Good day. Welcome to the Dow Chemical Company's 1Q 2016 Earnings Results Conference Call. Also please note today's call is being recorded. I would now like to turn the conference over to Neal Sheorey. Please go ahead, sir..

Thank you. Good morning and welcome to the Dow Chemical Company's First Quarter Earnings Conference Call. I'm Neal Sheorey, Vice President of Investor Relations. As usual, we are making this call available to investors and the media via webcast. This call is the property of the Dow Chemical Company.

Any redistribution, retransmission or rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited. On the call with me today are Andrew Liveris, Dow's Chairman and Chief Executive Officer; Howard Ungerleider, Vice Chairman and Chief Financial Officer and Jim Fitterling, President and Chief Operating Officer.

We have prepared slides to supplement our comments in this conference call. These slides are posted on our Investor Relations financial reporting page. You can also access the slides through the link to our webcast. I would like to direct your attention to the forward-looking statement disclaimer contained in both the press release and in the slides.

In summary, it says that statements in the press release, the presentation and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provision under Federal Securities Laws.

There are many factors that could cause actual results to differ from our expectations including those we've described in our filings with the SEC. In addition, some of our comments reference non-GAAP financial measures.

A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website. Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons exclude divestitures and acquisitions.

EBITDA, EBITDA margins, return on capital and earnings comparisons exclude certain items. Some of our comments may also contain statements about our announced agreement to complete a merger of equals with DuPont and the intention to subsequently spin into three independent publicly traded companies.

In connection with this intended transaction, Dow and DuPont have filed and will file materials with the SEC that contain important information. We advise you to read them. These filings are available free of charge from the SEC or Dow or DuPont as applicable. I will now turn the call over to Andrew..

14 consecutive quarters of earnings growth and EBITDA margin expansion, 10 consecutive quarters of volume growth, the highest production volume quarter in our history and we delivered value for those additional pounds as disciplined margin management enabled the highest EBITDA margin in more than a decade.

Importantly, on a trailing 12-month basis, this translated to an expansion in both ROC and EVA. These results have enabled us to increasingly reward our shareholders as we paid our highest regular quarterly dividend in our history of $0.46 per share.

I'll now turn the call over to Howard and Jim to cover highlights from the quarter, updates on Dow Corning and DowDuPont and our Plastics outlook. I'll then close the call with our market outlook and strategic priorities.

Howard?.

Thank you, Andrew, and good morning, everyone. Turning to slide six, our results reflected our continued discipline in executing on our financial priorities. Operating EPS increased 6% to $0.89 per share. Volume increased 4%. We saw growth around the world with North America up 6%, Europe, Middle East, Africa and India up 4%, and Asia-Pacific up 3%.

This more than offset a decline in Latin America, down 4%. Emerging geographies also continued to grow with India up 13% and Greater China up 5% reflecting continued consumer driven demand. Overall, price was down 12% primarily due to local price declines of which the largest contributor was the hydrocarbons business and ongoing currency headwinds.

However, it's important to note that our ongoing margin management more than offset these declines enabling operating EBITDA margin expansion to 21% with some of the strongest gains in our downstream innovation focused businesses in Consumer Solutions and Infrastructure Solutions.

Operating EBITDA was $2.3 billion with notable strength in our transportation, infrastructure, and electronic end markets, plus an all-time record in consumer solutions and a first quarter record in Performance Plastics which were more than offset by the impact of lower equity earnings and divestitures.

Moving on to our dashboard of key financial metrics on slide seven which reflect our consistent track record of delivering earnings growth, margin expansion and strong cash flow.

As a reminder, our financial priorities include delivering 3% above the cost of capital, driving 10% EPS growth over the long-term, maintaining a capital structure that provides financial flexibility and continuing to increasingly reward shareholders. And as you see here, over the last three years we've made steady progress against each one.

Now I'll turn to our segment results on slide eight starting with Ag. Agriculture Sciences' operating EBITDA was nearly flat with EBITDA margin up 250 basis points. The result exemplifies our self-help mindset as disciplined productivity essentially offset the impact of challenging market conditions and currency headwinds.

We also reached further milestones on our innovation agenda. In the ENLIST program we launched cotton in the U.S., in crop protection the business progressed its investments in support of launches from its product pipeline for novel herbicides such as Arylex and Rinskor and Inatreq fungicide.

Looking ahead, we maintain our view that the market will be down 3% to 5% this year as we expect high yields in the Americas, high channel inventories, ongoing currency headwinds and low crop prices.

While it may be too early to call the bottom, we are encouraged to see corn and soybean pricing rise from recent lows and long-term, the world continues to need solutions that will drive greater Ag productivity.

Turning now to Consumer Solutions on slide nine, this segment achieved an all-time operating EBITDA record, and margin expanded 400 basis points reflecting robust demand for Dow's innovative product portfolios in the automotive and the semiconductor sectors.

Dow Automotive Systems achieved volume gains on above market demand for solutions enabling lightweighting and sound dampening performance. The business launched a new BETAMATE solution for structural impact performance as well as technologies for advanced floor protection solutions.

