Earnings Call Transcript - DOW Q2 2021

Operator, Operator

Good day and welcome to Dow's second quarter 2021 Earnings Call. I would now like to hand the call over to Pankaj Gupta. Please proceed.

Pankaj Gupta, Vice President, Investor Relations

Good morning. Thank you for joining Dow’s second quarter earnings call. This call is available via our 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, Dow Investor Relations Vice President, and joining me on the call today 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 and on the Dow website. On Slide 2, you will see our agenda for the call. Jim will begin by reviewing our second quarter highlights and operating segment performance. Howard will share modeling guidance and outlook going forward, and then Jim will close with an update on our earnings drivers. Following that, we will take your questions. Now, let me turn the call to Jim.

Jim Fitterling, Chairman and Chief Executive Officer

Thank you, Pankaj, and thanks to everyone for joining us today. Starting on Slide 3, Dow continues to capture strong demand across our value chains during the second quarter. Team Dow is focused on execution, cost discipline, and balanced capital allocation, enabling us to deliver our strongest quarterly earnings performance in the company's history, both pre and post spin, with substantial growth in net sales and earnings year-over-year and sequentially. We achieved double-digit sales gains in all operating segments and businesses. A 66% increase in sales relative to the year-ago period was led by local price improvement of 53% combined with a 9% volume increase. Robust demand and the recovery of the global economy continue from the onset of the COVID-19 pandemic. Sales increased 17% sequentially, underpinned by tight supply and demand fundamentals across all of our value chain. We delivered higher operating EBIT of $2.8 billion year-over-year and $1.3 billion sequentially, with improvements in all segments and businesses. These gains were fueled by strong top-line growth and margin expansion. We also benefited from increased equity earnings, up more than $370 million year-over-year, led by higher margins at Sadara and the Kuwait joint ventures. Sequentially, equity earnings were up $54 million primarily from the Thai joint ventures. Cash flow from operations was $2 billion and free cash flow was $1.7 billion, up significantly both year-over-year and sequentially. This enabled a balanced execution of our capital allocation priorities. We continued our proactive liability management actions by reducing gross debt by more than $1 billion in the quarter, and reducing our annual interest expense by $35 million. Today, Dow has no substantial long-term debt maturities due until the end of 2025. We also returned more than $700 million to shareholders in the quarter through our industry-leading dividend, and we resumed our share buyback program to cover dilution. Finally, we continue to advance Dow's ESG priorities by releasing our consolidated ESG report, INtersections, which provides enhanced transparency on our environmental, social, and governance priorities. The interactive digital report can be found at the top of our corporate website. In summary, Team Dow maintained a relentless focus on meeting increasing customer demand despite lingering supply impacts across many value chains, marking a strong rebound from Winter Storm Uri. We continue to execute on our operational and financial playbook, delivering another strong quarter and a solid first-half performance. Turning to our segment performance on Slide 4, in the Packaging & Specialty Plastics segment, operating EBIT was $2 billion, up nearly $1.7 billion year-over-year and more than $780 million sequentially. Price gains in both businesses and in all regions led to integrated margin improvement and increased equity earnings. On a sequential basis, the segment expanded operating EBIT margins by 810 basis points on continued local price gains in olefins and in packaging applications. The Packaging and Specialty Plastics business reported sales gains year-over-year, driven by improvement in packaging applications for industrial and consumer packaging, and flexible food and beverage packaging markets. Volumes declined year-over-year and sequentially due to lower polyethylene supply from the lingering effects of Winter Storm Uri and our own planned maintenance turnarounds. Compared to the prior quarter, the business delivered local price gains in all regions. Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was nearly $650 million, up more than $860 million year-over-year, primarily due to the pandemic recovery combined with tight supply and strong demand in both businesses. Sequentially, operating EBIT was up $320 million and operating EBIT margins expanded by 640 basis points, driven by margin improvement and offset somewhat by continued supply constraints from Winter Storm Uri. The Polyurethanes & Construction Chemicals business increased net sales compared to the year-ago period on strong local price in all value chains, demand recovery, and durable goods and appliances and construction end markets and currency tailwinds. Despite industry supply chain challenges across a number of end markets, including mobility, the business delivered sequential sales growth on increased local price and volumes. The Industrial Solutions business delivered a net sales improvement compared to the year-ago period as a result of local price gains in offerings for coatings, industrial, and electronics end markets across all regions. Improved demand for materials used in industrial manufacturing, coatings, and infrastructure were more than offset by planned maintenance turnarounds and some third-party supplier limitations. Net sales also increased sequentially on local price gains in all regions. And finally, the Performance Materials & Coatings segment reported operating EBIT of $225 million, up nearly $200 million from the year-ago period. Operating EBIT margins increased 760 basis points on price gains and strong consumer and industrial demand recovery. Sequentially, operating EBIT was up more than $160 million due to price momentum and lower planned maintenance costs. The Consumer Solutions business achieved higher net sales year-over-year as demand recovery for silicone products led to local price and volume gains in all regions. Sequentially, the business achieved broad-based volume growth due to lower planned maintenance activity and strong demand in silicone applications, including personal care, as certain geographies began to experience an increase in travel and a return to workplace and social activities with notable improvements in China. The Coatings & Performance Monomers business delivered higher net sales year-over-year, driven by price gains in all regions. Increased demand for coatings applications was offset by lingering raw material and logistical constraints from Winter Storm Uri. Sequentially, the business achieved local price gains on tight supply and strong demand fundamentals and increased raw material costs, as well as increased volume from strong seasonal demand for industrial and architectural coatings. Now, I'll turn it over to Howard to review our outlook.

