Good day and welcome to The Dow Chemical Company's Third Quarter 2016 Earnings Results Conference Call. Also, today's call is being recorded. I would now like to turn the call over to Mr. Neal Sheorey. Please go ahead, sir..

Thank you. Good morning and welcome to The Dow Chemical Company's third quarter earnings conference call. I am 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 sides 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 provisions 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..

Thank you, Neal. And, if everyone could turn to slide three – good morning to everyone. The Dow team continues to deliver against every one of our goals for the year, building on our consistent track record of execution. Let's start with the financial highlights. We achieved record third quarter EBITDA and our highest third quarter EPS in a decade.

This quarter marks four full years, 16 consecutive quarters of earnings growth and margin expansion. In addition, we returned more than $900 million of cash to our owners through stock buybacks and dividends. Operationally, we continue to meet consumer-led demand for Dow products and solutions, driving volume gains in all geographies.

We've now consistently grown volume over three years, 12 consecutive quarters, despite a slow growth macro environment. We also delivered another quarter of productivity and cost savings, bringing the year-to-date contribution to $254 million on track to exceed our 2016 target.

On our strategic projects, we accelerated the Dow Corning integration moving quickly on our cost synergies as we said we would. Our Sadara joint venture celebrated the startup of its multi-feed cracker and a third polyethylene train. And our next wave of U.S. Gulf Coast projects is on the cusp of delivering bottom-line results.

Dow has proven time and again the power and resilience of our business model. Our focused market participation shows resiliency in all environments, our commitment to self-help productivity and cost-cutting and the compelling upside from our strategic investments.

Collectively, these drivers will deliver the next levels of earnings and cash flow growth and delivering that cash to our owners.

I'll now turn the call over to Howard to discuss our financial performance, the Dow Corning integration, modeling guidance, and our Ag results; Jim will cover the remaining businesses; and I'll close with some thoughts on our track record of success and our future growth trajectory.

Howard?.

Thanks, Andrew, and good morning, everyone. Turning to slide five, we had a number of important financial achievements in the quarter. We delivered operating EPS of $0.91, an 11% increase. We achieved record third quarter operating EBITDA of $2.5 billion, up $118 million, and we expanded our operating EBITDA margin to 20%.

Our earnings expansion was driven by our consumer-oriented businesses, which features strong results with the integration of Dow Corning and better than expected performance in Dow Ag. We grew volume in every geographic area in the quarter with notable strength in Europe, which was up 9%, and the United States and China, both up 6%.

Productivity continue to be an important contributor. We delivered another $76 million of savings in the quarter. And, finally, we resumed our share buyback program with more than $400 million of share repurchases in the quarter. Moving to slide six, and an update on Dow Corning.

Since close, we have been working quickly to integrate the silicones platform into our Consumer Solutions and Infrastructure Solutions businesses as well as capturing the synergies.

The quick wins we've already delivered underscore the power of the silicones franchise, its highly complementary hand-in-glove fit with Dow's business model and the role this transaction plays in further enhancing our earnings growth profile.

First and foremost, the core business continues to outperform even our initial projections on broad-based volume gains and share growth. Second, I am pleased to report that we've already reached more than $200 million in cost synergies on an annual run rate basis.

This was largely due to the value our team has extracted in purchasing, optimizing our warehouse and logistic footprints, as well as consolidating back office operations. We've also completed notifications with the vast majority of impacted roles, with only a small percentage remaining, where we're adhering to local labor rules.

We remain on track to achieve a run rate of 70% against our $400 million cost synergy target by the first half of 2017, and 100% by the first half of 2018. And finally, we're also seeing the power of silicones on the growth side of the equation.

As we've said for some time, Dow Corning's silicones is a natural fit into Dow's packaging, transportation, infrastructure and consumer care end markets. We are even more positive today about the growth synergy opportunities that this transaction presents.

Our commercial and R&D teams finalized the playbook to achieve the $100 million growth synergy target and in fact, we've already delivered some early cross-selling opportunities.

Bottom-line, the Dow Corning integration is progressing very well, delivering financial returns, uncovering future growth opportunities and enhancing Dow's market-focused portfolio. Before we turn to our segment results, let me share some thoughts on modeling guidance on slide seven.

In the fourth quarter, we expect ag market headwinds to persist, largely offset by our self-help actions. Comparing year-over-year, recall that we sold several nonstrategic molecules last year, which lifted Ag results in that period. Consumer Solutions will benefit from the integration of Dow Corning.

Approximately 60% of Dow Corning's EBITDA and synergies are in this segment. We do expect typical seasonality in electronic materials and U.S. auto production as we approach year-end. In Infrastructure Solutions, my comments about Dow Corning apply here as well, with the other 40% of its EBITDA generated here.

This segment also consumes roughly one-third of the propylene from our PDH unit. We expect that to be offset by continued oil and gas headwinds in energy and water. Turning to Performance Materials & Chemicals, which consumes two-thirds of the propylene from our PDH unit, from a seasonality standpoint we could see some upside from deicer sales.

After all, it did snow yesterday in Michigan. As you know, we have seen compression on the integrated EO and PO margins globally, which will impact PMC. Also, Sadara costs are increasing here as we continue to startup downstream units related to this segment.

