Greetings, and welcome to the Dow First Quarter 2023 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. As a reminder, this conference is being recorded. I will now turn it over to Dow Investor Relations Vice President, Pankaj Gupta. Mr. Gupta, you may begin.

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'm Pankaj Gupta, Dow Investor Relations Vice President, 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, in the slides that supplement our comments today, as well as on the Dow website. On Slide 2, you will see the agenda for our call. Jim will begin by reviewing our first quarter results and operating segment performance. Howard will then share our outlook and margin guidance. To close, Jim will outline how our Decarbonize and Grow and Transform the Waste strategies enable continued value creation. Following that, we will take your questions. Now let me turn the call over to Jim.

Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow demonstrated its agility, delivering sequential earnings improvement in what continues to be a challenging environment. These results reflect our competitive advantages and operating discipline as we leveraged our structurally advantaged feedstock positions, proactively aligned our operating rates with market demand, and focused on higher-value products where pockets of demand remain resilient, such as pharmaceutical applications, energy, commercial building and construction, and mobility end markets. Additionally, our actions to deliver $1 billion in cost savings in 2023 are progressing with $100 million achieved in the first quarter. These actions will ensure we continue to focus on cash flow generation through our low-cost to serve operating model. Turning to the details of the quarter. Net sales were $11.9 billion, down 22% year-over-year. Declines in all operating segments were driven by continued soft global macroeconomic activity. Sales were flat sequentially, as gains in performance materials and coatings and packaging and specialty plastics offset declines in industrial intermediates and infrastructure. Volume decreased 11% year-over-year, led by declines in Europe, the Middle East, Africa, and India or EMEA. However, volumes increased 2% sequentially on gains in performance materials and coatings and packaging and specialty plastics. Local price declined 10% year-over-year and 4% quarter-over-quarter due to industry supply additions in some businesses amidst soft global economic conditions. Operating EBIT for the quarter was $708 million, down year-over-year due to lower local prices and volumes. Sequentially, operating EBIT improved by $107 million, with gains primarily driven by performance materials and coatings. Cash flow from operations was $531 million in the quarter. On a trailing 12-month basis, cash flow conversion was 85%. With ample financial flexibility and a strong balance sheet, we are continuing to execute on our strategy as we advance our disciplined and balanced capital allocation priorities for long-term value creation. We returned $621 million to shareholders through dividends and share repurchases during the quarter, and our balance sheet continues to have no substantive long-term debt maturities until 2027. Now turning to operating segment performance on Slide 4. In the Packaging & Specialty Plastics segment, operating EBIT was $642 million compared to $1.2 billion in the year-ago period, primarily due to lower integrated polyethylene margins. Continued margin resilience in functional polymers was more than offset by lower polyethylene and olefins margins. Volume declines were primarily driven by lower consumer demand in EMEA. Sadara also had lower export volumes due to planned maintenance activity. Sequentially, operating EBIT was down by $13 million. Improved input costs and higher operating rates in our most cost-advantaged assets were more than offset by lower sales from non-recurring licensing activity and lower equity earnings. Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT for the segment was $123 million compared to $661 million in the year-ago period. Results were driven by lower pricing and demand, as well as higher energy costs, particularly in EMEA. Sequentially, operating EBIT was down $41 million. Lower energy costs were more than offset by decreased demand and pricing for propylene oxide, its derivatives, and isocyanates, in polyurethanes and construction chemicals. Industrial Solutions experienced lower volumes due to weather-related impacts and a third-party supply outage combined with lower demand in industrial end markets. And in the Performance Materials and Coatings segment, operating EBIT for the segment was $35 million compared to $595 million in the year-ago period. Local price declines for siloxanes were driven by competitive pricing pressure from supply additions in China. Volume was down as resilient demand for commercial building and construction, mobility, and industrial coatings was more than offset by volume declines in siloxanes and architectural coatings. Sequentially, operating EBIT increased $165 million, driven by improved supply availability, seasonally higher volumes, and reduced value chain destocking. Next, I'll turn it over to Howard to review our outlooks and actions on Slide 5.