Howard Ungerleider, President and Chief Financial Officer

Thank you, Jim, and good morning, everyone. Moving to our third quarter modeling guidance on Slide 5, strong consumer demand trends continue in retail, housing, and the manufacturing sectors, and inventory levels remain low across most of our value chains. We expect these dynamics to continue to support price strength in the third quarter as the industry continues to work to fulfill pent-up demand. In our Packaging & Specialty Plastics segment, downstream converter and brand owner inventories remained at all-time lows with balances very tight. Recent small increases in producer inventories are due to a heavy turnaround season for the industry, and yet industry days demand and inventory actually declined nearly 8% month-over-month on tight supply, coupled with increased domestic and export demand. This data includes Dow where we expect an approximately $150 million increase in the third quarter turnaround spending sequentially for planned maintenance at our crackers in Canada and in Spain, as well as $100 million lower earnings from non-recurring licensing activity, which occurred in the second quarter. ACC data indicates domestic demand for packaging applications reached its strongest level in history in June, and we expect a continuation of these positive demand trends as customers are reporting 45 to 60-day backlogs. Moving to Industrial Intermediates & Infrastructure, strong consumer demand for durable goods continues underpinned by order strength throughout the value chain. Housing and construction markets, particularly in the U.S., continue to support robust demand for polyurethane applications. Industrial and oil-related end markets are expected to continue to see gradual recovery sequentially, providing additional support for solvents and other industrial solutions. We also expect $30 million of additional planned maintenance turnaround spending at our joint ventures in the quarter. And in Performance Materials & Coatings, we expect a continuation of strong demand for electronics, mobility, and infrastructure silicone solutions. We expect to benefit as social activity increases on easing pandemic-related restrictions, including sequential improvement for personal care applications. These trends are supporting price momentum across the silicones value chain, and we anticipate increased turnaround spending of approximately $30 million in our consumer solutions business in the quarter, including a turnaround at our siloxane plant in Barry. Demand for do-it-yourself architectural coatings remains robust, and we expect to see an increase in contractor-related demand as new home builds increase and consumer and home social engagements begin to resume. Altogether, with robust demand expected to continue, our advantage portfolio is positioned to capture significant value moving forward. We've updated a few full-year items which can be found in the appendix of the slide presentation. Notably, we are expecting higher equity earnings, and with the improved earnings profile at Sadara, we now anticipate approximately $50 million of cash inflow to Dow in 2021. Turning to Slide 6, around the world increasingly positive trends indicate we remain in the early stages of economic recovery with an extended runway for growth. While industrial production is up nearly 20% over the year-ago low, it still has not reached pre-pandemic levels. Retail inventory to sales is at its lowest levels in more than three decades, and strong demand continues to counter near-term potential restocking efforts. U.S. housing starts increased again in May and are projected to continue rising, supported by limited supply of single-family homes due to a decade of underbuilding. And the proposed U.S. infrastructure bill has the potential to further elevate the already strong GDP estimates projected around the world. As vaccination rates increase around the world and economies continue to reopen, pent-up consumer demand and increased personal savings built over the past year should also provide an additional boost to the global economy. Consumer confidence continues to climb on the conviction that economic conditions will continue to improve, supporting continued purchases of homes, automobiles, and other durable goods. Business travel sentiment continued to improve in May, with more than half of U.S. companies planning to resume domestic business travel within the next three months. The personal care market, which has been one of the slowest to recover, began to see a rebound in the second quarter. The increases in U.S. cosmetics and beauty product sales are on the rise in consumer demand. And as borders reopen, recreational activities and international travel should also boost economic activity, while we're mindful that there will absolutely be some regional variations in the timing and the pace of the recovery. Along with these trends, we anticipate the strong demand we experienced in the second quarter across our polyethylene, polyurethane, acrylic, and silicone chains to extend through the second half of 2021. Polyethylene demand growth, for example, is projected to outpace supply additions in the near term, with pricing strength and resilient margins on a sustained and favorable oil-to-gas ratio with the majority of industry capacity adds coming in the higher end of the cost curve. Altogether, we expect these strong market dynamics, tight supply-demand fundamentals, and ongoing economic expansion across our key chains to continue to drive earnings and cash flow growth. With that, I'll turn it back to Jim.