Finally, in Performance Plastics, we expect a modest uptick from the cracker and the three PE units at Sadara as sales have begun. However, we expect these to be more than offset by higher costs from the Louisiana turnaround, debottleneck and maintenance activities currently underway as well as higher feedstock costs globally.

Now, let's turn to our segments. I'll start first with Ag on slide nine and then hand it to Jim to cover the rest of the businesses. Dow Ag continues to outperform despite the ongoing challenging industry fundamentals. Segment EBITDA increased by $141 million and represents the best third quarter results in nearly a decade.

Several factors contributed to our success. Share gains due to continued increasing demand for our innovative products, price improvements, continued self-help actions and strong early demand for the Latin America growing season. Latin America seeds was the highlight.

Strong demand in the region drove record sales with price and volume both rising by double digits. Corn seed sales nearly tripled primarily on double-digit volume and price growth in Latin America. The business increased share particularly in the Brazilian Safrinha season, where we have a strong position.

Soybean sales nearly tripled as well, reflecting higher price and volume. Crop protection set a third quarter EBITDA record supported by improved product mix and the ongoing self-help productivity and cost-cutting actions. Insecticides improved on increased price, while herbicide pricing and fungicide volume each declined.

I'll now turn it over to Jim to cover the rest of our segments..

Thank you, Howard. Moving to Consumer Solutions on slide 10, the segment achieved an all-time operating EBITDA record of $492 million, boosted by the integration of Dow Corning, which is further enhancing our end-market positions across this segment.

This marks the fifth consecutive quarter of EBITDA growth for this segment and it demonstrates the power and differentiation of our Consumer, Automotive and Electronic Materials franchises.

Dow Automotive achieved its seventh consecutive quarter of EBITDA growth and a record third quarter EBITDA led by double-digit volume gains in Asia Pacific on new business wins and market share gains. The business continues to grow above market on demand for Dow's light-weighting solution.

Consumer Care grew market shares through gains in home care market sectors and new innovation for personal hygiene solutions. Silicones in the Consumer Solutions segment delivered double-digit volume growth in Asia-Pacific behind demand for electronic and automotive applications.

The business also achieved its first cross-selling opportunities with the Dow Automotive, Consumer Care and Polyurethanes businesses. And Dow Electronic Materials achieved record quarterly EBITDA.

In addition to ongoing self-help measures, the business captured strong demand in semiconductor, interconnect and display technologies particularly in Asia-Pacific. On slide 11, Infrastructure Solutions delivered EBITDA of $379 million, primarily reflecting the integration of Dow Corning.

Dow Building & Construction achieved record third quarter EBITDA and delivered its eighth consecutive quarter of EBITDA growth. The business captured volume gains on demands for acrylic-based construction chemicals and benefited from continued voluntary adoption of our BLUEDGE polymeric flame retardant.

Silicones in the Infrastructure Solutions segment reported volume and EBITDA growth driven by improved demand in packaging and building construction applications. Dow Coating Materials reported volume growth in all market segments led by strong demand in Asia-Pacific and gains in both the architectural and industrial coatings sectors.

Moving to slide 12. Performance and materials chemicals (sic) [Performance Materials & Chemicals] (13:03) EBITDA declined, primarily due to the impact of portfolio actions which included divestitures and the reduced ownership in MEGlobal as well as higher Sadara start-up costs.

In the core business, pricing pressures led to unit margin compression, but this was partly offset by volume growth. In Polyurethanes, we achieved record volume on double-digit gains in specialty polyols and systems houses, led by growth in EMEA and Asia-Pacific.

Industrial Solutions reported volume gains in all businesses also led by strength in EMEA and Asia-Pacific. Turning to Performance Plastics on slide 13. The team achieved $1.25 billion of EBITDA and double-digit volume growth, with gains across all businesses.

A key part of our continued success is the team's focus on manufacturing reliability and producing incremental volume in a robust demand environment.

Dow Packaging and Specialty Plastics delivered record third quarter sales volume on double-digit growth in developed geographies and adoption of new innovations for food and specialty packaging applications.

Dow Elastomers also achieved record third quarter volume, driven by increasing global consumer preference for larger vehicles that incorporate more Dow content, as well as double-digit growth in athletic footwear. These applications are further enhanced by our innovative products, such as INTUNE and INFUSE Olefin Block Copolymers.

Dow Electrical and Telecommunications reported double-digit volume gains in the Americas, as the business continues to benefit from the global trends for fiberoptic cabling for faster and more reliable wireless connections.

Additionally, Sadara started up its multi-feed cracker in August and a third polyethylene train in September, adding to the two polyethylene trains already in operation. In the U.S. Gulf Coast, we commenced the Louisiana turnaround and feedstock flexibility project.

That unit will restart later this quarter giving our LA-3 cracker the ability to produce an additional 250,000 tons per year of ethylene and enhancing the reliability of one of the best units in our fleet.

During the quarter, our Texas 9 ethylene facility passed 85% mechanical completion and we made significant progress on our Performance Plastics production facilities. Our target for Texas 9 to come online remains mid-2017. And now, I'll hand it back over to Andrew..

Thank you, Jim. So if you'd turn to slide 15, and there is a chart here that you should pay particular attention to, the one on the right of the slide. As I mentioned at the start of the call, we've now achieved four full years, 16 consecutive quarters, of earnings growth and margin expansion. And we've been doing earnings growth now for over a decade.