In Electronic Materials, despite a decline in demand for applications tied to personal computer components, we benefited from new business wins for semiconductor and display technologies. For Infrastructure Solutions on slide 10, EBITDA was essentially flat despite lower equity earnings and margin expanded 220 basis points.

Dow Building and Construction delivered double digit volume growth with increases across all geographic areas on strong demand for our Construction Chemicals portfolio and STYROFOAM insulation.

Here too, our innovation is delivering as we saw continued adoption of the FR63 flame retardant technology as well as progress with our INSTA STIK roofing adhesives and our liquid armor flashing and sealants. Energy & Water Solutions continued to be impacted by headwinds in oil and gas exploration.

During the quarter, our Water business reached a milestone as its new RO membrane plant in Saudi Arabia sold its first production. This facility is targeted to meet demand of the emerging world for Dow's separation technologies.

I'm pleased to report that the site is already delivering our differentiated value-added products and is operating at similar rates and yield as our state-of-the-art operation in Minnesota. Performance Monomers' profitability improved partly due to the business' decision to reduce its merchant sales exposure.

And in Dow Coating Materials, the business grew volume due to improvements in industrial and architectural coating sectors, benefiting from a strategy to broaden Dow's participation in these end markets. The business continued to broaden its product portfolio, launching five new vinyl acrylic binders.

In equity earnings, Dow Corning Silicone delivered a double-digit earnings increase on strong volume growth. On slide 11, Performance Materials & Chemicals increased volumes in most businesses.

Polyurethanes delivered a double-digit volume increase on demand for system house applications and specialty polyols as the business continued to shift its mix into higher-value offerings. Industrial Solutions reported a volume decline, despite strength in the durables markets on weaker de-icer demand due to a milder winter.

We also saw a notable decline in our equity earnings in the segment consistent with our modeling guidance from the ramp up of Sadara spending, the change in ownership of MEGlobal, and lower MEG prices. Performance Plastics on slide 12 delivered a record first quarter operating EBITDA with volume gains across all business.

Packaging and Specialty Plastics achieved a new record polyethylene sales volume in the quarter driven by operational reliability and robust demand for its differentiated products.

The business continued to advance its innovation agenda with new launches in several product families including AGILITY for food packaging, INFUSE for health and hygiene, and INNATE for industrial and consumer packaging. Gains were achieved in most geographic areas led by North America and Asia-Pacific with double digit growth in China.

Earnings grew in our Thai JVs on stronger Asian NAFTA chain margins. These results were more than offset by a greater than $100 million headwind in Argentina due to our facility outage and the reduction of import barriers.

Elastomers delivered earnings growth on higher demand for its differentiated technologies that enhanced the customer experience in transportation and high performance athletic footwear. And Electrical and Telecommunications achieved double-digit volume growth on demand for infrastructure projects, subsea cable and fiber optics.

Turning to our second quarter and full year modeling guidance on slide 13, in the second quarter we do expect a seasonal uptick in infrastructure which lifts our Building and Construction, Coatings and Electrical and Telecommunications businesses.

In Performance Plastics we expect year-over-year margin compression in Europe as well as reduced earnings from our position in Latin America. In Ag, we expect the market headwinds to persist.

However, with our continued self-help actions we expect the first half of 2016 to be comparable to the same period in 2015 when adjusted for the impact of divestitures. In 2016, we continue to bring on several earnings growth catalysts starting with the PDH contribution which will continue to build throughout the year.

The start-up of new units of Sadara will also continue. In fact, the second solution polyethylene train came online this month. Turnarounds and maintenance spending will be higher sequentially in the second quarter by $100 million to $150 million.

We expect lower equity earnings to continue as a result of our portfolio actions, and the Sadara unit start-ups. Turnarounds and equity earnings headwinds in the second quarter will primarily impact Performance Materials and Chemicals and that will subside in the back half of the year.

The Dow Corning transaction is expected to be a tailwind in the second half of the year and we will benefit from ethane cracking enhancements in Louisiana toward the end of the year. We also see pension expense continuing to provide a tailwind.

As we look ahead, we expect our operating tax rate for the remainder of the year to be in the range of 23% to 27%. We expect our reported rate to fall in the 7% to 12% range in the second quarter assuming a successful Dow Corning close. I'll wrap up my comments this morning with an update on the Dow Corning transaction on slide 15.

We have made significant progress towards the integration and will hit the ground running immediately following close. In the first quarter, the transaction received a favorable private letter ruling from the IRS and we have made steady progress on the regulatory front with approval from several key jurisdictions including China, Japan and the EU.

Joint integration teams composed of Dow and Dow Corning leaders have been working together since the first of the year to set the foundation for a successful integration. With an eye toward our post-close priorities, we have established the business and the organizational structure that will lead Dow Corning in the future.

The team is aligned to three areas of focus, delivery of the 2016 plan and the market and technology based growth in our key sectors such as infrastructure, transportation and consumer care, productivity and asset management as well as the seamless integration and realization of our cost synergies.

I want to take a moment to talk about cost synergies and the work the team has accomplished to date which you'll see on slide 16. As we said in December, this traction provides Dow an opportunity to own all of the Silicones business and secure enhanced cost and growth synergies that are unique to Dow as the owner.