Thank you, Jim, and good morning, everyone. In the second quarter, we expect to continue navigating challenging macro conditions around the world. While the pace of inflation has slowed, elevated levels continue to pressure both input costs and demand, particularly in industrials, durable goods, and housing. On the bright side, demand in agriculture and energy markets remains resilient, as does consumer demand for personal care and household items. In the U.S., consumer spending continues to moderate while retail sales were up 2.9% year-over-year in March. After contracting for five straight months, normalizing value chain inventories are driving improvements in manufacturing PMI, which reached 50.4 in April. Residential building and construction markets remain under pressure, with housing starts and building permits down around 20% year-over-year in March. However, builder confidence increased for the fourth straight month in April on growing demand in the new home market due to limited resale inventory. In Europe, while energy prices have remained lower than previously anticipated, higher inflation levels continue to weigh on both consumer and business sentiment, with manufacturing PMI continuing to contract since July of last year. In China, March industrial production rose 3.9% year-over-year and is recovering gradually, with manufacturing PMI now at 50. March retail sales also rose 10.6% year-over-year at their fastest pace since July 2021. Though recovery following the pandemic lockdowns has been slow, we continue to expect growth over the medium term. Against this backdrop, we continue to take disciplined actions to manage our costs and deliver our target of $1 billion in cost savings in 2023. We're implementing our global workforce reduction program of approximately 2,000 roles. Notifications have begun, and 75% of the impacted roles will exit by the end of the second quarter. We're also continuing to review our global asset footprint on a business-by-business and region-by-region approach, rationalizing select higher-cost, lower-return assets in line with market fundamentals. Additionally, we're executing opportunities to reduce operating costs. This includes decreasing maintenance turnaround spending by $300 million year-over-year and driving efficiencies through the value chain, including streamlining our logistics networks and reducing our spending on purchased raw materials and contract services. All in, we expect to deliver approximately 35% of our cost savings in the first half of the year and the remaining 65% in the second half of the year. Turning to our outlook for the second quarter on Slide 6. In the Packaging & Specialty Plastic segment, we see signs of improving domestic demand versus the start of the year, as well as continued easing in marine pack cargo allowing for increased export volumes. We expect healthy oil to gas spreads to continue to favor cost-advantaged positions as rates increase to meet seasonally higher demand levels. All in, we expect these factors to have a $75 million tailwind versus the prior quarter, along with another approximately $70 million tailwind from cost savings actions. We anticipate these will be partly offset by a $25 million headwind from a seasonal increase in planned maintenance activity. In the Industrial Intermediates & Infrastructure segment, demand remains resilient in energy and pharmaceutical end markets, however, we expect continued demand pressure in consumer durables, and building and construction, which is also driving a decline in cost pricing from its recent peak. We anticipate a $25 million tailwind from improved volumes in Industrial Solutions following third-party outages and the winter weather-related impacts, as well as a $20 million tailwind from cost savings actions. Additionally, Dow will begin to turn around at our Louisiana Glycols facility, which is projected to be a $50 million headwind for the segment. In the Performance Materials & Coatings segment, while demand for consumer electronics and industrial end markets is softening, we're seeing a seasonal increase in demand for coating applications as well as improvement in mobility. Our cost-saving action will deliver a $50 million tailwind for the segment. The completion of our first-quarter turnaround at our Deer Park acrylic monomers facility will be offset by impacts from the planned maintenance at our Carrollton and Zhangjiagang siloxanes facilities. All in, with puts and takes mentioned and listed on our model and guidance slide, we expect a sequential earnings improvement of $150 million to $200 million versus the prior quarter. With that, I'll turn it back to Jim.