You can see that we have taken a series of purposeful steps taken over these past many years. These steps are deeply rooted in our strategy to get the near-term right and the long-term right, and steadfast execution from an aligned team Dow.

And to put things into context, you actually have to go back to the late 1990s, when our industry came under pressure from state-owned enterprises. Returns were clearly impacted because we all had, Dow included, a me-too product wheel. Low-cost integration was absolutely necessary, but on its own, not enough to ensure long-term profitable growth.

Since then, we've taken a number of decisive actions to create a sustainable business model built on both low-cost integration and innovation to drive our narrower and deeper focus in attractive end markets, to invest for growth in consumer-led sectors while having a strong presence in investment-driven markets, like infrastructure, and to control what we can control through disciplined productivity and cost savings.

In doing so, we believe we've created a portfolio for all seasons, a more resilient portfolio, one built to grow and last. We have fundamentally shifted our earnings trajectory, not only enhancing our growth but also driving greater consistency.

Equally important, we've put in place a series of growth drivers that will serve us well in the near-term and long-term.

These include a reinvigorated industry-leading R&D engine, which now delivers over 5,000 new products every year; a new set of technical capabilities, most notably the addition of Dow Corning silicones; an expanded footprint in attractive global markets through our investments in the U.S.

Gulf Coast, the Middle East and Asia, positioning us to grow where growth exists; and finally, a low-cost structure that has productivity wide into its very core. These drivers will further enhance our market focus, continue to reduce our volatility, bolster our integration and our innovation and ultimately maximize shareholder value creation.

Stepping to slide 16. Of course, the ultimate proof of our business model is the enhanced returns team Dow has delivered, earnings growth, enhanced cash flow and higher shareholder returns.

And going forward, our team remains relentlessly focused on our priorities, delivering the operating and financial plan, accelerating earnings growth and value creation through the continued integration of Dow Corning and advancing to the Dow-DuPont transaction and intended spins. And we will do so despite persistent macro uncertainties.

As I've said before, regional economic trends are mixed at best. North America and Europe show measured growth, with Dow products growing stronger than the market. Latin America, especially Brazil, which is beginning to recover, is a slow growth environment. However, we do see bright spots there, particularly the Andean economies and Mexico.

And economic transitions are underway in Asia, notably China. In this environment, we will continue to find growth where growth exists. That includes our core consumer-led markets of packaging, automotive and construction.

As we establish the foundation for the new Dow, we have the right tools in hand to build the world's leading material science company and our four-year streak, 16 consecutive quarters, of earnings growth and margin expansion fuels our excitement for the future. In closing, on slide 17, we have not nor will we lose sight of our priorities.

Dow will continue to deliver through our focused portfolio, integration, our innovation and our geographic reach. Through our relentless focus on our execution and on maximizing value creation for our customers, for our shareholders, for the near-term and for the long-term. With that, Neal, let's turn it 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 earlier comments regarding forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and the following Q&A.

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

Thank you And we'll take our first question from Frank Mitsch with Wells Fargo Securities..

Hey, good morning, gentlemen and a nice quarter..

Thanks, Frank..

As I look at the beat that you had and particularly the terrific volumes that you're seeing that we're not really hearing from a lot of other companies out there, and especially given the fact that three months ago we probably weren't as optimistic as what these results turned out to be, what exactly happened over the past three months to lead to this major upside?.

I'll start off and I'll give it to Jim. At the end of the day, the volume is a harbinger of the product mix, Frank. There's no question that out there consumer demand exists. I just came back from China. I participated in a couple of interesting market-driven events like Walmart had a food safety seminar.

There is huge demand for safe food product supply in China. So that type of driver is actually growing double digits, way above the Chinese economy. So where things are weak is in the industrial economy around the world. But where things are strong is safety drivers, hygiene drivers, environmental drivers and actually consumer drivers.

And I think our product mix, especially with Dow Corning now added in which has given us new growth synergies, is double down and triple down on that part of the portfolio. And that's also true in packaging and plastics, electrical and telecom and elastomers.

Jim, did you want to add?.

I would just say in the weak spots, Andrew covered them. In oil and gas, although we've seen a little bit of rebound in the energy sector, it's not enough yet to have a significant impact. And industrial solutions has got some weakness in oil and gas, steel, industrial coatings applications for steel and also some EO derivatives in the ag space.

And in Latin America, really Brazil is the story. Our sales in Latin America are good, but Brazil is at bottom and trying to recover right now. Otherwise, the rest of the businesses had strong volume performance and strong demand.

North America, Europe, China, Southeast Asia and a little softness in the Middle East because of what's going on with the oil economy..

And next we'll move to David Begleiter with Deutsche Bank..

Thank you. Good morning..

Good morning..

Andrew, another strong quarter in plastics. As we head into 2017 and the startup of a number of ethylene crackers, and even 2018, what's your view on U.S.

ethylene chain margin in 2017?.

Yeah, Jim, why don't you take that one..

Yeah, David, I think the startup of the crackers it's going to be staged over 2017, so our view is you're going to see, obviously from our perspective, some uptick in our sales growth because we've got three new trains from Sadara running now.