Dow Corning Silicones is a successful and thriving business that Dow helped build over the last 70-plus years. This transaction enhances our market-facing businesses with a high quality silicones franchise and provides a catalyst for growth.

It allows Dow to accelerate our narrower and deeper focus in our key value chains including transportation, infrastructure, consumer care and electronics. Because we know the business so well, there is a tremendous value in the synergy capture, and here Dow is uniquely positioned to access quick wins.

The $300 million of cost synergies will focus on back office and operational efficiencies and we expect to achieve 100% run rate within 24 months after closing. You see here our latest estimate of how this will develop. We expect to deliver a 65% target run rate within 12 months.

The team has now completed their work to validate our cost synergy target and their findings give me great confidence that we will hit our commitment. In total, we still see this transaction adding more than $1 billion in additional EBITDA for Dow on a full year basis post-synergy capture.

It will also be accretive to our EPS, operating cash flow and free cash flow in year one. With that, I'll turn the call over to Jim..

Thank you, Howard. Turning now to slide 17, we continue to make strides toward the close of DowDuPont and the pursuit of the intended separation into three independent publicly traded companies. Here you see our updated timeline. All key deliverables remain on track.

A major milestone in the quarter was the filing of the Form S-4 registration statement and just last week we followed up with the first amendment. We continued to expect the S-4 will be made effective in the second quarter. Following that, both Dow and DuPont will set the date for our respective special meetings for shareholders to vote on the merger.

The second major milestone in the quarter was our formation of a joint implementation management office or joint IMO which is driving the integration process across the two companies. And the third milestone was both companies jointly engaging McKinsey who has assisted many other companies through large successful integrations.

Turning to slide 18; with oversight from the joint executive steering committee, the joint IMO is developing execution ready plans to ensure that we can quickly integrate the merger, capture our anticipated cost and revenue synergies and begin to operate as three independent divisions as soon as possible post-close.

The clear objective of the joint IMO which Rick Olson from DuPont and I co-lead is speed of execution, speed to close, speed to capture the synergies and speed to spin. The team is squarely focused on that mission.

Soon after forming the joint IMO, we commissioned multiple sub teams focused on the diversity of work streams from governance to stand up and separation activities to sourcing and purchasing. There have already been numerous joint planning meetings between the two companies.

Plans are progressing well and we continue to make significant progress to realize the vision for the merger and the subsequent intended spins. One of the key deliverables for this team is an execution-ready playbook to achieve our greater than $3 billion synergy target.

In this space we've already done considerable benchmarking to validate our targets. We followed a rigorous process coordinated by McKinsey to provide objectivity and external validation for our assumptions. We compared various financial metrics for the intended spins against best-in-class peers. We did this across businesses and functions.

This independent benchmarking yielded a similar answer as the joint working session our companies held prior to announcing the merger. This is just one of the reasons why we feel even more confident in the target and the opportunity in front of us. We're equally excited about our near-term earnings growth drivers which are on slide 20.

In March, our PDH plant successfully completed the performance test and achieved full run rates less than two months after start-up. The unit recently went down for planned maintenance and will begin ramping back up next week. We made significant progress on the construction of our Louisiana flexibility project, which is now 95% complete.

And in Texas our Texas-9 cracker is 50% complete with more than 80% of the equipment installed. In Saudi Arabia we have started our second polyethylene plant on purchased ethylene and have proven several of the major cracker components.

We continue to move forward with the start-up of this impressive site and expect those activities to accelerate as we proceed through the year. And our multiyear productivity push continues to deliver bottom line results. Let's now take a moment to discuss our outlook for the plastics and feedstocks markets starting with polyethylene on slide 21.

Some are projecting much looser balances for the second half of the year and into next year. The main point of disagreement that we have with consultant projections is the speed in which new U.S. projects are brought online as well as assumptions about projects in Asia and the Middle East, which we find overly optimistic.

If you look at history, you will see that industry supply projections are almost always higher than what is achieved due to project cancellations, construction delays and labor constraints. For example, in 2007, supply projections for 2012 were about six world scale ethylene crackers higher than what became reality.

We generally degree on the demand projection in these scenarios which rest on sustainable urbanization in the developing world. Ten years ago, China's per capita use of polyethylene was roughly one-fifth of the United States. Today it's half. And this trend will continue. Our view is highlighted in the chart on the right.

If you overlay more realistic assumptions about the ability of the industry to bring new facilities online, we see sustainably high rates of ethylene and polyethylene utilization for the next several years. In this environment, we believe that lasting value creation comes from participating in the entire Plastics value chain as outlined on Slide 22.

The dynamics across the chain can shift significantly over time. The long-term winners are the players that own the entire chain integration and can manage the swings through feedstock flexibility, geographic diversification, innovation and differentiation. No one rivals Dow on this front, and our results have shown this time and time again.

First, we believe the value of our advantaged feedstock positions will grow. Feedstock flexibility remains one of our signature advantages of Dow's cracker fleet. This combined with our European LPG capabilities and U.S. PDH form structural hedges for the exposure to frac spread pressures.