Jim Fitterling, Chairman and Chief Executive Officer

Thank you, Howard. Turning to Slide 7. Dow's consumer-driven portfolio is uniquely positioned to benefit from the demand trends that Howard outlined a moment ago, which continue to translate into an attractive $650 billion addressable market with approximately 1.3x to 1.5x GDP growth across our packaging, infrastructure, mobility, and consumer care markets. These demand trends in our fast-growing markets are underpinned by an accelerated transition toward more sustainable materials, providing ample opportunities for Dow to continue to innovate with our customers and brand owners to enhance the sustainability of our products and value chains while advancing our net-zero carbon and circular economy targets. For example, as the mobility sector continues its transition to more sustainable solutions, electric and autonomous vehicles offer upside of approximately 50% more revenue across multiple Dow chemistries versus traditional internal combustion engine vehicles, including high-value polyurethanes, silicones, and silicone hybrid-based adhesives and engineering sealants widely used in battery assembly, noise and vibration reduction, drivetrain, comfort, and heat management applications. Our new Dow silicone technologies for electric and hybrid vehicle applications help OEMs to meet the evolving needs of automotive electrification while advancing vehicle performance, reliability, and sustainability. And we recently introduced SPECFLEX C, a new polyurethane solution sourced from recycled raw materials to help automotive OEMs meet demand for more circular products and their sustainability goals. We also continue to align our growth CapEx to address this growing market demand for sustainable materials. This quarter, we outlined our roadmap to reduce CO2 emissions by more than 40% by 2030 from our manufacturing operations in Terneuzen, The Netherlands. And Dow and Shell demonstrated progress on our joint technology to electrically heat steam cracker furnaces, receiving partial funding from the Dutch government, and together we are evaluating the construction of a multi-megawatt pilot plant with startup in 2025. We plan to share more detail on our strategic and financial priorities to continue creating long-term value for all our stakeholders at our upcoming 2021 Investor Day on October 6, which will be hosted both virtually and in-person in New York City. Stay tuned for more details, we look forward to engaging with you. On Slide 8, as we shared last quarter, we continue to see demand across our ethylene, polyethylene, polyurethanes, acrylic, and silicones value chains outpacing supply through 2021 and staying balanced in the near term. These market dynamics will be further supported through 2022 and beyond by the GDP-fueled market growth trends we just discussed. Some industry views call for softening conditions, largely based on their view of announced capacity additions. However, they do not account for industry delays and cancellations, and when coupled with elevated demand growth from continued reopening of the global economy, will likely lead to tighter-than-forecasted market conditions, all of which will result in continued earnings, margin, and cash flow growth for Dow in the near term. And while we capture these improved earnings in our core businesses, our current slate of lower capital, faster payback, and higher return capacity expansions will generate an additional $1 billion of accretive earnings over the next several years, with many projects delivering earnings already this year, such as our ethylene derivatives at the Thai joint ventures, polyethylene for high-performance packaging applications at our Alberta operations, and surfactants for leading brand owners’ laundry and home care end markets. And notably, in the second quarter, we progressed our polyethylene glycol incremental expansion, completing customer qualification ahead of schedule and beginning shipments of our industry-leading CARBOWAX SENTRY polyethylene glycol active pharmaceutical ingredients. Combined with favorable supply and demand fundamentals, these projects further enable Dow to continue to deliver significant value for our owners over this foreseeable future. We'll close on Slide 9. Our steadfast execution of the operational and financial playbook that we outlined at spin, combined with our agile response to market conditions over the past year have enabled us to deliver strong performance and enhanced value to our shareholders. We are uniquely positioned to continue building on that strong foundation today. Our value proposition starts with our differentiated portfolio and an asset base that is characterized by first our feedstock flexibility and position, which supports our low-cost position and enables us to drive higher asset utilization and maximize cash margins as we quickly balance our feedstock and product mix to supply and demand dynamics. And second, our leading scale global footprint and differentiated portfolio provide us with access to high growth markets in all major regions. We have achieved strong performance in this early part of the economic recovery and remain advantaged through our participation in higher-margin functional polymers, silicones, and formulated systems. We continue to develop innovative solutions to address our customers' needs and capture the opportunities arising from critical market trends. Our high-value adhesives and innovative packaging solutions support the rapidly growing e-commerce sector. Through our mobility science platform, we are targeting low carbon enabling mobility, and electric and autonomous vehicle opportunities. More broadly, across our portfolio, we are enhancing the sustainability of our solutions and the value chains they serve. For example, deploying lower carbon energy solutions in gas trading, carbon capture, and concentrated solar power at our operations. And through value chain collaboration, we are increasing post-consumer recycled content in our products, and enabling the design of fully recyclable packaging. Today, more than 80% of Dow products for packaging applications are reusable or recyclable. And our research and technical teams are working actively on the remainder to achieve that same goal. Beyond the strength of our portfolio and our innovation investments, our deliberate focus on operating discipline and balanced capital allocation approach are critical elements of our value creation playbook. We have achieved a top quartile cost structure and cash conversion, and our restructuring efforts will yield an additional $300 million in earnings, all while maintaining a best owner mindset. We also delivered a return on invested capital of greater than 14% on a trailing 12-month basis. At the same time, we have prioritized investments in our downstream higher margin, faster payback opportunities and upstream investments that expand our leading ESG profile while increasing our capital expenditures by $350 million this year. We reduced net debt by approximately $5 billion since the end of 2018. Dow's strong operational and financial performance this year resulted in a credit rating upgrade by S&P and an upgraded outlook by Fitch, supporting our strong investment-grade balance sheet. And we continue to return significant cash to shareholders through our industry-leading dividend. In closing, Dow is uniquely advantaged to continue delivering value through our best-in-class consumer-led portfolio, our leadership in innovation and sustainability, and our strong operating and financial discipline. With that, I'll turn it back to Pankaj to open the Q&A.