We'll have a fourth one coming up in first quarter in Sadara and then mid-2017 we've got our Gulf Coast projects coming on. So I think from our perspective, we've been running the franchise flat out for the last 12 months and inventories are at five-year lows in the downstream chain.

So our view is the market demand – as long as you don't have a cataclysmic event in the economy, the market demand is going to be there for these products and the timing of these startups is going to be such that I don't think you're going to see it really loosen up that much next year..

And bottom-line is that everyone's expectations of a very weak ethylene market in 2017, in our view are way too pessimistic. We're already seeing delays and notably our three PE units started up in Sadara are running flat out and so it's a harbinger of strong demand drivers, especially the areas Jim and I have referred to already..

And, next, we'll move on to Steve Byrne with Bank of America Merrill Lynch..

Hi.

Continuing on this ethylene chain margin discussion, how would you characterize the feedstock mix in your ethylene crackers right now? How does that compare to where it's been the last couple of years and more importantly, where do you see it going over the next couple years?.

Go ahead, Jim..

So our mix right now is still light, so obviously ethane and propane both in the mix and it just depends on what part of the world you're in, what's in and what particular week, but that still looks good.

Obviously, what you've seen through the course of this year is our naphtha-based units become more competitive, so you're seeing good equity earnings out of our Thai joint ventures. You've seen our positions in Europe become stronger over the last couple of years – I think that continues to play out.

Our view is that propane is still long and propane is Dow's big advantage in fleet feedstock flexibility. Propane is still long for some time to come. Ethane is still long until you get to the end of all these projects coming on, which is more like the 1920 timeframe, so our view is we're still going to see some very good chain margin in this space..

And, next, Jeff Zekauskas with JPMorgan will have a question..

Thanks very much.

In your Performance Plastics discussion for the fourth quarter, you framed things year-over-year and last year in Performance Plastics you made about $1.3 billion in EBITDA and it looks like – you seem to say that you're going to be flat to down, which would be sort of roughly a flat performance in the fourth quarter from the third quarter even though propylene prices are up and polyethylene prices are up.

Regionally, where are you feeling a squeeze and is this the correct characterization of your guidance?.

Go ahead, Jim..

I would say, Jeff, the difference I would say is we've got turnarounds in this quarter that are fairly significant, so the Louisiana three turnaround the majority of that cost comes in this quarter and we expect that unit to be up sometime mid-November.

That is not just a turnaround but it's also tying in the ethane cracking flexibility, which is both front end on the furnaces and back end on the distillations section and separation section of the plant, so that's a big turnaround.

You still got Sadara startup costs for another polyethylene train that comes up in first quarter, so those are neither one in last year.

The other example I would give you is when you look at this quarter and third quarter, if you look at the margin compression year-over-year, half of that is from Sadara startup costs in the beginning of the LA-3 turnaround. So I don't think we're foretelling that there is a big margin compression coming here or there is a big drop-off in demand.

I think it's really more related to one-off items. We've also been doing turnarounds in our polyethylene derivatives space, so in Seadrift, where we're heavy on electrical and telecom capacity, we've been doing some turnarounds and debottlenecks and reliability work there. We're doing the similar types of things in St. Charles in our LP-6 plant.

We're getting ready for really the Texas 9 cracker coming up and the ability to have more ethylene down in the Gulf Coast and get as much as we can out of the franchise in the Gulf Coast..

And, next, we'll move on to P.J. Juvekar with Citi..

Yes. Hi. Good morning..

Good morning, P.J..

You have significant investments coming online in the Gulf Coast, Sadara and you have Texas 9 PDH. When you look at all this, how much total incremental EBITDA do you expect from all these investments? And if there is a potential downturn, let's say in 2018-2019, do you think this incremental EBITDA can offset any ethylene downturn? Thank you..

Howard, why don't you take the first part of that question on EBITDA forecasting..

Yeah. Well, I mean, I think you have to go back and you have to have a view of whether you're a bull or a bear in the cycle. I mean, we put out a long-term range in 2014 at the Investor Day and we said, look, all of these projects add at least $3 billion of EBITDA over the long-term and we're still standing by that number.

That's a long-term number and when you add it all up, that's where we see the long-term..

And, Jim, on the ethylene part?.

Yeah. So P.J., when we authorized all of these investments, we said we expected greater than $3 billion of EBITDA impact out of all of them. And as Howard said, at any point in time you can have some cash margins that are above or below where we are right now. PDH today – case in point, St. Charles was right on the line with what we've said.

PDH today is still running very positive cash margins, even in a low propylene environment, it's running very positive cash margins. LA-3, the real EBITDA increment from LA-3 is the fact you get 250,000 tons a year more ethylene out of that. So that's right to our bottom-line. That's produced for us versus purchased, so that goes to the bottom-line.

And Texas 9 in derivatives is a whole new slate of products. It's really four of our highest value-add derivatives plan on that franchise, it's our highest growing segment. So we're going to continue to shift the mix here up in the higher-performing products and away from the most commoditized parts of the earnings.

So we're still bullish on the fact that we're going to deliver these results..

And just to get it out now, I know you guys are all into the plastics forecast here, this company – the next last slide I did in the deck shows consistent earnings growth with the plastics profile having obviously an effect but it doesn't wobble the company as much as it used to because of the value add point Jim just finished on, plus the forecast going forward on the supply side shows more of a plateau in these next few years despite these supply adds because of the delays.