And we continue to see ethane and propane balances as being favorable for some time. We have given our updated outlooks for these in the appendix. Bottom line, our view hasn't changed. We see plenty of NGLs available for the new crackers based on continued growth in gas demand.

Second, European and Asia NAFTA cracker margins will continue to reflect tight conditions as underlying demand surpasses realized supply while the U.S. ethylene balance will be somewhat looser. Third, polyethylene over ethylene margins are likely to remain solid as polyethylene capacity additions lag ethylene expansions, especially in the U.S.

The key point here is that it's consumer demand that drives the market balance. And finally, the value of Dow's differentiation should grow. We've proven the value of our customer intimacy and our differentiated portfolio time and again.

We are the innovator to the packaging, elastomers and electrical and telecommunications industries, and that, coupled with our new capacities in Sadara and the U.S. Gulf Coast, drives growth and advantaged results. I'll now turn the call back over to Andrew..

move swiftly through the key steps of the DowDuPont transaction. As you heard from Jim, we are on track and we continue to see the $3 billion in projected cost synergies as the floor. We are driven by the mantra, speed to close, speed to spin. Our team has clear goals and a resolute focus on achieving them.

Our unique combination of differentiation and integration coupled with a focused market participation driven by our innovation agenda is delivering results. Our broad geographic footprint and relentless productivity mindset will serve us well in the face of volatility and regional and market headwinds.

The Dow team is building momentum for the integration of the Dow Corning Silicone's business, the creation of DowDuPont, and the ultimate creation of the new materials co to be named Dow, a growth company with a winning portfolio.

These once-in-a-generation transactions further bolstered by our near-term growth drivers and our relentless focus on execution will enable new levels of value creation for our customers and generate even greater returns for our shareholders. And with that, Neal, let's turn to Q&A..

Thank you, Andrew. Now we will move on to your questions. I ask that you please keep to one question so that we can allow as many people as possible the opportunity to ask a question.

First, however, I would like to remind you that my comments regarding forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and the following Q&A.

Operator, would you please explain the Q&A procedure?.

Certainly. We'll take our first question from Hassan Ahmed from Alembic Global..

Morning, Andrew..

Morning..

You know, obviously really continued strength within the Performance Plastics side of things. A couple of quick ones on that. You obviously outlined your views on NGLs so if you could just tell us, within those views of NGL pricing, what sort of natural gas and crude oil pricing assumptions do you have? So that's one part of it.

And the second part is that in my mind obviously part of the continued strength within Performance Plastics was lower NGL prices but the other part was a rebound in ethylene prices.

So could you also tell us who right now is setting the price for ethylene? Is it MTO?.

I'm going give that to Jim. Go ahead, Jim, both of them..

Yeah. Hassan, thanks for the question. We believe that gas is really going to be very well supplied over this five-year horizon and I think in most cases, gas remains sub $3. Maybe it runs between $3 and $4 depending on where oil price goes. And our other view is that $50 to $60 barrel oil, the NGL supply is going to expand significantly in the U.S.

Gulf Coast region. So when you combine that with the fact that the crackers' completion schedule and their RTO horizon is stretching out and that spreads that NGL demand intensity out and that's reflected in what we put in the appendix. Ethane export starts up this year but that growth is slow.

And propane competition right now is acting as a ceiling for the prices at the cracker level. In fact, it's back into the site. And if you look at first quarter, ethane and propane were kind of at an even tradeoff in the cracker slate.

So we think the outlook for NGLs for all these projects is going be just fine and then we'll continue to have a favorable balance there. And you'll see that in the oil and gas ratios as well. As far as ethylene, ethylene moved up $0.05 in March. And I think a little bit of that is some bounce-back in volume demand.

As you could see from our own results, volume growth is good there. And you also see some impacts of different outages around the world. Some planned, some unplanned. Look, I'm not a believer yet in this whole theory that MTO is setting the pricing out there. I think demand is setting the pricing.

MTO may be a factor in some commodity grades of ethylene, polyethylene in China but for most of the marketplace, I think you've also got a very, very competitive U.S. Gulf Coast situation that's helped setting that price..

Extremely helpful. Thank you so much..

Moving on, we'll take our next question from Steve Byrne, Bank of America..

Hi.

In your Ag business, what specifically are you doing to cut costs? And if the merger with DuPont closes, say, at the end of the calendar year, is that too late to negotiate with retailers on the combined platform of crop chemicals to negotiate a combined rebate program and/or to incent growers to buy both chemicals and seeds?.

Go ahead, Howard..

Yeah. Good morning, Steve. I mean, look, if you look at the Ag results for Dow AgroSciences this quarter, I'm really proud of Tim Hassinger and the whole team. On a down 10% top line, they were able to keep EBITDA flat. Actually if you exclude the divestitures, it was actually up a couple of percentage points.

So they did just a tremendous job and the focus and the execution was evident. It was really around productivity. If you remember, we were one of the first in the Ag space to really declare that the Ag market was starting to slow down. And so they got ahead of it with footprint rationalizations and lower SG&A and lower R&D in a focused way.