Thank you, Howard. Moving to Slide 7. While we expect near-term conditions to remain challenging through the year, we continue to see positive underlying demand trends driving above GDP growth across our attractive market verticals over the next few years. Packaging is vital to delivering a lower carbon footprint. Through our $3 million metric ton Transform the Waste commitment, we will capture demand growth for recycled polyethylene, which is accelerating as brand owners and customers increasingly seek more circular products. In Infrastructure, more than $3 trillion in investments will be needed to meet global infrastructure plans. Green buildings are driving demand for Dow products, including low carbon footprint silicone sealants for high-rise buildings, reflective roof coatings, and lower carbon emissions cement additives. An expanding middle class will support growth in consumer spending where our products help deliver a lower carbon footprint and enable more sustainable materials through technology, such as biodegradable polymers or bio-based surfactants for home care and thermal conductive silicone gels and adhesives for electronics and batteries. And in mobility, stable global vehicle production growth is expected with increasing demand for electric vehicles, which contain three to four times more silicone content than internal combustion engine vehicles. Lighter weight vehicles are also aided by our high-value polyurethane systems and EPDM technologies. Further, we continue to execute our targeted suite of higher return, lower risk projects, which are expected to add $2 billion in underlying EBITDA by the middle of the decade. These investments put us in an advantaged position to capture demand as economies recover and raise our underlying earnings profile. Turning to Slide 8. With growing consumer and brand owner demand for more sustainable and circular products, leading in the transition to a more sustainable future remains critical to our strategy to drive growth and shareholder value creation. In collaboration with X-energy, in the second quarter we expect to select an analysis site in the U.S. Gulf Coast to develop a small modular nuclear energy facility by 2030. Nuclear technology will be key in generating safe and reliable power and steam at our sites while enabling zero CO2 emissions manufacturing. In Alberta, we recently awarded Fluor with a contract to provide front-end engineering and design services for our Path2Zero project. Today, we achieved another key milestone by selecting Linde as our industrial gas supplier to supply nitrogen and clean hydrogen for the site. Securing partner agreements and subsidies is our next step. All of these actions are critical to reaching a final investment decision this year. As a reminder, this investment for the world's first net zero CO2 emissions ethylene and derivatives complex will decarbonize 20% of our global ethylene capacity. At the same time, it will grow our global polyethylene supply by 15% and triple our Alberta site polyethylene capacity. We're also taking a capital-efficient approach to meet increasing demand for more circular solutions as we scale up production for both advanced and mechanical recycling with strategic partners like Valoregen, Mura Technology, and WM among others. Valoregen's 15 kiloton mechanical recycling facility in France will start up during the second half of this year. This hybrid recycling plant is expected to process up to 70 kilotons of plastic waste per year by 2025. And Mura remains on track to start up the first-of-its-kind, 20 kiloton per year advanced recycling plant in Teesside in the United Kingdom in the second half of this year. This is the first step in our strategic partnership with Mura to launch as much as 600 kilotons per year of advanced recycling capacity by 2030. As the key off-taker of post-consumer and advanced recycled feed from both of these partnerships, Dow will commercialize circular polymers in high demand from global brands. Altogether by 2030, we are on track to deliver an additional $1 billion in underlying EBITDA improvement through our Alberta project, commercialize 3 million metric tons per year of circular and renewable solutions and reduce Scope 1 and 2 CO2 emissions by 5 million metric tons compared to our 2020 levels. Turning to Slide 9. We remain focused on delivering on our commitments with transparency, accountability, and a culture of benchmarking. Today, we published our annual benchmarking update as we have every year since spin, which can be found in the appendix of this presentation and is posted on our website. The results once again demonstrate our strong performance relative to peers. In particular, Dow delivered best-in-class free cash flow yield and net debt reduction since spin. We also achieved above peer median return on invested capital and returns to shareholders. Taking a closer look at the results on Slide 10, our free cash flow yield on a three-year average is nearly two times the peer average and three times the sector and market averages. Our differentiated portfolio, cost-advantaged assets, and operating discipline have resulted in three-year EBITDA margins and return on invested capital well above the peer median. This includes our 15% return on invested capital, which is above our 13% target across the economic cycle. Our focus on cash flow generation has supported strong shareholder returns, and our strengthened balance sheet has resulted in improved credit ratings and outlooks. Additionally, all operating segments achieved best-in-class or top quartile free cash conversion and cost performance. Notably, Packaging & Specialty Plastics further expanded its outperformance over the next best peer on an EBITDA per pound of polyolefin basis by $0.05 per pound. It also delivered five-year average EBITDA margins 500 basis points above the peer median. Looking forward, our growth investments throughout the decade will further enhance our competitive advantages and shareholder value creation. Closing on Slide 11. Dow continues to execute with consistency and discipline to deliver resilient performance in the near term and sustainable growth in cash flow generation over the long-term. We're implementing targeted actions across the enterprise to reduce costs and maximize cash. Our strong balance sheet provides financial flexibility as we continue to deliver against our capital allocation priorities and our Decarbonize and Grow and Transform the Waste strategies will raise our underlying earnings profile while reducing our carbon footprint and increasing recycled content. All combined, we are confident in our ability to continue delivering against our financial targets across the economic cycle. With that, I'll turn it back to Pankaj to open up 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 prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.

Our first question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you, and good morning, everyone. Wondering if you could touch a little bit more on Performance Materials and Coatings. Obviously, the segment showed very strong results on a sequential basis that were fairly better than what the Street was looking for. So, if you can just give us a little bit more insight into why things turned out better than planned and just sort of what you think the trajectory is for the balance of the year?

