hamburg on the Elbe River. We have our own port there and the capability to accommodate an LNG ship. By contributing that land, we take an equity position in the Hanseatic Energy Hub, which plans to build a new terminal by 2026 and is currently in the approval process. If successful, this will meet 15% of Germany's natural gas demand and offer Germany a second supply source apart from Russia, which is strategically important for the country. That's the reason for our involvement. We are not far enough along to discuss the offtake agreements, but we will supply utilities, cooling, and other resources to help establish a zero carbon emissions hub. I'm pleased we could participate in this. There has been talk of building an LNG import facility in Germany for some time, and we were uncertain about Stade's viability until it came together quickly after the Russia-Ukraine situation. I'm really happy that the team acted swiftly and established our position in this project.

Thank you. That is all we have time for today. I will now pass the call back to your host, Mr. Pankaj Gupta for closing remarks.

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.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.