So that was one of the big differentiators in results this quarter. On your last question relative to Dow-DuPont, look, I mean, as you heard from Jim in the prepared remarks, we're on track with the closing before the end of the year. So we really have to get to 2017 before we can have those kinds of discussions.

But the teams are actively working on synergies to make sure that we continue to get the cost efficiencies across all three of the intended spins..

Yeah. But just to add to that last point, Howard, it's fair to say just to underline, we are separate companies, we're operating separately. We will not have any of those conversations and then when we get to day one, there'll be an opportunity and hopefully as I think stated by Jim, that's back half of this year for 2017..

Moving on, we'll take our next question from Duffy Fischer from Barclays..

Yes. Good morning, fellows. First question is just around the cost programs.

What was running through this quarter cumulatively and how should that step up throughout the year?.

Yeah. I think I'd like Jim to have a shot at that and, Howard, you can add if you wish..

Duffy, we had in-flight programs that we started last year. Some of them were related to making sure that we had stranded costs out as we did the chlorine divestiture so some of that is rolling through. And we've essentially got those stranded costs out from the chlorine deal.

Additionally, we have some other activities that are going on from productivity that also hit in things like cost of goods sold. So you'll see that show up in the EBITDA margins, things that we're doing on efficiencies there, both in manufacturing, supply chain, some IT cost improvements.

A couple years ago, we finished the implementation of a new IT infrastructure and we're starting to see some productivity come out of that. And then each of the businesses has individual targets and each of the functions have individual targets which will keep rolling out.

We have a $300 million target for in-flight savings for 2016 and we banked $90 million of it in the first quarter. So we're on track to deliver that target and more..

Thanks, Duffy..

Moving on, we'll take next question from Vincent Andrews, Morgan Stanley..

Thank you, and good morning, everyone. Just a question on your volume and your operating rate. I've been under the impression that in 4Q you obviously had a big quarter there. I thought that inventory levels in general were pretty low coming into 1Q. Then you obviously were able to run all the assets harder to put up the volume growth.

Where are we in terms of your inventory levels as we head into 2Q and your ability to run harder? I'm just trying to think about how we should be thinking about volume sequentially from here..

Jim, go ahead..

Yeah. Vince, this is Jim. We had really a strong first quarter, obviously strong volume sales and also good inventory performance. I would say right now inventories in most of these chains are very balanced. I'll use Plastics as an example where I can give you some specific data.

We had 37 days, the industry had 37 days of inventory in North America going into the big turnaround season here. And that is really a tight inventory position. And we obviously are at that level, slightly below that as we head in. And operating rates have been very high.

So I don't think in any of these businesses you're going to see the units in inventory be very high. You have some working capital impacts from the changes on accounts receivable and payable because of what's happened with the revenue line. But on a units basis, things remain balanced and relatively low for this time in the year.

We have turnarounds coming up in Q2. But we're going to be coming out of those with tight inventories and the ability to still run hard..

Okay. Thank you very much..

Thank you..

Moving on, we'll take our next question Jeff Zekauskas from JPMorgan..

Hi. Good morning..

Hi, Jeff..

I would have thought that you would have earned a lot more in Performance Plastics and Performance Materials this quarter, in that European ethylene margin or European petrochemical margins were much stronger in the first quarter than they were in the fourth quarter. And U.S.

ethylene margins really weren't all that different because of falling raw material costs. Your big competitor reported flat to up sequential petrochemical results and yours are down 15% or 20% sequentially.

Did something happen? Or what accounts for the sequential quarter change that you're experiencing that some of your competitors didn't experience?.

Go ahead, Jim..

Thanks, Jeff. I'll talk about our performance and then we'll talk about the peers next. First on Plastics, I think one of the things that is not evident just at the high level on the numbers is we had about a $100 million headwind from Latin America.

And it was a combination of currencies and obviously the changes that happened in Argentina as they removed duties and opened up. So people won't see that in terms of the high level numbers. In Europe we saw strong business in Europe just as you mentioned and I don't think our view there is any different than our peers.

When you look at Performance Materials & Chemicals, I'd say that delta is 50/50. And if you look at polyurethanes in Performance Materials & Chemicals, they're carrying the burden this year of the higher start-up cost of Sadara. So you have to, on a run-rate basis, you have to think about where they will be next year.

And they've also got some commodity price pressures in some parts of the chain, mostly in isocyanates right now. And then in Industrial Solution, Howard mentioned that we actually, with the stepdown on MEGlobal and also the slower MEG prices, that hits Industrial Solutions earnings.

So if you look about at Industrial Solutions, how they did year-over-year, that's carrying that stepdown in MEGlobal and MEG prices. And also a de-icing season that was 50% lighter than it was last year, and the weight of oil and gas sector. Some of the EO derivatives go into the oil and gas sector and they're carrying that.

So I think that explains really most of our own performance. On peer comparisons you have to adjust for one times and portfolio differences, so divestiture sales and then the portfolio difference. Some of our peers are heavy into polypropylene and, of course, we don't play in that space.

When you take those things out and put it on an apples-to-apples basis I think you'll see that it's a slight beat there..