Good morning, Vince. That's a great question. We faced some challenges in the fourth quarter in silicones due to outages that did not continue into the first quarter, which contributed to some of the impact. However, pricing and demand in silicones remained relatively stable. There has been some downward pressure on siloxanes pricing in China because of new capacity additions, but we are beginning to observe an increase in demand that should help stabilize the situation. Additionally, we experienced higher net sales in coatings and monomers, along with increased volumes. Part of this is related to supply availability in silicones and siloxanes, and the rest is preparation for the upcoming seasonally higher volumes as we move into the second quarter. We anticipate a more traditional seasonal increase in the coatings and monomers segment. There is some pressure on architectural coatings, but industrial coatings appear to be performing well. We will need to closely monitor housing starts and sales to understand their impact on architectural coatings throughout the quarter.

Your next question comes from the line of Hassan Ahmed with Alembic Global. Please go ahead.

Good morning, Jim and Howard. Question around packaging and specialty plastics. Look, I was a bit surprised to see EBITDA being sequentially flat keeping in mind that, obviously, we got $0.06 a pound worth of polyethylene price hikes and ethane was down sequentially. So that's sort of part one of the question. And part two is that, I'd also love to sort of hear your views on what's happening with your operating rates within ethylene and polyethylene, keeping in mind that you guys scaled back in Q4? Thanks so much.

Good morning, Hassan. Those are good questions. Pricing in packaging and specialty plastics improved throughout the first quarter, although we saw a decline in the fourth quarter. Essentially, we finished the quarter lower than we were at the beginning of last year's fourth quarter. We did notice pricing improvements, with an increase of $0.03 in March and a $0.05 nomination for April. However, the averaging effect diminished some of the impact from the improving oil to gas spreads. The oil to gas spreads improved significantly in March, while February had less impact. I anticipate this trend to continue into the second quarter. Operating rates for the quarter increased by 10 percentage points, but Europe continues to face the most pressure due to higher costs and lower demand. Our overall volumes in Europe have declined the most year-over-year, resulting in the lowest operating rates there. In contrast, our operating rates in the U.S. Gulf Coast, Canada, and Argentina remain above 90 percent, aside from turnaround times.

Yes. On two other points on that comparison. So don't forget that in the fourth quarter, we had the innovation catalyst and actually a licensing sale. Those are lumpy. That was about $70 million in the fourth quarter that didn't recur. So that was a headwind sequentially. And then also the bulk of Q1, we had the cracker in Sadara out for a planned maintenance turnaround. So that's now back up and running, and that should be a tailwind improvement in the second quarter.

Your next question will come from the line of David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Good morning. Jim, the sequential increase in Q2 is a little less than normal. Where are you seeing the greatest pressures from a volume perspective in Q2 versus maybe perhaps normal seasonality?

I would say the biggest pressure continues to be in II&I, particularly in polyurethanes and construction chemicals. One thing that might not be immediately obvious in the second quarter guidance is that there's a $70 million headwind from Chlor-Alkali and Vinyl due to lower demand. This complex operates on both caustic soda and chlorine demand. With housing down and PVC demand decreasing, the resulting impact on operating rates leads to declines. Additionally, we are experiencing downward pressure on both demand and price in caustic soda from industrial uses. They are managing the situation well and making necessary adjustments, but this is likely the most significant factor when looking ahead to Q2. From a turnaround perspective, we're in pretty good shape. Howard, do you have a comparison for turnarounds between Q2 and Q1?

Yep. I mean turnaround sequentially are going to be about a $75 million headwind. $25 millions of that in P&SP and the balance in Industrial Intermediates.

Your next question comes from the line of Steve Byrne with Bank of America. Please go ahead.

Yes. Thank you. I just wanted to confirm that the margin benefit from propane to propylene that's not realized in the PM&C segment. Is that right? And perhaps a question about the headcount reduction, 2,000 target for the year. What is that off of the total number? And is your benchmarking analysis that it highlight that is an area to focus on, like, EBITDA per employee or something like that? Thanks.

Sure. First, Steve, I'll address the first part because I want to ensure I'm accurate. Howard, please feel free to share your insights. We transfer propylene and ethylene at market rates. However, we do roll some of the benefits from the propylene spread into our II&I segment, particularly for polyurethanes, coatings, and monomers. This integration benefit will be reflected in their numbers moving forward. Regarding the 2,000 headcount reduction, this is based on our published Dow Direct headcount list. You can expect about 75% of these exits to occur by the end of the second quarter, as Howard mentioned, with close to 90% by the end of the year. The timing delay is due to site announcements concerning closures, which require coordination with works councils and other parties. The main driver for this reduction is our overall cost position and the need to keep costs aligned with demand. Demand significantly fell in the fourth quarter, reaching the lowest levels since March 2020 at the onset of the COVID pandemic. We need to tighten our operations accordingly and then consider how to grow beyond that. Any thoughts or comments?

No. That's correct. Agreed.

