Executive Summary / Key Takeaways

• Strategic Rebalancing for Long-Term Value: Dow is proactively reconfiguring its global asset footprint and capital allocation to strengthen its competitive position, focusing on high-return, integrated growth projects in advantaged regions while divesting non-core and high-cost European assets.
• Technological Edge and Operational Discipline: Proprietary technologies like Poly-7 for polyethylene, advanced alkoxylation, and downstream silicones expansion, coupled with a unique feedstock flexibility and a commitment to operational efficiency, provide Dow a significant cost advantage and underpin future margin expansion.
• Financial Flexibility Amidst Downturn: Despite a prolonged industry downturn and recent profitability pressures, Dow maintains a strong balance sheet, ample liquidity, and has taken decisive actions, including a 50% dividend reduction and significant cash generation from strategic partnerships and litigation, to preserve financial flexibility.
• Outlook for Sequential Improvement: Management anticipates a sequential EBITDA improvement in Q3 2025 to approximately $800 million, driven by polyethylene margin recovery, contributions from new growth projects, and accelerated cost reductions, signaling a potential inflection point in core earnings.
• Navigating Competitive Pressures: Dow faces intense competition, particularly from Chinese exports and industry overcapacity, but its strategic asset rationalization and focus on differentiated, high-value applications are designed to mitigate these pressures and defend market share.

The Materials Science Powerhouse: A Foundation for Future Growth

Dow Inc. stands as a global leader in materials science, with a rich history dating back to its founding in Midland, Michigan, in 1897. The company's core business revolves around providing essential solutions for diverse, high-growth markets such as packaging, infrastructure, mobility, and consumer applications. Dow's overarching strategy is rooted in leveraging its purpose-built asset footprint, particularly its low-cost feedstock positions in the Americas and the Middle East, to drive competitive advantage and profitable growth across the economic cycle.

The company's strategic evolution has been marked by a continuous pursuit of operational excellence and a "best owner mindset." This involves both significant investments in core capabilities and a disciplined approach to portfolio optimization through divestitures and asset rationalization. This dual focus allows Dow to adapt to dynamic market conditions, ensuring long-term competitiveness and value creation for its shareholders.

Technological Differentiation and Innovation

Dow's competitive moat is significantly fortified by its differentiated technologies and a robust innovation pipeline. The company's proprietary solution technology, exemplified by the new Poly-7 polyethylene train in Freeport, Texas, is designed for lower cost, increased production capacity, and improved efficiency and flexibility. This technology enables Dow to achieve 10-15% lower operating costs per unit in ethylene production compared to some alternatives, thanks to advanced catalysts.

Beyond cost efficiency, Dow is investing in next-generation solutions. The ambitious Path2Zero project in Fort Saskatchewan, Alberta, aims to be the world's first net-zero Scope 1 and 2 carbon dioxide equivalent emissions integrated ethylene and derivatives complex. This transformative project, while currently delayed due to market conditions, is projected to generate approximately $1 billion in incremental annual EBITDA by 2030. It represents a significant leap in sustainable production, targeting 30% less waste in next-gen versions and offering products with zero Scope 1 and 2 emissions, appealing to brand owners seeking lower carbon footprints.

Further enhancing its portfolio, Dow's new alkoxylation capacity in Seadrift, Texas, is expected to deliver margins in excess of 1,000 basis points higher than MEG, supporting growth in attractive Industrial Solutions markets like home care, pharma, and energy. The company is also expanding its downstream silicones capacity, which consistently delivers growth above GDP rates in high-value applications such as infrastructure, electronics, mobility, and consumer. Dow's coatings, for instance, offer 10-15% greater efficiency in application, such as faster drying times, while its Industrial Intermediates products feature 15% faster processing speeds compared to some rivals. These technological advancements, combined with Dow's unmatched feedstock flexibility allowing it to crack the most optimal feed slate, enable the company to optimize production for cost and market needs.

Dow's commitment to innovation extends to circularity, as evidenced by its long-term agreement to supply millions of pounds of low-carbon solutions to a major consumer brand owner. This demonstrates the company's ability to capitalize on innovation that meets customer sustainability commitments. Furthermore, the submission of a construction permit application for an advanced nuclear project in Seadrift, Texas, in partnership with X-energy, highlights a long-term vision to replace existing energy assets with safe, reliable, and clean power, aiming to eliminate most Scope 1 and 2 emissions at the site. These technological differentiators are critical to Dow's competitive positioning, enabling higher margins, lower costs, and a stronger market presence in a challenging industry.

Competitive Landscape and Strategic Positioning

The materials science industry is characterized by intense competition, cyclicality, and significant capital intensity. Dow operates within this dynamic environment, competing directly with global giants like BASF SE (BASFY), PPG Industries (PPG), and Arkema S.A. (ARKAY), as well as numerous regional players.