Pankaj Gupta, Vice President, Investor Relations

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.

Operator, Operator

Thank you. Our first question comes from P.J. Juvekar with Citi.

P.J. Juvekar, Analyst

Yes, good morning. Jim, the arbitrage between U.S. prices for polyethylene and other commodities versus Asia are growing. And this was evident in your pricing where U.S. pricing was 2x that in Asia. So how much of this is driven by the shipping tightness? And is the shipping tightness or logistical challenges impacting your business? Thank you.

Jim Fitterling, Chairman and Chief Executive Officer

Good morning, P.J. Thanks for the question. Obviously, days sales and inventory in North America went down. And I think what you saw was ourselves and most producers actually exported less into China. That was part of it. Also, you had a big rise in the cash flow part of the cost curve. So even though the arbitrages are where they are, most of the producers in China are running at cash flow breakeven. So our outlook is that demand here and around the world continues to be strong. I don't think you'll see a chance for us to build any inventory through the third quarter; there are still a fair number of planned turnarounds. And our view is with these GDP growth rates of 6% for this year and currently forecasted at 4.5%, maybe 5% for next year, there’s going to be quite a demand for polyethylene.

Operator, Operator

We'll take our next question from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Thank you. Good morning. Jim, consultants are calling July to be the peak for integrated ethylene, polyethylene margins and then erosion to the rest of the year. What's your view on these margins and the cadence of declines in the back half of the year?

Jim Fitterling, Chairman and Chief Executive Officer

Thanks, David. Good morning. Right now, the July order book is stronger than we saw through the second quarter. I expect that we'll continue to stay that way through the quarter. In some views, we probably had our highest raw material prices in the second quarter because the ethane frac spreads went up fairly dramatically. I do expect we'll see some of that soften as we move forward. I think long-term we expect natural gas prices to be between $2.75 and $3 a million BTU, so that’s positive. And with these oil-to-gas ratios, I think we're going to see that continue. One of the things that happened with oil, obviously, as everybody looked at the oil supply coming on, but I think they failed to look at demand for oil. And as the economy reopens, there's going to be another step up in demand. So I think some of that supply is just necessary to get ready for the increase in demand that's coming.

Operator, Operator

We'll take our next question from Frank Mitsch with Fermium Research.

Frank Mitsch, Analyst

Good morning, folks and congrats. Jim and Howard, you guys have previously spoken that peak EBITDA at Dow would be $12 billion or greater. And as I look at the first half of the year, we're essentially at that run rate. So the question is, are we at peak? And if so, how sustainable is it or would you like to take this opportunity and offer an upgrade there?

Jim Fitterling, Chairman and Chief Executive Officer

Good morning, Frank, and thanks. Look, we're at a pretty good run rate right now. Our expectation for the third quarter is fairly similar. We really only have a couple of items that are negative on the third quarter, just a couple of more turnarounds and some one-time catalysts sales that don't repeat. Given that, that looks good. Additionally, I talked a little bit about incremental growth projects. Those projects, some of which are already starting up this year, give us the ability to add another $1 billion of EBITDA to those numbers. So I think we're showing with the work that we've done on the balance sheet with the work that we've done on reliability, and the incremental expansions that we're making, as these other geographies come out of the pandemic like India, Brazil, and Southeast Asia, and we see personal care, plus the industrial and service markets come back, I think there's a potential for more.

Howard Ungerleider, President and Chief Financial Officer

Frank, this is Howard. I would just add to that there's also self-help. So we've got the restructuring from last year that's going to continue to be a tailwind for us this year and into next year. That's a $300 million tailwind total over the 2-year period. And then the investments we're making in digital, we expect will be at least another $300 million. So if you add that to Jim's numbers, you're talking about more than $1.6 billion of organic indoor self-help regardless of the macros. But the macros, as Jim talked about earlier, are very, very strong, and we don't see that abating in the near-term.

Operator, Operator

We'll take our next question from Vincent Andrews with Morgan Stanley.

Vincent Andrews, Analyst

Thank you, and good morning, everyone. Just looking at Slide 8 on the PE, MDI, and siloxane supply and demand and utilization rates, the three utilization rate ranges that you have, I just look at siloxane, and it is very narrow, the range of outcomes on supply and demand in '22, and it gets wider as you get out to '26. Whereas it looks like it's the opposite for PE and MDI. So what is it about siloxane that creates more of an uncertain medium-term outlook from a supply and demand and capacity utilization perspective?