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Thanks very much. ExxonMobil announced a very large project in Baytown to produce ammonia and hydrogen in order to decarbonize their Gulf Coast facilities. Is that something that Dow might do, that is, do you want to get involved in the ammonia markets or the hydrogen markets in the United States? And then secondly, for Howard, what's the working capital benefit look like for this year? Is that, I don't know, $400 million? Is it a higher number or a lower number? Your cash flows probably will work their way up this year?

Good morning, Jeff. I'll take the Exxon question and the ammonia question. I think one of the things that's happened is, obviously, ammonia as a fuel is becoming an interesting market. And so, in addition to decarbonizing, there's also a shift in what's expected to be a shift in fuel mix. We've seen that with some announcements in ammonia fuel for overseas shipping. And so, I think there's a play into that market. As we look at our own assets, we're going to look at hydrogen and carbon capture as ways to decarbonize. And obviously, we've got the plan to decarbonize one of our assets with advanced small modular nuclear reactors. It will be site specific as we go through it. I think hydrogen clearly is going to play a role because of the ability to take off gases through autothermal reforming and convert those into hydrogen. That will probably be the most efficient for us. But there will be a wide variety of uses, but I don't see us entering the ammonia markets.

Yes. Jeff, on the working capital, really proud of the work that the Dow Team did. Sequentially, we kept our conversion or efficiency on a days basis flat, sequentially from Q4 to Q1. You think about as we enter turnaround season as we enter hopefully a period of heavier demand, that's very good. Actually, we put our inventory units down about 2% sequentially. To your question about the full year, I would say, we're working on between two and three days of structural efficiency, improvement in working capital. On a dollars basis, that's anywhere between $300 million and $500 million for the year in terms of improvement in cash.

Your next question comes from the line of Mike Sison with Wells Fargo. Please go ahead.

Hi, guys. Nice start to the year. Just curious, I think you mentioned your North American operating rates would improve Q2 to 90%. I think the EBIT driver is up $75 million. So just curious why the improvement in P&SP wouldn't be stronger in Q2? Are you thinking polyethylene margins are coming down? Or just maybe any other factors that the improvement would have been better?

Good morning, Michael. I would say two things. We've got nominations out for April in terms of pricing. I think there's also capacity coming on. So we're being realistic about where we think things are moving in the marketplace. Exports are up, which is good. We hit the highest level of marine pack cargo exports since March of 2021. And so, that is a really good sign. And the schedule reliability on marine pack cargo exports has been the best since October of 2020. So we're seeing really positive trends there. The only inventory increase we saw in the region was really at the export hubs, which was sitting there waiting for exports. So I think overall industry inventories are under control. So those are all net positives. Oil to gas spreads promptly are a little bit less than where we ended the quarter. And I would expect as we get into second quarter and demand for that natural gas picks up a little bit, we should see some of that natural gas pricing move up a little bit. But still, it's going to be good oil to gas spreads here in the U.S. So I think it's still guiding up on integrated margins, but there could be potential for some upside from there.

Yes, Michael. The other thing is, don't forget, there's a $25 million headwind from a turnaround in Functional Polymers, which is in P&SP as well sequentially.

Your next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

Yeah. Good morning. Thanks for taking my questions. So maybe just to dig a little bit further on the U.S. side of the market. Obviously, there is some capacity coming on in the polyethylene area. Can you speak to the demand trends that you're actually seeing, if there's any pockets of either strength or incremental weakness that you're seeing? And then also, can you give us kind of an update as to how you're seeing the mix of domestic versus export demand and how you expect that to trend through 2023?

Yeah. Good morning, John. The global demand has been improving. North America, we had some benefit, obviously, in the first quarter because the industry had about 14% of capacity online due to force majeures and unplanned events, and there were some delays in capacity startups in the first quarter. We still see North American fundamentals to be very robust as we go into the second quarter and through the year. I think logistics challenges appear to be behind us, both marine pack cargo and road shipments are all kind of getting back to normal space. The biggest drag right now probably on P&SP is in Europe. Europe has been pretty slow, still some destocking going on there. We're having some advantage from cracking propane in Terneuzen and Tarragona. So we've been cracking max propane there. So that helps a little bit. But I think the weight of the European market is really the biggest drag right now. I expect North American market to be pretty robust.

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes. Good morning, Jim. I'm listening to your prepared remarks, it sounds like you're still evaluating potential for rationalization of some higher-cost assets. And so, I'm wondering if you could speak to the possible size, scope and timing of that effort, and whether you're really looking at Europe as the center of gravity, given geopolitical and energy changes there or something larger and broader than that?