So we think high-operating rate environments and strong value-add demand drivers like packaging, E&T and elastomers builds margin for Dow from here, not destroys margin. Add to that the feedstock flexibility point on the previous question, that's an expanding margin scenario in one of our core franchises..

And, next, we'll move on to Jonas Oxgaard with Bernstein..

Morning..

Morning..

Another nice quarter. Appreciate it. Looking at Sadara, in your numbers, you said 80 million pounds sold. If my math is right, that's about 10% of the utilization. Looking at next quarter, everything is running full out.

Does that mean you'll reach somewhere around 90% utilization on the actual plant? And how should I think about the EBITDA or the daily income contribution from this?.

Yeah, so just to be very clear, we have four units running of the 24 that have to start up. And so we've got a fair while to go before we get up on the utilization rate for the whole complex. The four units that are running, clearly the three polyethylene trains are running flat out. That was the point we were making earlier.

So we are very early in the capacity utilization. We still expect lender reliability tests in 2018 timeframe. So 2017 is going to be a big startup year for us. However, the headwind will start becoming more tailwind and I'll give that part of it to Howard..

Yeah, Jonas. Good morning. I would say, look, in the fourth quarter, we will have a tailwind in plastics for Sadara, but offset by the comments that Jim made relative to Louisiana 3 turnaround and some of the higher costs coming globally from a feedstock standpoint. But 2017, it will definitely be a tailwind for plastics.

But as Andrew said, you still have 22 units that you're in the steep part of the curve in spending. And those are all in PMC with the exception of one additional polyolefins unit that'll start up in the first quarter. So PMC will be a headwind all through 2017..

And next we'll move to Duffy Fischer with Barclays..

Yes. Good morning..

Morning, Duffy..

Wanted to go back to the volume number in the Performance Plastics segment. And I was wondering if you could talk about it maybe in three buckets.

So how much of that volume improvement was your existing asset base that just ran harder, so on the olefin side this quarter? How much was new olefins capacity, either debottlenecks or some of the new plants coming online? And then how much was the downstream value added where you were able to upgrade those olefins into capacity that wasn't utilized a year ago?.

Jim. We don't think of it that way, but I think we'll give you a stab. Go ahead..

Just high-level, Duffy, it was the first that you mentioned, existing asset base. I said before, we've been running flat out, sold out in those units. We've achieved some pretty phenomenal operating rates in those units in spite of the fact that we've turned a few of them around during this year to get ready for the Texas-9 startup.

And then I would say the rest of it is the latter part, the mix shift and the value add from the mix shift is the big thing. There really hasn't been enough time to have enough of an impact from new capacity.

As Sadara starts up, you've got to fill that supply chain to get the product out, so we've been moving a lot of product out into that supply chain. We sold some material, as was discussed earlier, in the third quarter in the month of September.

However, you're going to see more of those sales come in the fourth quarter as we've got three units running and getting that supply chain full. And for that reason, a lot of our growth in the third quarter was North America, Europe and then China and Southeast Asia.

And I would say had we had more Sadara volume in the third quarter, we'd have had more growth in China..

A lot of the investment we've done in the machine, the assets the last many years has now made that machine more reliable. So our production is up versus same quarter last year, up 9%. That's 1.9 billion pounds that we've sold in Q3 that we didn't sell a year-ago. Year-to-date, that number is 5.6 billion pounds. So kudos to our operations people.

They're running safely, they're running reliably. And our salespeople have been able to get it out the door and move more volume to demand based on value add and, therefore, kept inventories quite low. So this machine is moving into the high-80%s operating rate. Right now it's 86%.

As a totality of Dow, this is not just the ethylene integration piece that I'm referring to, I'm talking about the whole company. And so the value-add piece, when you think about innovation agenda, stretches across all of it, from the propylene derivatives to the ethylene derivatives to the silicone derivatives, all the value-add piece.

And very few of our businesses today are we selling the strict monomer. Probably the last remaining example there is our acrylic chain, our performance monomer, where we are moving, driving all those monomers down to value-add polymers and emulsions. That's the last part of the Dow commodity engine that sells just commodities..

And next we'll move on to Vincent Andrews with Morgan Stanley..

Thanks very much. Just a question. We've had some increases in the oil price more recently.

And I guess as I'm thinking about what's left of this year and into next year and we think about the ethylene and polyethylene chain, do you anticipate those higher prices increasing the marginal cost of production and flowing through to product prices such that you can hold onto the recent $0.05 increase in polyethylene prices? Or should we expect seasonality and everything else to overwhelm that?.

I think your last phrase defines it, but I'll let Jim get into the details. But in essence, there's always a lead lag factor, but as oil prices go up that's generally good for us over time. But there is always transitions. Jim, speak to it, please..

It's generally good. The feedstock for us is predominantly gas, and so what you see is it's remained low and steady over this time period and so we haven't seen any real move up in the input costs.

We saw prices firm up in polyethylene at the end of third quarter and we've seen them firm into the beginning of fourth quarter and I think that's back to inventories being low and demand being high. And so as oil goes up, that just adds an element to prices being able to firm up in the near term. And that's our view.