Jim Fitterling, Chairman and Chief Executive Officer

Yes, thank you, Vince. The siloxane business hasn't seen a lot of recent capacity, as obviously we've been working on reliability and doing some turnaround work in our own assets. I think a lot of it is really end market-driven, and the positive side on the demand for downstream silicones is that you've got a tremendous draw as you move into things like electric vehicles. We're still seeing strong growth in housing and also in large building projects around the world. So I think that's going to continue. My other thought is that our sustainable portfolio from our standpoint, when you look at the sourcing of our silicone metals, is going to allow us to be able to meet some of our brand owners' sustainability demands, and that's going to be positive for Dow. You've got some older assets out there. You've got to keep an eye on that about 4% to 5% of the industry capacity is older, high cost, and has a pretty high CO2 footprint. And so we're keeping an eye on that.

Operator, Operator

We'll take our next question with Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

Thanks very much. Also on Slide 8, you talked about a Canada cracker expansion. In the old days, you used to talk about expanding PE by 600,000 tons a year, which was supposed to happen in the second half of 2022. Is that what that is, or is that something different? And when you did previously talk about a 600,000 ton expansion, is that still going through? And then secondly, on Slide 14, you said your turnarounds this year were $500 million higher than last year. Is that a normal number? What's your normal turnaround costs in a year?

Jim Fitterling, Chairman and Chief Executive Officer

Thanks, Jeff. Two good questions. In Canada, that expansion is an addition of another furnace and some work on the debottlenecking of the backend of the cracker up there. And we have the available capacity in Canada to convert that to polyethylene. So that add is probably about half of that 600 kt that you're talking about in terms of available pounds. There was a project that we had slated to build in the U.S. Gulf Coast of 600 kt, and when COVID hit, we pushed out and we're dusting that off right now, and we're going to make a decision on that sometime this year. So we are continuing to look at expanding in the plastics portfolio downstream. And with the work we've done on reliability, we've got the ethylene within our portfolio to be able to fuel that and make that happen. On turnarounds, again, with cash flow being tight last year, we pushed some into this year. Maybe, Howard, you can comment on what is a more normal number going forward?

Howard Ungerleider, President and Chief Financial Officer

Yes, I mean, look, Jeff, last year, as Jim says, we pushed a lot of turnaround. So 2020 versus 2019 was down about $200 million. We expect this year, as you said, to be up about $500 million. It really does depend. I mean, we've got cracker assets around the world, as you know. And I would say in a typical year, we do between one and three. So if you want to say on average, it's two a year. That would tell you that the average turnaround is probably in the range of $1 billion plus or minus. And this year, it's going to be a little bit above trend line because of push out from last year.

Operator, Operator

Our next question comes from Duffy Fischer with Barclays.

Duffy Fischer, Analyst

Yes. Good morning. Just wanted to triangulate if I could. Pricing for polyethylene is up about 6% as we exited the quarter versus the average for Q2. But when you gave your guidance for the sales growth from Q2 to Q3 for that segment, it's flat, up 2%. So if you just flatline price and you kept the volume the same, you should be up roughly 6%. Can you just triangulate back that 4% as missing? Is that a lack of volume? Or do you see the price rolling over in the back part of the quarter that would get us to equal there?

Jim Fitterling, Chairman and Chief Executive Officer

Yes. Thanks, Duffy. Inventories are real tight right now. And as I mentioned, we haven't been able to really build anything. So with turnarounds in front of us in this quarter, we've been a bit conservative on the volume that’s in that third quarter outlook. Obviously, we are going to try to be able to beat that. And I would say on pricing, we are still seeing some positive upward price movement on certain grades of product. High density, for example, right now is pretty tight. And so I think you're going to continue to see some price movement upward there. But overall, as we get through the turnarounds in the third quarter, I think you're going to see that we are going to have plenty of available volume to move, and that will start to add toward the end of the quarter and into the fourth quarter.

Operator, Operator

We'll take our next question from Hassan Ahmed with Alembic Global.

Hassan Ahmed, Analyst

Good morning, Jim and Howard. As I heard your commentary, it seems, obviously, the fundamentals are looking very strong, near to medium term at least. Obviously, that’s reflected in your strong cash flow. And then again, you made a comment about no sort of significant debt payments due until 2025. So my question is, how are you guys thinking about share buybacks? I mean, you guys did around $200 million of buybacks in Q2, enough to offset dilution. But with the way the balance sheet is right now, the way the fundamentals seem to be, are you guys thinking about a more significant buyback program?

Jim Fitterling, Chairman and Chief Executive Officer

Good morning, Hassan. Let me take a shot at that, and I'll ask Howard to chime in as well. As of the end of the second quarter, we've paid out about 88% of net income in dividends and share buybacks since the spin. So that’s well above our 65% through the cycle guideline. And we just brought back buybacks in the quarter to start to cover dilution. And what we bought was about $200 million worth of shares during the quarter. So that's our priority. I would also say that, remember, we have organic growth in front of us, and so we're going to need some money to go into incremental growth CapEx. This year, we will be at $1.6 billion. We need a couple more years to get up to depreciation levels, which is about $2.2 billion. And we have the projects, and they're good projects, lined up to do that. Howard, any other comments?