And we could help you on follow-up on specific comparison to the competitor you referenced. But we're quite comfortable that we are at or better than their performance..

Moving on, we'll take our next question from Frank Mitsch from Wells Fargo..

Hey. Good morning, gentlemen. And Andrew, nice job on the quarter and perhaps even nicer job delegating questions this morning. You're keeping Jim and Howard on their toes..

Frank, it's a new mode for me and I appreciate you noticing it..

Yes. Yes. Hey, as I think about the quarter and actually the recent quarters, the volumes have absolutely been eye popping. I'm wondering to what extent – Brent is up – well actually it's about – Brent today is about 35% or so higher than when the last time you guys reported a quarter. I'm wondering to what extent some of the volume is that.

And I'm wondering to what extent, if we see Brent stabilize here, maybe we see volumes start to moderate.

Could you offer some comments on that?.

I'll start seeing you said I haven't answered a question yet. I'll start and I'll let Jim or Howard pile on. Look, just being in both Europe and Asia, specifically Japan and China, I would tell you the low oil price phenomena is seeping through to the consumer economy in both places, actually, as oil importers.

And that's been a sustained trend now for several quarters. You're seeing consumption increase. And then double down on our products that we supply, some of the very specialty products that we have downstream.

These are the products that the Chinas and the Europes need, whether it be lightweight materials for cars or whether it be building insulation for energy-efficient buildings. On and on, our innovation agenda is working in those economies. So we're seeing sustainable volumes because we can actually sell out asset and sell up asset.

It's that combination, Jim had it on slide, I think 22, that shows that we can make money at different parts of – in his particular case, he referenced the Plastics business. So we think that's detaching itself from that oil number quite substantially.

In fact, Frank, if you've seen our 14 quarters in a row and 10 quarters in a row of volume increase, if you see how that volume increase is made up, it's mix and it's mix under – if you look at the extremes of oil price, we've had oil price as high as $120 in that four-year period, and oil price as low as in the high $20s in that same period.

Yet we've grown volume through sustained execution of products people need. So it's not an inventory readjustment that you're noticing in our results.

Jim, did you want to pile on?.

Yeah. The other thing I would say, Frank, Andrew mentioned China. We had probably 70% of our businesses where we were double-digit growth in volume in China this quarter. Packaging, polyurethanes, Industrial Solution, elastomers, electrical and telecom, auto coatings, Building & Construction all right down the line.

And it's all strong consumer-driven demand. You've got an economy that's changing there and we play in all of those spaces. The second thing I would say is around the world, Auto has continued to be strong. And in all these portfolios, you've got an increasing number of new products that are driving innovation.

You see that show up in the EBITDA margin line. So it's not just volume of old, existing products.

It's volume of brand new products and innovation advantaged products, whether it's in Automotive with adhesives, some of the things we talked about in Building & Construction, new olefin block copolymers and elastomers into Asia which was just a blockbuster quarter for them in Asia-Pacific. You've got a lot of strength.

It's not just one particular thing..

Moving on, we'll take our next question from John Roberts, UBS..

Thanks. Nice quarter, guys. Howard, I was a little confused about the second quarter tax guidance. So that's 7% to 12% tax rate that you say is reported.

Will there be an operating rate that'll be in the 23% to 27% range? Will it be given some differences or does the second quarter actually have a low operating rate too?.

Yeah, John. Good morning. No. To be clear, the operating tax rate guidance we expect in the second quarter and really through the balance of the year, the operating rate should be in the 23% to 27% range.

I just wanted to highlight, because we do expect to close the Dow Corning transaction in the second quarter and assuming that happens, the reported rate is going be likely in the 7% to 12% range driven by the balance sheet gain that we'll get on the step, just on the purchase accounting side of the equation.

I just wanted to flag that so you weren't surprised..

And then, Jim, I think you said polyethylene expansions are expected to lag ethylene expansions in the U.S.

Where does the excess ethylene go if the polyethylene expansions lag the ethylene expansions?.

Well that's a good question, John. I think right now in the short term with some of the unplanned events that are happening you're seeing some of it go into EDC and BCM so you're probably seeing a little higher run rates in those industries. The volume is still good on EG. There's not a lot of EG in the Gulf but the volume is still good there.

The other thing is you're seeing exports move up out of the U.S. because of the cost competitiveness. The U.S. is exporting more polyethylene so you're seeing more of that product move..

Okay, thank you..

Moving on, we'll take our next question from Peter Butler, Glen Hill Investments..

Good morning. Good morning..

Good morning..

Morning..

Obviously there's been a lot of volatility in currency and energy markets of late.

Is Dow gearing up and getting more aggressive in trading? Do you see opportunities here to make some decent money?.

Howard, talk about our forex hedging and (44:23) hedging..

Yeah. Well, what I would say is, I mean, look, we're still – as I said in the opening comments, I mean, currency is still a net headwind for us although it's been a declining headwind. So in the quarter we had about a $0.04 EPS headwind on currency, about $60 million in EBITDA.

In terms of our treasury group, I mean, Peter, you know they do an exceptional job. We do not speculate on currency. We do hedge our economic exposure and that work has been going on and will continue to go on..