And I'll stop at trying to predict what's going to happen with oil price. But at least that's where we are today in the current quarter..

And next we'll move to Peter Butler with Glen Hill Investments..

Good morning. Good morning. Management appears to be making really good progress improving the quality, consistency and predictability of the earnings stream.

Would this encourage Dow's board to significantly boost the dividend payout ratio and boost the share repurchase program? It also could cause analysts to boost Dow's trend earnings growth projections in their models..

Go ahead, Howard..

Yeah. Thanks and good morning, Peter. Thanks for noticing about the consistency in the increasing results. I appreciate it. Look, on the dividend and share repurchase, we have been on a streak here of a double-digit CAGR of growing our dividend for the last several years. Our payout ratio really hasn't changed.

It's a 45% of net income target, long-term target, that will go back to the shareholders in the form of dividend growth. And we've been tracking at that number as the earnings has improved, net income has improved, we've improved the dividend. On stock buyback, the same. We've spent over $7 billion of cash in the last several years buying back stock.

You saw that we entered the market again now that the shareholder vote was behind us on the Dow-DuPont transaction. We bought more than $400 million worth of stock back in the third quarter with about $1.9 billion left in our open program and so we're going continue to do that as well..

Yeah. I mean, look, I've said it many times on these calls and between calls. The last many years has been a proof point that we can be a consistent cash flow generator and earnings grower so we can return cash to owners. And that'll come through dividend and share buybacks while we fund our growth programs.

We're coming off some pretty significant investment in CapEx here and so as we come off that CapEx spend, that's going to open up more of the cash flow. If we think we're undervalued, which we do, we'll buy back shares and we'll go back to our board for more authorization.

But for sure being a consistent dividend grower is part of the Dow mix of returning money to our owners..

And, next, we'll move on to John Roberts with UBS..

Thank you. You announced you're divesting a small ethylene copolymers business which I assume overlapped with DuPont's packaging polymer businesses and is related to the antitrust issues.

I know the Ag antitrust continues, but have you largely concluded the antitrust discussions outside of Ag?.

Complex regulatory processes in EU, China and particularly – and in the U.S., those three in particular, but Brazil, remain in front of us in terms of whatever might come from them. We clearly have been in the market on the ethylene-acrylic acid copolymers and ionomers business under the PRIMACOR brand. That is one that we have foreshadowed.

We have had no surprises in any of the discussions. They are going a little longer than we had hoped. As Ed I think said on his call, we expect Q1 close. We're very confident about that. We're not in a position to speak to specific remedies. We are waiting for those key jurisdictions.

Just a note, by the way, we've got 10 approvals already, 10 jurisdictions have approved us. Some pretty key ones as well. However, having said that, setting the pace here through EC, DOJ, MOFCOM is our whole focus, and we're being very, very thoughtful about how to respond over time.

You're going to see some filings from time to time especially out of EC. I think it's important to note that their process does that. Just know that we are quite aware of all of that and we are working towards – a few months shouldn't impact the value creation of a $30 billion deal. So taken a few more months, you should want us to all do that..

And, next, we'll move to Hassan Ahmed with Alembic Global..

Good morning, Andrew.

Andrew, through the course of the last couple of months, we've seen some pretty significant moves up in coal prices, right? Now as you sort of sit there and think through sort of the macro, call it ethylene, polyethylene pricing environment, do you see sort of these moves having an impact first and foremost on ethylene and polyethylene pricing? And secondly, do you see them having any sort of impact on future, call it CTO, MTO, CTP supply?.

So as I mentioned earlier – I'm going to give the other part of the question to Jim here in a second, but just on the big energy picture as it relates to China in particular, I was just over there as I indicated. I would tell you China is de-industrializing very fast, Hassan.

I have no confidence that they're going to allocate capital to coal or emissions-heavy investments. I think there will be some of that, but these are massive capital investments that have the problem of not being forecastable in terms of return. And that's the other pressure point.

I believe certain enterprises have got this from literally the top leadership are under huge pressure to show returns. And they are having in essence a come-to-Jesus moment in terms of understanding how capital gets allocated between equity, property and other investments.

It's much more Western financial environment appearing there, especially as they open up their financial sector, which they pretty much are committing to do. I think that recalibration in China is going to slow down coal heavy investments with time. The paradox there is I think they're going to go much heavy into nuclear.

I think that's going to be their place of choice while they transition to LNG. So I am not confident at all that you're going to see CTO or MTO off of coal coming in anywhere near the pace that was foreshadowed.

Jim on the margin aspects of it?.

The only thing that I would add to what Andrew said is that most of the capacity that's on those CTO and MTO plays is heavily, heavily commodity-oriented C4, and it's not really an area that we play in significantly in that part of the world or really anywhere right now.

So we're shifted towards a much higher mix, more driven towards the end-use markets that we talked about before. We still think, and we have thought for a long time, that people are pretty optimistic about the rate at which these plants are going to come on and how high they're going to run.

And there is a dissatisfaction already with the returns on these investments that's heavily, heavily capital intensive to put in one of these operations relative to what you can do in the U.S. Gulf Coast or in the Middle East..

And, Christopher Parkinson with Credit Suisse will have our next question. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker) Thank you. You mentioned that within Ag that seeds are chugging along on the back of the Latin American demand on both price and volume.