Good morning, Kevin. I would say Europe, obviously, adds the attention because in most cases, it's moved into the high-cost position around the globe and there's a lot of pressure from higher energy costs as well. LNG costs into Europe right now are in the $14 to $17 a million BTU range, while we sit here in the U.S. between $2 and $3. And so, I think you can sense over the long-term that, that continues to be the same in the long-term, that will put a lot of pressure on the European market. A lot depends on how the European Union and also how the individual member states respond via energy policies and other changes that they're looking at and hard to anticipate when they'll make those decisions. But energy cost is going to be a big driving force, and that will be one that will be hard to overcome. So we'll continue to look at those assets. We don't want to jump the gun and get ahead of any policy changes that might make them still competitive long-term. But those are the biggest things on big assets, big sites that are in our head right now.

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Please go ahead.

Yes. Good morning, Jim. Wanted to dig a little bit on the comment you made about a $70 million sequential headwind in chlor-alkali. So a couple of questions there. Is that mostly with the European assets? Or is that on the U.S. contract chlor-alkali you get? And is most of that pain coming from caustic? Or are you also seeing margin squeeze on the chlorine and chlorine derivatives?

Good morning, Duffy. Our primary exposure to caustic is in Europe and Latin America, so most of that $70 million is attributed to those areas. None of the guidance provided was related to our contracts with any specific company. This situation is largely influenced by market dynamics and demand, which are driving lower prices and reduced operating rates in those regions. We'll continue to monitor this closely. If the housing market begins to improve, it could be one of the first factors to provide some relief. Additionally, industrial demand has also been somewhat weak. These two factors will likely be key to making a turnaround.

Your next question comes from the line of Josh Spector with UBS. Please go ahead.

Yeah. Hi, thanks for taking my question. I just wanted to follow up on volumes. I'm thinking maybe another quarter or two out. So, the past couple of quarters, your volumes have been down something in the range of 8% to 10% year-over-year. That seems to be kind of where you're guiding for the second quarter. And I mean, generally, we're seeing a slower uptick than what we expected sequentially and some market weakening. So I'm just curious, at this point, should we be assuming that volumes are down a similar level to that in 3Q? And obviously, the comps get easier in 4Q. But I'm wondering what in your view would change that trajectory or if that's the right way to think about it?

Yes, good question about volumes. I would say North American volumes are recovering, which is a positive sign. If you compare it to the same quarter last year, we were down 11% in volume, mainly driven by EMEA, which experienced a 15% decline during that period. However, other cost-advantaged regions were performing relatively well. Additionally, in the Asia Pacific region, we started to see some positive growth in the China market after February, which we hadn't observed earlier in the first quarter. In the first quarter, both P&SP and II&I volumes dropped significantly. As Howard mentioned, we had some nonrecurring licensing activity, which impacted EBITDA rather than volume, and the Sadara cracker turnaround also reduced volumes for them. I anticipate that Asia Pacific volumes will rise in the second quarter and continue to do so. We're beginning to see some improvement in areas like MEG, with the spot market gaining traction and operating rates in China increasing. The key question will be when we begin to see positive momentum in Europe. Overall, I expect gradual improvement throughout the year. Our plan is for the first half to generate slightly less than half of our yearly target, with the remainder achieved in the latter half, primarily through effective price and volume management, operational control, and realizing the $1 billion in cost savings.

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Hi. Good morning. Just to follow up on that sequential build. What are you thinking about in terms of the amount of summer inventory build or how to think about the seasonality in Q3, given the mix in the top end markets you've described?

We're really focused on efficiency, aiming to achieve two to three days of it. Ideally, I want to gain that efficiency through increased sales rather than the other way around. We're keeping our inventories well managed. For instance, we ended the first quarter very much in line with, if not slightly lower than, our inventory levels at the end of the fourth quarter. I don't see a need to build large inventories as we approach the season, although there may be a specific business area like coatings that might require a slight pre-build for seasonal demand. In other areas, we are prepared to adjust our production rates to meet demand, and that's our plan. I believe we will keep inventory management fairly tight throughout the year. There aren't any external factors that suggest we need to change our approach. We would only alter our tight inventory strategy if we see significant demand drivers or signals.

Your next question comes from the line of Christopher Parkinson with Mizuho. Please go ahead.

Okay. Thank you so much. It's obviously been a few years with China now finally emerging from COVID. But can you just kind of give us your latest and greatest thoughts on your three main segments regarding the potential for new Chinese supply across polyethylene, MDI, and then just the remainder siloxanes, which you've already been mentioning. Just given that they're finally emerging from this, just any update on your thought process there will be incredibly helpful. Thank you so much.