BASF, a diversified chemical producer, holds a larger global market share in industrial intermediates and performance materials than Dow. While BASF often leads in innovation speed, bringing new products to market 20-30% faster due to its larger R&D budget, Dow's proprietary ethylene production processes offer 10-15% lower operating costs per unit. This cost efficiency is a critical differentiator for Dow, allowing it to maintain market share in price-sensitive segments like packaging, even as BASF's superior R&D appeals to eco-conscious customers with products boasting 15-20% better sustainability metrics. Dow's financial performance, while resilient in cash flow generation, has historically lagged BASF in net profitability and Return on Invested Capital (ROIC), indicating that while Dow can produce materials more cheaply, BASF often captures higher value through its premium offerings.

In the Performance Materials & Coatings segment, Dow directly competes with PPG Industries. PPG is dominant in industrial coatings, known for products with 20% higher durability. Dow, however, differentiates through broader material science integration, offering a 5-10% edge in cross-segment applications and coatings that provide 10-15% greater application efficiency. While PPG generally boasts higher operating margins (around 15% compared to Dow's 1.97% TTM operating margin) and ROE, Dow's focus on scale and cost leadership helps it secure market share in cost-sensitive markets.

Against Arkema S.A. , a specialty materials producer, Dow leverages its scale to offer 20% lower upfront costs in certain segments, while Arkema differentiates with eco-friendly technologies. Dow's strength lies in reliability and overall cost-effectiveness, which allows it to outperform in cash flow and market share growth. However, Arkema's efficiency in niche areas could pressure Dow's position in sustainable markets.

Overall, Dow's market positioning is defined by its cost leadership, particularly in its Packaging & Specialty Plastics segment, and its strategically advantaged asset footprint. The company's annual benchmarking results consistently show higher polyolefin margins than peers over the cycle. Barriers to entry, such as high R&D costs and stringent regulatory hurdles, favor established players like Dow, protecting its market share against new entrants who face 20-30% higher initial costs.

However, the industry faces significant headwinds, including persistent overcapacity, particularly from newer market entrants exporting at "anti-competitive economics," and geopolitical uncertainties leading to volatile trade policies and tariffs. This has resulted in increasing import activity from competitors in China, especially impacting polyurethanes and siloxanes markets in Europe and Latin America. Dow is actively engaged with governments and industry associations to defend fair trade and address these challenges.

Financial Performance and Operational Resilience

Dow's recent financial performance reflects the challenging macroeconomic environment and the company's proactive strategic adjustments. For the second quarter of 2025, net sales were $10.10 billion, a 7% decrease year-over-year, with declines across all operating segments and geographic regions. Local price was down 7%, and volume decreased 1%, partially offset by a 1% favorable currency impact. This trend continued into the first half of 2025, with net sales of $20.53 billion, down 5% from the prior year.

Profitability was significantly impacted, with Cost of Sales (COS) as a percentage of net sales increasing to 94.2% in Q2 2025 from 87.9% in Q2 2024, indicating margin compression. Operating EBIT for Q2 2025 was $38 million, a substantial decline from $856 million in Q2 2024. This was primarily driven by lower integrated margins, particularly in Packaging & Specialty Plastics (Operating EBIT of $71 million, down from $703 million in Q2 2024), and lower operating rates. Industrial Intermediates & Infrastructure also saw a significant decline in Operating EBIT to $185 million from $7 million in Q2 2024. Performance Materials & Coatings, however, showed resilience with Operating EBIT increasing to $152 million from $146 million in Q2 2024, driven by margin expansion from lower input costs and a favorable mix towards downstream silicones.

Despite the top-line and margin pressures, Dow has demonstrated strong operational discipline. Research and Development (R&D) and Selling, General and Administrative (SGA) expenses decreased due to ongoing cost reduction initiatives and lower third-party purchased services. The company recorded significant restructuring and asset-related charges of $591 million in Q2 2025, primarily for asset write-downs ($334 million), severance ($154 million), and exit costs ($103 million) related to European asset rationalization. These actions, while impacting current earnings, are designed to enhance long-term competitiveness and are expected to result in an annual EBITDA uplift of $200 million by 2029.

Cash flow from operating activities for continuing operations was a use of $470 million in Q2 2025, compared to a source of $832 million in Q2 2024, primarily due to working capital and performance-based compensation. However, the company's liquidity remains robust, with $2.399 billion in cash and cash equivalents at June 30, 2025, and $8.4 billion in undrawn committed credit facilities. Dow has no substantive long-term debt maturities until 2027, providing significant financial flexibility.

Strategic Initiatives and Outlook

Dow is executing a comprehensive strategy to navigate the prolonged industry downturn and position itself for future profitable growth. This includes a multi-pronged approach to cost reduction, portfolio optimization, and targeted growth investments.