But can you just comment a little more about the key drivers here? And a little more on your expectations heading into Safrinha as well as pre-buying in the U.S.? And then also you mentioned crop protection was negative. I'm assuming most of that was insecticides in Brazil, but were there also challenges in Europe as well? Thank you..

Go ahead, Howard..

Yeah. Good morning, Chris. So overall on the key drivers, I mean really proud of the Dow Ag team in the quarter. I mean that $141 million improvement versus same quarter year-ago, I'd break down the drivers into three buckets, and it's pretty much equally split.

About one-third was due to the higher volumes and higher prices and specifically seed in Brazil for sure. About one-third came from just the continued drumbeat, steady drumbeat now for many quarters in a row on self-help productivity and cost cutting. And then the other one-third was really by the turnaround in currency.

If you think about a year-ago, there were pretty big currency headwinds facing us in Ag, and it didn't help much – actually in the quarter I think it was 1 percentage point of the price up was related to currency and Ag. And actually overall at company level currency was a zero help to us. But it helped on the margin and certainly the delta change.

That was the other one-third of the key drivers. When you think about why the volume was up in seeds in Brazil, I would say a couple of things.

One, just the continued development of our new technologies that we continue to introduce, that farmers continue to get more and more comfortable that it does what it says, and it increases their yield and so they just continue to get used to it. I do think there was some early buying in the quarter.

I mean the farmers – we don't get to choose the weather. The farmers decide when they get to plant, and I do think there was some of that that will a Q3 versus a Q4 move. So I would not count all of that is a Q3 gain. But we feel good about where we ended up in the quarter..

And next we'll move to Robert Koort with Goldman Sachs..

Thank you. Good morning..

Good morning..

Jim, I was wondering you mentioned oil and gas, maybe some signs of life. Is that more of things flattening? Or are you actually seeing an uptick? And then could you also just give us in your deck that shows the polyethylene-ethylene long-term supply-demand balance, what your growth rates for both are assumed in those charts? Thanks..

Yeah. So on oil, Bob, really we've seen a flattening and kind of an uptick here in the U.S., which I think is – I think it's instructive that at $50 a barrel, you've got people moving rigs back into oil production down in the Gulf Coast. It hasn't been a lot.

Remember, 1,500 rigs were moved out of production and you've got about 11 to 15 that have moved back in, but it is a move and it's starting in that direction. So there is cautious optimism there.

I think if prices continue to firm up on oil, they continue to firm up toward the $55 maybe even next year into the $60 range, we're going to see more rigs coming back in. So shale gas is going to be competitive. Some of these fields can be competitive at $25 a barrel. So I think we've got a situation which is good for us that the U.S.

is competitive and it's going to be there longer. And so when you look at where our assets are around the world, where it's a very good competitive cost position base is to have our franchise. As far as supply-demand balances and the numbers that are in here, we're still running at the traditional 1.3 times, 1.4 times GDP types of numbers for demand.

And the real question mark is what's the GDP number that you plug into there? I would say at the beginning of the year, we were starting with something like a 3% global GDP. And we backed off of that some through the year more towards global 2.5% number.

But look, we've had 6% growth all year, and we've oscillated between 6% and 10% in China year-over-year. We've operated in kind of the 4% range in North America, similar maybe a little bit stronger in Europe and kind of flat in Latin America.

So our view going forward is these operating rates are strong, and it's not just reflective of the fact that you've got the historical rates. It's also sustainable packaging is driving a lot of trends toward plastics, and that's competing against other materials, and we're knocking other materials out.

So I think the sustainability trends are helping us stay there..

And next we will hear from Don Carson with Susquehanna Financial..

Andrew, a question on Ag antitrust approvals. Your strong Ag results I think underscore your under-appreciated Brazilian corn seed position. You've actually got a bigger share there than DuPont.

So wondering if overlap in the seed is an issue in South America? And then more broadly, how do you address the non-product overlap issues? The EC has made some – raised some concerns about potentially reduced innovation due to decline in R&D spending as you combine.

And then how do you put your deal in the context of the other two transactions going on, which the regulators have said they'll also look at as well?.

Yeah. Thank you, Don. You have to start where you were leaving off. I mentioned many times already on this call that food and agriculture (51:55) discussions for countries and regions.

And so just like energy and just like security, food is right at the centerpiece of political, basically making sure the constituencies are satisfied that they have adequate and safe food supplies. So agricultural lobbies and farm lobbies are strong everywhere and, of course, create unlevel playing fields around the world.

That's why there's some jurisdictions without GMOs and some with GMOs and there're some jurisdictions that have trade protection barriers and some that don't. So this is not a new conversation. Eyes wide open going into our transaction, as you all know, you in particular, about 10 years of asking the question, what are you going to do with Ag.

We always felt that there was a complementarity between biology and chemistry and an integrated farm science helping the farmers. Integrated farm science, including big data, is expensive. And R&D to fuel that has to be funded in a public company over long cycles.

In short-cycle investment type of thesis, not many people have patient money for long-cycle investment. So smart scale and innovation and pro-competitiveness for farmers to get the very best out of their plot of land, whether it's an acre or 10,000 acres.