Howard Ungerleider, President and Chief Financial Officer

Yes. The only other thing I would say, Hassan, you saw we reinitiated share buybacks in the second quarter, as you said, with the $200 million. I would say that for modeling purposes, that's a good quarterly run rate for the back half of the year. And then as we get to the end of the year, at Investor Day, we will talk more about 2022.

Operator, Operator

We'll take our next question from John McNulty with BMO Capital Markets.

John McNulty, Analyst

Yes, thanks for taking my question. Just a quick one. With regard to the impact in Packaging & Specialty Plastics and Industrial Intermediates around the Uri volumes, can you give us a little clarity on how much that nicked you in 2Q? Because I assume that’s all in the rearview mirror and we should be kind of looking to 3Q? And is that right?

Jim Fitterling, Chairman and Chief Executive Officer

Good morning, John. I think your assumption is right. They were impacted pretty hard in 2Q, and we should see that come back. The assets are running very hard right now. The only caveat to that, I would say, is that there are still a couple of lines where some raw material supply limitations, small raw materials are important in making those products, sometimes causing us a little bit of a backlog. I think most of that capacity was out during the month of April. And so as you think about it and go forward in Q3, I would say you'll have three solid months of production, where last quarter we had two, and we pulled hard out of inventory. So I don't think that we are going to have a chance to rebuild inventories until maybe the end of the year. And that would all depend on if the economy slows down. As Howard mentioned, we’ve customers, and most of them in those chains that have 45 to 60-day backlog. Our view is we're going to be running hard through the end of the year and right into 2022.

Operator, Operator

Our next question comes from John Roberts with UBS.

John Roberts, Analyst

A little bit related there, Jim and Howard, but Dow and the industry had a much harder time recovering from Winter Storm Uri. If we had a similar situation again, would the impact likely be the same? Or has there been some learnings or changes that would mitigate the effect if we had a repeat of this?

Jim Fitterling, Chairman and Chief Executive Officer

Yes. That's a good question, John. We do like we do after a hurricane, we gather the team together, and we take a look at what worked well and what didn't work so well. Uri was a little bit different in that it was so widespread. It was not just us, but it was everything upstream and downstream of us, gas production, electricity, water. The biggest damage, obviously, was freeze-ups. You can't winterize everything to prepare for that, but you can winterize some things. If you have some advanced notice, you can actually take some things down and protect them. The team has gone through that, and we've got an updated game plan on what we would do in the face of a situation like that again. I think the whole industry is going through it. I know ERCOT is working on that on the power side. Winterization is a big part of what they're doing and what they're requesting us to do as well because we are a supplier into ERCOT. I do think there are some positive developments since Winter Storm Uri. The widespread nature of it is what caught everybody and has taken so long to work through.

Operator, Operator

Our next question comes from Michael Sison with Wells Fargo.

Michael Sison, Analyst

Hey, guys. Nice quarter. I think PE prices are at all-time highs, and obviously, demand is strong and supply is super low. Just curious, though, do you think there's a fundamental change in demand for polyethylene on a structural basis, maybe post the pandemic? Is it possible that we're really going to be above that 1.3 to 1.5 GDP going forward? And then just curious what you think would need to happen for prices to fall?

Jim Fitterling, Chairman and Chief Executive Officer

Yes, Michael. Thanks for the question. We’ve seen a change in buying behavior from customers. There are some areas that really drive a lot of packaging-like e-commerce activity, which I don't think is going to go backward. I also think that plastic packaging is so lightweight and strong, and it has the lowest carbon footprint of any packaging type; you are going to continue to see a drive toward that. For most companies, the shipping costs and CO2 footprint will drive that. I just use a paper versus plastic scenario in a grocery store. One truckload of plastic shopping bags would take four to five truckloads of paper bags to replace it. I think you're going to see as carbon comes into the equation that it advantages plastics greatly. I don't think there's something that's going to see it long-term move above 1.5. For many decades, it's been in that 1.5 type of GDP growth rate. I think that will stay. There are some functional polymers that are made out of ethylene and polyethylene derivatives that are continuing to grow, as well as materials for construction that are positive. You're going to see growth in some other applications like products that go into alternative energy, both solar panels for encapsulation, wind blades, and other applications. So I think we can sustain that over a long period of time, which is positive.

Operator, Operator

We'll take our next question from Bob Koort with Goldman Sachs.

Bob Koort, Analyst

Thanks very much. Jim, I wanted to ask you, maybe it dovetails on Mike's question, but in terms of PE demand growth in that multiplier, the Dow and the industry is also embracing the circular economy. Just curious what effect you think the recycling initiatives and circular initiatives out there, what that might do to virgin demand growth rates relative to that sort of 1.5 times GDP multiplier?