Jim, did you want to comment on the energy headwind?.

Yeah. I'd say, Peter, in our model obviously the biggest hedge that we have in here is a physical hedge. And so we manage that very, very actively and take advantage of the seasonality that's out there in the marketplace. And we can do that because of our storage and we can do that because of the access that we have to the market.

Nobody's got the flexibility or the kind of access we have to all the NGLs, naphtha oil. So that helps us a lot. But as far as speculation, it's to Howard's point as well, we're very careful about how we manage that..

Moving on, we'll take our next question from Aleksey Yefremov from Nomura Securities..

Good morning. Thank you..

Hey..

If you look at Sadara, do you expect sequential improvement in equity contribution within Plastics as polyethylene units start up? And is it fair to say that most of your year-over-year headwind in equity earnings is concentrated in Materials and Chemicals?.

Jim, take the first slice of that..

Yeah. So right now the commissioning is going well and we're underway with the mixed-feed cracker. The key point will be when that mixed-feed cracker starts up. So once we get the mixed-feed cracker running and we can communicate to you that it's up and running, we've got those two polyethylene plants proven.

At that point, you should start to see some of that show up into the Performance Plastics business. Obviously, the start-up costs on Performance Materials and Chemicals, primarily in the polyurethanes business, are going to continue through the year because those units don't start up until later in the year. So it's kind of a mixed bag there.

And I would expect you won't see most of it until probably second half..

Yeah. And not much to add. I mean, we gave the down $50 million to $100 million headwind year-on-year for the second quarter if you look at it versus same quarter a year ago. And clearly the tailwind, it will come in Plastics in the back half of the year to Jim's point. But PMC is going to be a headwind for us all year.

They're in the big part of the build from a unit op standpoint in Performance Materials and Chemicals..

And Jim....

Moving on, we'll take our next question from Christopher Parkinson from Credit Suisse. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker) Perfect. Thank you very much. I'm just going to be boring and switch back to Ag from Plastics.

You mentioned the Ag sector should be down roughly 3% to 5% year-on-year, but could you just offer a little more guidance given your cautious view in Brazil and Southeast Asia due to political challenges and weather? And then also the South American market and North America.

And then also very quickly on your comment on Argentina, regarding your herbicide portfolio do you have the necessary registrations to benefit from improvements there? Thank you..

Go ahead, Howard..

Yeah. Thanks, Chris. I mean I would say, look, first you got to look at Ag as a first half. So first quarter, second quarter and so that's where I said in the prepared comments that on balance, it's going be essentially flat ex-M&A, first half versus first half a year ago.

I will say, and I'd hesitate to call the bottom but you certainly see crop prices have moved up. We are moving from an El Nino weather pattern to a potential La Nina weather pattern and that could be helpful into 2017. I would say in Latin America, there is a greater optimism today. We see upside in the second half in Latin America.

If inflation doesn't ramp up further, things should improve gradually..

Want to comment on Argentina?.

Yeah. I mean, I think we are very well positioned on the crop protection side in Argentina..

And the registration's not an issue at all?.

No..

Okay..

Moving on, we'll take our next question from P.J. Juvekar from Citi..

Yes. Hi. Good morning. Jim, I want to go back to your ethane and propane comments. Propane exports are going up significantly and ethane demand could go up with the new crackers and Enterprise Products building the export terminal.

So are you expecting more drilling activity to get to your outlook of a long ethane propane? And then given that, what is your new expectations for EBITDA from your PDH and the new ethylene plant? Thank you..

Well there's demand – thanks, P.J. There's demand obviously for natural gas. And as that natural gas demand increases and you start to see frac spreads come back, so your point on exports, you're starting to see some improvements in the frac spreads. As you start to see those come back, although we think they're going remain subdued.

Maybe frac spreads will be $1, $1.50 a million BTU. That's enough incentive for people to take more out of the gas and you're going start to see some NGLs become more available there. And then the other factor is oil price. And our view is oil is going to $50 to $60.

Currently that's obviously, I think the way the market, financial market is headed, but and they're usually ahead of when the supply demand balances. And our view is the back half of this year that supply demand is going to balance. Q1 output in the U.S. was down 200,000 barrels a day quarter-over-quarter.

I think the back half you're going to see that tighten up a little bit more and then into 2017. So those two factors I think, from our view, are going to continue to drive the availability of those NGLs..

Moving on, we'll take our next question from Bob Koort from Goldman Sachs..

Good morning. This is Ryan Berney on for Bob. I just wanted to ask a question here on the polyethylene operating curve that you provided on slide 21. I think you said earlier that you expect kind of polyethylene units to lag the ethylene, especially in the U.S.

But here it looks like you have kind of your polyethylene rate dipping ahead of when that capacity is probably going to come online in 2017 and 2018. So I'm kind of wondering if you could bridge there whether that's just a kind of pickup in demand expectations or really how you think about that..

Yeah. In general, on polyethylene capacity and supply demand, one of the things you have to bear in mind with these numbers is there's a wide range of interpretation on them. In these assets you make a mix of products and they can swing those operating rates 2% or 3% pretty easily.