Sure. Regarding MDI and siloxanes, last year there were four capacity additions for siloxanes in China, each ranging from 100,000 to 200,000 tons. More additions are planned for this year, but the largest increase we saw was about 650,000 tons last year. For MDI, it’s more about timing, and I feel positive about the supply and demand situation. Currently, operating rates are between 75% and 80%, depending on how quickly new Chinese capacity will come online. We anticipate that these additions will be more gradual over time rather than all at once in 2023. Therefore, we believe the industry operating rates will remain in the high 70s, approaching 80%, which is historically a favorable range for MDI. Regarding polyethylene, most capacity in the past decade has been added in China, and due to supply additions, delays, and cancellations, we expect the market to be relatively balanced, possibly slightly net short by 2 million to 5 million tons over the next few years. Supply additions in polyethylene are not currently a major concern for us; rather, we are focused on advancing our recycling business and ensuring our operations are situated in the most cost-effective regions. Areas like North America, the Middle East, U.S. and Canadian ethane, and Argentina are significantly advantaged compared to European and Asian naphtha, as well as MTO and CTO. We aim to expand our presence in these more cost-advantaged locations moving forward.

Your next question comes from the line of Mike Leithead with Barclays. Please go ahead.

Great. Thanks. Good morning. I was hoping you could help me reconcile Slide 5 and Slide 7 a bit. If we look at Slide 5, your main product verticals look pretty challenged near term. And then on Slide 7, you talk about why they should see pretty attractive growth over the next one to two years. Obviously, I recognize there's a bit of a time disconnect or differential there. But I guess, internally, how do you get comfortable that what we're seeing near term only transitory or maybe the other way around? When do you start rethinking some of the timing of your expansion investments if demand remains weaker for longer?

Yes, good question, Michael. I mean, I think a lot right now, a lot of the weight on the market is the inflationary pressure and the things have remained stickier for longer. You are seeing in commodities that pricing is coming down. That hasn't rolled through yet to the consumer. And so, the weight on the consumer and the consumers' confidence has not been there. And the manufacturing confidence indexes have not been that great either. A lot of them have been in contraction until just recently, and we're starting to see some positivity in the PMI numbers. China just moving positive. It's a little bit mixed still here in North America, but a couple of zones in the Fed are starting to move into positive PMI territory. So I think as that market sentiment improves, we'll get ourselves back on to the normal trajectory. And what typically drives the growth for our products is GDP and an increasing middle class. And both of those, we believe, are going to continue to drive them for the long-term. It's true in Packaging & Specialty Plastics. The drive to urbanization drives a lot of volume in silicones and siloxane. So, think about architectural structures, high-rise buildings, even multifamily homes, which have been weak relatively. And then when you get back into II&I, polyurethane and construction chemicals, really driven by housing starts, housing sales, whether it's in insulation or it’s in appliances or durable goods and in Dow Industrial Solutions, markets like ag, pharma and consumer products every day consumer products, household goods, cleaning items that you buy all have positive trends. So I think it is a timing issue. There's been a lot of projects and incentives and policies deployed to drive this capital that's going to be invested in infrastructure, but it takes a while for that to actually ramp up. And so, I think that's why we took the near-term, long-term view of it, and that was what those two slides were meant to represent.

And Mike, I mean the other positive on long-term trend of mobility with EVs, don't forget, there's a significant increase in multiple of the need for Dow chemistry in an EV vehicle than in an internal combustion engine. So that will be a real growth driver for our silicones business as well as our elastomers business and to a lesser extent, urethane acrylics.

Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning, everyone. You work on your Alberta projects, do you have a sense of how much capital costs have come up roughly since you built the Texas 9 cracker on the Gulf Coast?

Good morning, Aleksey. Thanks for the question. On Alberta, I would think about it this way. Our target there is to try to get the total cost of the project in dollars per ton of capacity to be advantaged to the Texas 9 project. And we believe that we can do that based on what we've seen so far. Through the rest of this year, we'll be getting firm bids on some of the bulk materials that go in, and we'll have a feel for that. But we've been watching, obviously, steel, cement and the other markets that really drive a lot of those bulk costs. I think we'll be able to do that. Part of it is scale, part of it is learnings on construction and techniques that we picked up off of Texas 9. And so, there's some that we'll engineer into this as well. But my sense of this is, Texas 9 since start-up has been well above 15% return on invested capital, which is going to be one of the most successful cracker projects and derivatives projects ever. And I think when you look at Alberta, we're going to have a chance to replicate maybe even improve on that.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.