Jim Fitterling, Chairman and Chief Executive Officer

Yes. Good question, Bob. We are seeing a real demand pull from consumers and brand owners that want more post-consumer recycled material in there, or they want more material that’s made from either a biosource to ethylene or something that is made from advanced recycling to get back to feedstock and back to a product. I think the drivers that are going to help on the virgin side of things are obviously redesign of packaging types on flexible packaging; many packages are complicated and hard to recycle. I think one of the positives of our portfolio right now is that more than 80% of our portfolio is fully recyclable or reusable today, and the research and technical service teams are working hard to get the rest of that to 100%. All the brand owners are working on redesigns right now of different packages to move away from complex structures into simpler structures. We use that bare naked granola example with Kellogg's, where that package has been redesigned. This is going on across the value chain. We are seeing the investments in mechanical and advanced recycling pick up. We are seeing the number of states that are approving advanced recycling projects pick up. I think our next big impact is going to be on infrastructure at the state and local level to allow more collection of curbside recycling of more products. That will be the next drive north. We still have a long way to go even to catch up with Europe. In the United States, we have a long way to go to get to that 35% of recycling. We set a target by 2030 to collect, reuse, or recycle 1 million metric tons of plastic through our own actions and partnerships. I can tell you, I’m pushing the team to always pull that number forward and get that done faster. I think we're seeing real demand in taking recycled packaging products into some things that are more durable and longer-lived, building materials, using recycled plastics in aggregate for roadways, architectural decking—all kinds of things that are upgrading the use of end-of-life plastics. So I think over time, it's going to be a real positive.

Operator, Operator

The next question comes from Laurence Alexander with Jefferies.

Laurence Alexander, Analyst

Good morning. What price of carbon do you currently use for evaluating growth projects? And is it high enough that you are actually seeing it skew the types of projects that you're considering from what you would have considered otherwise?

Jim Fitterling, Chairman and Chief Executive Officer

Yes, that’s a good question. I would say today the price is around €50 to €55 a ton. I mean, that's what we see today in the EU on the market and translate that back into dollars as well. I would say that is not a high enough price of carbon to drive the change that needs to be made because the lower carbon technologies are much more expensive than that. But it is enough to put pressure on us to make sure that all of our projects have lower carbon approaches to them. One of the things we will talk about at Investor Day is the work we did to outline the next 20 to 30 years of how we would get there. I think carbon capture, as we talk about, as we get beyond this infrastructure build that's in front of Congress right now and we get to the next step, you’ve got to look at advanced technologies. Carbon capture and blue hydrogen are two that we have to keep an eye on. Those are the lowest cost next step for us to get our industry to low CO2. But they're a lot more than €55 a ton to deliver that. Without the right tax incentive or support from government in terms of investment in those technologies, you would need a market price on carbon that is much higher than that. We are right on top of that and we are very attuned with that. That’s one of the things that we're piloting in Terneuzen. That's the 40% reduction that I talked about by 2030, is we are looking at blue hydrogen and carbon capture to try to make an improvement at that site.

Operator, Operator

We'll take our next question from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan, Analyst

Great. Thanks for taking my question. Congrats on the strong results here. You had mentioned some comments on supply additions being at the high end of the cost curve. Could you just maybe remind us what your assumptions are on how much polyethylene capacity is being added in the rest of '21 and where that is coming, whether it be in, again, China or other regions? And also for '22, what do you expect on that side? And have you seen any changes as far as projects being accelerated that were potentially pushed out during COVID or returning back to the table? And then longer term, do you expect new projects to be announced? It sounds like the market is going to be very tight for a little while, and you don't see any letup in demand. So is that kind of within your thinking as well? Thanks.

Jim Fitterling, Chairman and Chief Executive Officer

Thank you, Arun. That's a good question. I'll try to cover everything. Approximately 50% of the global polyethylene additions through 2025 are higher-cost sources like naphtha or coal to olefins or methanol to olefins. Out of that, 35% is naphtha and 15% is from coal or methanol to olefins. Around 60% of these capacity additions will occur in Northeast Asia. Considering the Chinese projects currently under construction or in the startup phase, about 50% are expected to reach the market by their announced timelines, which equates to around 12 million metric tons out of a total of 24 from 2021 to 2023. These capacity increases are likely to decrease some imports into China, making it more self-sufficient, though we don't anticipate China will be exporting at those levels. Additionally, there are some existing crackers that are considered unreliable due to trade risks, accounting for about 2 million to 3 million metric tons. Looking at the long term, supply additions are projected to be around 31 million metric tons. We estimate delays or cancellations could be between 6 million to 15 million metric tons. Demand growth is expected to be around 25 million metric tons, so we anticipate a shortfall of about 9 million metric tons during that period. In the near term, given the current GDP growth rates, the market will likely be tight. Regarding growth, I mentioned earlier about a 600 kt expansion in polyethylene, which is on the table, along with incremental expansions in ethylene. We're also working on our own FCDh and EDH technologies in the Gulf to advance low carbon initiatives. One key aspect that needs to be addressed before we can see more announcements is the clarity around U.S. policies related to carbon, including carbon border adjustments, carbon taxes, or possibly a voluntary emissions trading scheme. We need to understand these elements, as well as China's role in the global landscape and how Europe is progressing. All of these factors must be clarified before we can determine the best path forward for new projects, and we are actively seeking suitable opportunities.