So a flat line like you see there in 2016, 2017, 2018 at any given point in time could be moving up. Our point is that you don't see any big dip downward in polyethylene operating rates coming in front of us.

And even we, right now, have been running well above those operating rates for a considerable period of time to generate the kind of volume growth that we've been generating. I could, in fact, use two new trains coming up in Sadara to feed the commercial organization because they're screaming for more product..

Great. That's helpful. And then second....

Moving on, we'll take our next question from Don Carson, Susquehanna Financial Group..

Good morning. This is Emily Wagner on for Don. I was wondering if you could just talk about the organic growth outlook for Dow Corning businesses in the second half excluding synergies..

Go ahead, Howard..

Yeah. The – thanks. Good morning. So Dow Corning in the first quarter, the Silicones business had 8% volume growth versus same quarter a year ago.

I would expect that to moderate a little bit, but certainly it historically has been around one to two times GEP (52:57) so if you want to take 1.5 times global GEP (53:00) that's probably a good proxy from a modeling guidance standpoint..

Moving on, we'll take our next question from Arun Viswanathan, RBC Capital Markets..

Great. Good morning. Thanks for squeezing me in. Just had a question to go back on Plastics. If we take out the $100 million that you called out on Argentina, is that appropriate? And does that mean that given the recent price increases in polyethylene, that your Q2 results would be significantly above what you did in Q1? Thanks..

You know, I don't know what kind of guidance to give you on Q2, but on pricing, we saw pricing take hold in April and we see it continuing through. We see demand continuing to be strong. Obviously, all the downstream markets' demand is good.

You're into a turnaround season where you have twice as much capacity offline this year as you did last year and you had fairly high operating rates for the industry. So I think all that bodes well going into Q2. Hard for me to give you an exact number on what the upside would be but you've got good underlying demand..

And at this time we have time for one further question. That'll come from David Begleiter from Deutsche Bank..

Thank you. Good morning.

Andrew and Jim, in terms of Europe, if Brent goes back to $50 or $60 what happens to its elevated level of European profitability in ethylene and polyethylene? Does it get pressured a little bit here at higher oil prices?.

Go ahead, Jim. Reference the industry and also our special way of handling that..

Well, I think in general in the industry, we've seen some improvements in naphtha ethylene spreads which has been positive both for Europe as well as for Asia-Pacific and so those have held up. Obviously, Europe over the last several years has moved into a little bit of a different position, a little bit more balanced.

You haven't seen much new cracker capacity come back. You've seen a little bit come back to support Shell. Obviously, Porto Marghera came back up to support Shell. The other thing is the shift towards LPG cracking on our side.

We've shifted to a very high percent of LPG cracking and we continue to look at opportunities to make small incremental investments to expand that. And that flexibility has helped us out tremendously. So I don't see that's going to stop.

So I think Europe has got a pretty good handle, the Dow in particular, but in general in the industry has got a pretty good handle on how it's adjusting itself to a changing world..

And at this time I'd like to turn the conference back over to Neal Sheorey for any closing remarks..

All right, thank you.

Andrew, before we close the call would you like to make any final comments?.

Yeah. I want to hit on five key points that we made throughout all the question-and-answer session as well as the script. We're off to a strong start to the year which is continuing the three-and-a-half-year streak of earnings growth, managing all sorts of environments.

That's coming because we firstly have targeted growth and the portfolio is built for this environment. The diversification works. And frankly we're finding growth where growth is and we're seeing great numbers coming out of our various regions. Then use markets whether it be China here in the U.S. or even Europe.

We're benefiting from strong margin management and a strong focus on ROC. And that's the next point I want to make. The U.S. and Chinese markets are strong markets and we have strong outlooks there.

We can continue to grow margin in those markets under these environments because we do have the product mix and that last question on Europe means we have the feedstock flex to keep making margins in a recovering Europe. U.S., Europe and China being strong for us is something we've now seen for a while and it's continuing to build momentum.

And then the two transactions. Both Howard and Jim outlined it, the questions we were asking on the transactions. We are moving towards these transactions becoming a reality and we're planning very strongly to execute the synergies and execute them and lean into them and execute them quickly.

And execute them so in the case of the DowDuPont transaction we moved to spins as fast as we can, in the case of the Dow Corning transaction so that we integrate. Howard's numbers of $300 million of cost synergies and $100 million of growth, just to remind you is about 8% of revenue.

We did double digit percentage of revenues on synergies on both Carbide and Rohm and Haas. So we have a strong record of executing the synergy targets that we will talk about.

We'll have a lot more to say about DowDuPont and the specifics on that in ensuing calls as we build towards the S-4 registration and of course the shareholder meetings on both sides. Both Ed and I are very dedicated to delivering the three-in-one, $3 billion of cost, $1 billion of growth as a floor. So with that, Neal, I'll turn it back to you..

Thank you, Andrew. And thank you, everyone, for your questions. As always, we appreciate your interest in the Dow Chemical Company. For your reference, a copy of our prepared remarks will be posted on Dow's website later today. This concludes our call for today. We look forward to speaking with you again soon..

And again that will conclude today's conference. We thank everyone for their participation..