The company is accelerating its cost reduction program, now targeting approximately $400 million in savings for 2025, part of a larger goal of at least $1 billion in annualized cost reductions by 2026. These savings are primarily focused on third-party contract labor and purchased services, alongside a workforce reduction of approximately 1,500 roles.

Portfolio optimization is a key pillar of Dow's strategy. The company recently completed the sale of its Telone™ soil fumigation product line for $121 million and announced the sale of its 50% interest in the DowAksa joint venture for approximately $125 million. These divestitures, at attractive EBITDA multiples of around 10x, are part of Dow's "best owner mindset" to focus on core, high-value downstream businesses. Furthermore, the company is undertaking a strategic review of its European assets, leading to the decision to shut down an ethylene facility in Böhlen, Germany, chlor-alkali and vinyl assets in Schkopau, Germany, and a siloxanes plant in Barry, United Kingdom, by 2026-2027. These actions are "cash accretive" and aim to right-size regional capacity and remove higher-cost, energy-intensive assets.

Capital allocation is being recalibrated to match current market realities. Dow has reduced its expected full-year 2025 capital expenditures to approximately $2.5 billion, a $1 billion reduction from its original plan. This includes the strategic decision to delay construction of the Path2Zero project in Fort Saskatchewan, Alberta, until market conditions improve, ensuring the project's returns remain above the cost of capital.

Despite the challenging environment, Dow is bolstering its near-term cash position through unique levers. The strategic partnership with Macquarie Asset Management (MQG), finalized in May 2025, involved the sale of a 40% equity stake in Diamond Infrastructure Solutions, generating $2.4 billion in initial cash proceeds, with potential for up to $3 billion if Macquarie exercises its option to increase its stake to 49%. Additionally, Dow expects to receive approximately $1.2 billion in cash proceeds from the NOVA Chemicals judgment in 2025. These actions are expected to provide over $6 billion in near-term cash support.

Looking ahead, management anticipates a sequential improvement in Q3 2025 EBITDA to approximately $800 million. This uplift is expected to be driven by sequential improvement in polyethylene integrated margins (following the June price settlement and expected July price increases of $0.05-$0.07 per pound), higher volumes from newly commissioned growth investments (Poly-7 polyethylene train and new alkoxylation unit), and the accelerated cost reduction program. This positive outlook is expected despite higher planned maintenance and lower seasonal demand in some segments.

Risks and Challenges

Dow operates in a cyclical industry susceptible to global macroeconomic conditions, energy and raw material price volatility, and geopolitical events. The current environment is characterized by "protracted down cycle" expectations, "significant impact of slower global GDP growth," and "heightened trade and geopolitical uncertainties." These factors can lead to reduced demand, margin compression, and supply chain disruptions.

Industry overcapacity, particularly from "newer market entrants exporting at anti-competitive economics," poses a significant challenge, negatively impacting profitability. The imposition of tariffs and trade barriers, such as those seen in Brazil and discussions in the U.S., can disrupt trade flows and impact sales volumes and prices. The ongoing conflicts in the Middle East and between Russia and Ukraine also present risks to supply chains and market stability.

Dow's equity earnings from nonconsolidated affiliates, such as Sadara, have been volatile and impacted by challenging macroeconomic conditions, leading to negative investment balances. While the company has taken steps to mitigate legacy liabilities, such as groundwater contamination matters, inherent uncertainties remain, and future costs could still be material. The recent downgrade of TDCC's credit rating by Moody's Ratings reflects the impact of current market conditions on earnings, although Dow maintains a strong investment-grade profile.

Conclusion

Dow is a materials science giant confronting one of the most prolonged industry downturns in decades. Its core investment thesis hinges on its ability to leverage a strategically advantaged, low-cost asset footprint and differentiated technologies to drive profitable growth through the cycle. By proactively rationalizing high-cost European assets, accelerating cost reductions, and strategically investing in high-return, integrated growth projects like Poly-7 and advanced alkoxylation, Dow is rebalancing its portfolio for enhanced resilience and future earnings power.

Despite recent financial pressures, the company's decisive actions to bolster liquidity through strategic partnerships and litigation proceeds, coupled with a prudent dividend adjustment, underscore its commitment to financial flexibility. As global markets gradually rebalance and demand recovers, Dow's technological leadership in areas like zero-emissions ethylene and high-value silicones, combined with its disciplined operational execution, positions it to capture demand in attractive end markets and deliver higher shareholder returns. Investors should monitor the impact of ongoing trade policy developments and the ramp-up of new capacity, as these factors will be critical in determining the pace of Dow's core earnings recovery and its ability to solidify its competitive advantages in the evolving global chemical landscape.