Operator, Operator

Our next question comes from Alex Yefremov with KeyBanc Capital Markets.

Alex Yefremov, Analyst

Thank you. Jim, just to continue on the subject, you mentioned that the price of carbon in Europe is currently not high enough to really provide incentive to implement these technologies. As this price rises and Europe implements the tax to help domestic industry sort of absorb these higher carbon prices, do you think that ultimately amounts to something neutral for Dow Chemical? Because having capacity in Europe you will directly or indirectly benefit from these import taxes?

Jim Fitterling, Chairman and Chief Executive Officer

I believe it is possible. I've mentioned this before and will keep emphasizing it; we need to engage in a meaningful and open conversation about the costs involved. Ideally, everyone agrees on the goal of making improvements, reducing carbon emissions, and reaching net zero. However, there hasn't been an educated discussion at any level about the costs associated with these efforts. In Europe, the emissions trading system has a price for carbon and allowances for emitters. If emitters stay below their allowances, they can trade carbon credits. Over time, allowances will decrease, leading to increased prices that will incentivize conversion. Currently, Europe is focusing more on driving up costs and encouraging that shift rather than discussing the overall costs. We are actively trying to communicate the realistic expenses, the available technologies, and to scale up the most cost-effective options moving forward, such as blue hydrogen and carbon capture. I believe that over the next two to three years, we will start to see progress in this area. All heavy industries, along with the power and utility sector, are looking into these changes while recognizing that there won't be zero costs involved. Additionally, as we transition to a hydrogen economy, the most effective method of producing hydrogen is through steam methane reforming, which relies on natural gas. This means that substantially more natural gas production will be necessary, which is another challenging topic to address right now.

Operator, Operator

Our next question comes from Steve Byrne with Bank of America.

Steve Byrne, Analyst

Yes. Thank you. So, Jim, you are really leading this initiative on net zero. I mean, you are clearly one of the few that have a net-zero greenhouse gas emission target for 2050. I'm curious to hear your view as to what’s driving that? I mean, clearly, there's not U.S. government policy driving that. You are describing a carbon tax in Europe that’s insufficient to incentivize that. Is there any opportunity that you see that downstream revenue could be enhanced from it? I'm not sure how, but there are clearly ways for you to premium price for a recycled product or renewable product. But a low carbon footprint product, is there a revenue potential that could help drive a return on that CapEx, or is this all really self-motivated?

Jim Fitterling, Chairman and Chief Executive Officer

Good question, Steve. We are starting to see consumer preference drive the brand owners for lower carbon and more recyclable products. Clearly, both the brand owners and ourselves are in the space that we want to make investments in that area, but we want those investments to be value accretive. The policies are not there right now. What we are trying to work through are the right set of policies that we need to make value-creating investments going forward. I would say the consumer drive and the consumer preference on this is going to be the thing that makes it happen. The market premiums are starting to show up in some of the plastics today. When it comes to post-consumer recycled materials into packaging, we are seeing a strong pull from the brand owners and beginning to see premiums. If you go back a decade, we had not seen that. Brand owners are allocating premiums for recycled materials to address circularity, which I think is a sign that customers want it. When you get it down to a per package basis, it's very small. The problem comes through the value chain and the cost to manufacture the materials. If you take it down to a per package basis on the shelf at a supermarket, it might add $0.01 to the cost of a product that you buy. It isn't significant at the consumer level; it's significant through the value chain.

Operator, Operator

And we'll take our next question from Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy, Analyst

Yes, good morning. Jim, I wanted to ask you about industrial intermediates where your operating income more or less doubled sequentially. Two parts. Can you talk about the upside relative to your expectations 3 months ago? How much might have been polyurethanes versus other industrial chemicals? Then, given that momentum and your sales forecast of flat to up 3%, do you have a strong view today as to whether third quarter could be flat, up, or down profit-wise sequentially?

Jim Fitterling, Chairman and Chief Executive Officer

That's a great question. In Industrial Intermediates & Infrastructure, we experienced strong demand for both polyols and isocyanates in the construction chemicals sector, particularly for materials used in single-family homes and larger construction projects. I believe this demand will remain robust, and the supply-demand situation will continue to be tight. We saw strong pricing for both polyols and isocyanates, and there isn't much new capacity entering that market. Additionally, we have several new capacity additions planned for pharmaceutical ingredients, including an expansion of polyethylene glycol, among other materials. We also offer a range of low VOC solvents that are used in the coatings sector. As the coatings industry shifts from traditional organic solvents to waterborne or lower VOC options, this trend benefits our portfolio. This same trend is also advantageous for cleaning chemicals and products used in homes, and we see positive momentum from both brand owners and industrial users. We expect that the performance in the third quarter for these businesses will be similar to what we experienced in the second quarter.

Pankaj Gupta, Vice President, Investor Relations

Very good. Thank you. That concludes our call today. We appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within 24 hours. Thank you.

Operator, Operator

And that does conclude today’s conference. We thank you for your participation. You may now disconnect.