Row crops and niche crops and the science needed to get more food, safe, reliable food, to all the citizens of those countries is mission at hand with our deal and, frankly, I'm sure it's the mission at hand for the other deals. We are first in in all jurisdictions.

We are very eyes wide open on what it means to create a pro-competitive farm lobby, and we believe our deal does that. And if there are pushbacks based on various views on how those innovations come to market, we will definitely engage and are engaging.

Again, we are taking the time to listen very carefully to what the jurisdictions want us to do and we are very, very thoughtful on those remedies. And we're confident we'll close this deal in Q1 and, frankly, solve that complex equation that you asked about and hopefully I've articulated on..

And next we'll move on to Kevin McCarthy with Vertical Research Partners..

Yes. Good morning, gentlemen. A question on your preferred. We've noted that the share price is once again above the trigger level of $53.72 over the past half dozen sessions or so.

So my question is, if that were to continue such that you could force conversion, how might you react in the wake of that? In other words, would you expect to take action to offset the step-up in the common count? And, if so, how quickly might you be able to offset that? Thanks..

Thanks, Kevin. Look, we've been working both the numerator and the denominator on that equation for quite a while. So as we articulated in the results today, 16 consecutive quarters of year-over-year earnings growth and margin expansion to work the numerator. And we have been proactively working the denominator on share count.

We bought back, I think I mentioned earlier, over $7 billion worth of stock here in the last several years and another $400 million. We're planning to continue to do that. So we're working the equation both ways and you should continue to expect that..

And next we'll move to Aleksey Yefremov with Nomura Securities..

Good morning. Thank you.

Should Sadara start-up costs go away when all the units start up or will they represent some kind of fixed cost on a go-forward basis? And also in the short run, do you expect in the fourth quarter the net contribution from Sadara to be in that positive between the start-up costs and increased earnings from polyethylene units?.

Go ahead, Jim..

Yeah. So on Sadara start-up costs, right now we're in the EO and derivatives and getting ready for the isocyanates block, which is nine integrated units in that block to start up. And that'll be first quarter, second quarter, third quarter types of timing for those things.

So you expect to see that through next year and that's a significant number of units. And then once you get to 2018, you'll see those start-up costs go away and we'll be back to having the full units up and operational.

And, at the same time, on the ground in Sadara within the joint venture, they're working hard to get their cost positions where it needs to be and get their comps where they need to be to be competitive as a JV in their own right. So I think both of those things are going to have an impact in 2018.

Howard has said we expect plastics to show some positive next year. We expect it still to be a headwind in Industrial Solutions and Performance Materials, but we're working through all that right now..

And at this time, we have time for one more question. We'll hear from Arun Viswanathan with RBC Capital Markets..

Great. Thanks for squeezing me in here. I guess just had a question. I'm trying to understand how you guys are performing better than your markets, especially in Europe and in automotive Europe.

EMEA was up 9%, but was that more Middle East or was that Europe? What are you seeing in Europe? And then also what are you seeing in automotive going forward? Thank you..

Go ahead, Jim..

Yeah. So I think the issue is where we're playing in automotive. When you look at the number of applications that we're in, whether it's our plastics products, ENGAGE, things like bumper fascia for the cars. Our light weighting solutions like our crash-durable adhesives.

So as companies continue to use carbon fiber aluminum, other things to bond to the steel frame, they need more adhesives in that vehicle. And when you get to it, we look at content per vehicle.

So even though, in some areas, production in automotive year-over-year has flattened out, we're expanding our content per vehicle in that space and I think that's what's driving the growth for us. Elastomers is a big product line that sells a lot into the automotive sector.

Coatings as well, into areas like sound dampening for the car is an area that people sometimes don't appreciate how much content goes into the automotive space. So that's how we're growing better than market is really getting the content per vehicle up and getting the number of solutions on the new vehicles up.

And as you go into heavier vehicles, into trucks, you get into crossovers and higher-performing vehicles, like the higher-performing sedans, the ones that people are paying more value for, we have more content on those vehicles than, say, the entry-level sedan..

And at this time, I would like to turn the call back over to Mr. Neal Sheorey for any additional or closing remarks..

Great. Thank you.

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

I'd kind of want to wrap the call by one more time referring to the visuals we showed you on slides 15 and 16, which shows the CAGR of 6% on the earnings growth and also EBITDA growth. They also show what we've done on cash flow and what we've done on the TSI (59:05).

I would tell you that, again, controlling what we can control, self-help and productivity and an innovation agenda speaks to that last question a bit which is why are we growing volumes above market. We're growing where growth is needed and we have built a portfolio really under all sorts of environments that can perform, a portfolio for all seasons.

We're very focused here on running the business to its maximum EBITDA, EPS output. At the same time, we're very focused on closing the Dow-DuPont deal and we're powering on (59:36) those things, I'm very proud of our team and that we've been able to do both. There's never been a better time at Dow. We're better positioned than ever before.

We have a strong track record, multiple years now of delivering and we're delivering these results under these macros that frankly are not very helpful. But we have the portfolio and we've built the business, and you can expect us to return cash to our owners.

That's our focus and this value creation of the deal in front us, once we close the deal and implement the synergies and get going on the spins, we'll create even more value for our owners. So I really want to double down on the fact this is a company that's delivering and we will continue to do so..

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. Thank you..

And that will conclude today's call. We thank you for your participation..