Hi, everyone. Thank you for taking my questions. I wanted to ask about the implied EBITDA guidance of $1.5 billion for Q2. Considering the $75 million in headwinds, it seems like the number could be closer to $1.6 billion. How do you see that fitting into your framework from peak to trough? Would you still consider $2 billion as a typical mid-cycle Q2 figure? Are we 75% to 80% there? Also, do the cost reductions help close that gap? How should we think about our position in your earnings trajectory? Thanks.

Howard, would you like to discuss the outlook?

Yes, Arun, you are considering the transition from Q1 to Q2 correctly. From my viewpoint, Jim, you might see it differently, but I believe $2 billion is on the lower side for a normalized basis. We are still observing a current portfolio perspective from the lowest point to the highest point, and as we approach the middle of the decade, this should align more with 7.5 or 8 up to 13 or possibly 14 with the inclusion of the Alberta project. Hence, for us, a more normalized EBITDA should fall within the $9 million to $10 million range under typical market conditions. When you assess $1.5 billion, give or take, you're hovering around the lowest earnings quarter on an annualized basis. Additionally, the $1 billion in cost savings, with 65% expected to contribute to our bottom line in the second half of the year, is intended to ensure we can aim for that $6 billion mark, give or take.

Your next question comes from the line of Patrick Cunningham with Citi. Please go ahead.

Hi, good morning. Thanks for taking the question. In the release, you highlighted some year-over-year strength in functional polymers for renewable technology. Can you highlight some of those technologies? And then similarly, on the near-term growth investments, I think Functional Polymers is a significant part of that. What technologies or end markets are targeted investments here?

Yes. Welcome, Patrick. And Functional Polymers is about 25% of the P&SP portfolio on the polymer side. And I'd say the two biggest areas of strength there are in the solar photovoltaic films and you think about the protective films that are used to put together the solar panels. We've got a good position there. And with some of the leading producers around the world, we're starting to see some real volumes pick up there. So I think you're going to see that industry be the beneficiary in the near term, probably one of the early beneficiaries of the infrastructure and the IRA monies that have been deployed. And the other area would be wire and cable, and we're starting to see a pickup there. So as we put more alternative energy in and we would also have to deal with the aging grid and we have to deal with also infrastructure work that utilities need to do on the grid to increase the reliability and expand the grid because populations are expanding in a lot of these urban areas. That drives demand for wire and cable products, of which we have a leading market position, whether it's high voltage transmission or whether it's down into medium and lower voltage, things like in the telecom sector. So, as we're expanding reach for more wireless access to the people, we're going to see more telecommunication towers go up, that's going to drive more demand for wire and cable products for those projects.

Your next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Hi there, good morning. Jim, could you provide some more color on your auto end market? The mobility category on Slide 5 actually looks a little bit better than all of your other major areas. Are you gaining share? And how are things tracking relative to your expectations?

Mobility is a growth platform for us, and the team there that's focused on building back some of that core capability that we had prior to the spin is doing a great job. Silicones are a big part of that. So improving the resilience of the system with more electronics on the vehicles is great. But we also play a leading part in noise, vibration, and harshness in the vehicle. So we've got a long history of doing that. We're starting to see a pickup for recycled materials. So our SPECFLEX C and also our RENUVA recycled materials, like recycled mattresses, SPECFLEX C CPU system is made out of polyols made out of recycled engine oil are now pickup in automotive seating applications. We also have a lot going on with acrylic, both hybrid acrylic and silicone technologies in this area. We've just won some recent innovation awards for some products that I think are going to be real platform winners. LUXSENSE silicon leather. We just got a big innovation award. This is a really high-quality synthetic silicone-based leather which can be used in automotive applications. It's durable. It holds color well, and you can clean it easily. Also, a lot of pickup with the Bridgestone self-sealing tires, which has a silicone inner layer to it, which allows that tire to seal. And that will completely eliminate the need for a spare on a vehicle. That also can be recycled. The silicon can be separated from the tire and be recycled. And then we play in the lighting area. In LED lighting, we're a big provider, both in what you would see in your home every day with LED lighting, but also in multiple optical silicones. We think the headlamps in automotive applications as they become more sophisticated, they move more to the multiple optical silicon in those applications. So we're excited about it. We think it has the potential to be a significant contributor to our future growth.

I will now turn the conference back over to Pankaj for any 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 our website within approximately 48 hours. This concludes our call. Thank you, once again.

Ladies and gentlemen, thank you all for joining. You may now disconnect.