Good day and welcome to The Dow Chemical Company Fourth Quarter 2016 Earnings Call. I would now like to turn the call over to Mr. Neal Sheorey. Please go ahead, sir..

Good morning, and welcome to The Dow Chemical Company's fourth quarter and full year 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, re-transmission or rebroadcast of this call in any form without Dow's express 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 statements 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.

Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled, Risk Factors, in our most current Annual Report on Form 10-K and quarterly report on Form 10-Q.

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. I will now turn the call over to Andrew..

Thank you, Neal. If you turn to slide three, good morning, everyone. The fourth quarter of 2016 capped another strong year of performance for Dow in which the full power of our business model was once again on display.

We reached 17 consecutive quarters of EPS growth, 13 consecutive quarters of volume growth, another year of record EBITDA, and shareholder returns that have outpaced the industry and the market. As you can see, the Dow team delivered exactly as we said we would in 2016.

We have delivered this performance day in and day out against one of the most unpredictable and volatile macroeconomic environments in our history, mitigating risk and driving both top line and bottom line growth.

In a world of constant uncertainty, our focus on targeted markets, productivity and investing in strategic growth drivers has resulted in consistent performance, no matter the headwinds, and we have done this while rewarding our shareholders with substantial share repurchases and consistent increases in our dividend, now at a record level.

We are exiting 2016 with strong momentum and this bodes well for 2017. Our strategic agenda, our strength in portfolio and our determination to deliver served us well throughout 2016, as it has over the past four-plus years, and as it will continue to do so into 2017 and beyond. Turning to slide four, this brings me to our results for the full year.

Here are the headlines. Financially, we grew full year EPS for the fourth consecutive year. We achieved record full year EBITDA. We converted all of our Series A preferred shares into common stock. And we returned $3 billion to shareholders, resulting in a TSR that outperformed the market. Operationally, we exceeded our productivity target.

In fact, since 2012, we have removed $2.7 billion of total costs out of our system. We continued our streak of volume growth, which is now more than three full years running. We capitalized on our higher quality portfolio, illustrated through our operating EBITDA margin, which is north of 20%.

And we drove operational excellence to ensure we had the pounds to meet growing consumer demand for Dow products. And strategically, we made significant progress on all of our investments for growth, positioning each to deliver in the year ahead.

We closed Dow Corning, which was immediately accretive to earnings and far surpassed every value and synergy capture target we set. We achieved multiple milestones to advance the proposed merger with DuPont, including finalizing our plans to ensure we deliver the $1.5 billion of cost synergies for Material Co.

Sadara completed its construction phase and is turning its attention to startup activity. And we completed two expansions as part of our U.S. Gulf Coast investment and our new cracker and derivatives remain on target for startup later this year. In sum, 2016 proved to be yet another successful and strategically important year for Dow.

We achieved new milestones and drove our focused agenda with clear priorities. I'll have more to say later in the call regarding our track record of success, our outlook, and our priorities. First though, I will turn the call over to Howard to discuss our quarterly performance and our Ag results, and then Jim will then cover the remaining businesses.

Howard?.

Thanks, Andrew, and good morning, everyone. Turning to slide six, we closed the year with another strong quarterly financial performance. Dow's reported sales in the quarter were $13 billion. Excluding acquisitions, sales grew in nearly all segments, as volume rose 3% and pricing was flat. We reported operating earnings per share of $0.99.

Notably, our fourth quarter performance was the highest EPS result of 2016 and in fact our highest fourth quarter in a decade. You will see that our GAAP EPS was primarily impacted by a charge for asbestos-related matters, which was largely due to a voluntary accounting change to accrue for defense costs that were previously expensed as incurred.

This change reflects our adoption of common practice as well as our confidence in the improved processes and systems we put in place two years ago to better predict these costs. It also accrues for pending and potential future claims through the terminal date, which drives less volatility in the accrual level.

Equally important, these moves provide an increased level of financial transparency through better visibility into our underlying performance. Our record EBITDA of $2.6 billion in the quarter was driven by strong performance in our downstream segment.

Consumer Solutions set an all-time quarterly EBITDA record and Infrastructure Solutions and Agricultural Sciences both set fourth quarter EBITDA records. We also continued our focus on productivity and cost out, delivering $60 million in the quarter. And we delivered $1.9 billion of cash flow from operations.

Finally, we continued to see the powerful contribution from Dow Corning in the quarter in both our Consumer Solutions and Infrastructure Solutions segments. I'm very pleased with the rapid progress we've made in just seven short months since closing this transaction. Our teams continue to surpass every target set for this integration.

On the cost side, we exited the quarter with a cost synergy run rate of more than $360 million. This is more than three times our year-end target and puts us well ahead of schedule to achieve our two-year run rate target of $400 million. It also speaks to the focused and rapid implementation mindset that our teams have taken since day one.

On the growth side, we continue to see early cross-selling wins and customer excitement continues to increase as they see the value of our integrated portfolio with silicones, which allows us to go deeper in our key end markets of infrastructure, consumer care, and transportation.

Turning to slide eight and our business results, Ag Sciences reported record fourth quarter and full year EBITDA, driven by sales gains from price and volume growth, as well as sales of new Crop Protection technologies, currency improvements, and self-help actions.

We've said for years that innovation has always been the centerpiece of our Dow AgroSciences business, and even in this down ag market, we continue to advance our novel technologies. For example, we recently received notification from the EPA that it has federally registered Enlist Duo herbicide for use on Enlist cotton.

Additionally, the EPA has now extended the geography for the product from 15 to now 34 states, which covers the vast majority of cotton, corn, and soybean acres in the United States. This marks the full system approval of the Enlist cotton trait, which will now be available this spring.

And in 2017, we will launch and ramp several more Crop Protection technologies. Isoclast insecticide will ramp in the U.S., Japan, Korea, and Latin America. We will launch Arylex herbicide in Europe, Canada, and Australia. And we will pursue line extensions such as Resicore herbicide in the U.S. and Strongarm herbicide in Latin America.

You can expect innovation to remain front and center in Dow AgroSciences. Now, let me turn it over to Jim to cover the rest of our segments..

Thank you, Howard. Moving to Consumer Solutions on slide nine, the segment reported record quarterly and full year EBITDA, boosted by the integration of Dow Corning, as well as new commercial wins and market share gain. This marks the fifth consecutive year of EBITDA growth for this segment.

Dow Automotive reported its eighth consecutive quarter of EBITDA growth. The business had record fourth quarter and full year EBITDA, driven by double-digit volume gains in Greater China and Brazil. Dow Auto also continues to grow well in excess of industry growth rates fueled by its innovation strength.

As an example, our structural adhesives platform grew nearly four times the market year-over-year. Consumer Care achieved double-digit volume growth in the Americas on market share gains of new product introductions tied to trends in gluten-free food and single dose detergent applications.

Dow Electronic Materials achieved record fourth quarter and full year EBITDA results on continued above market volume growth. The business has now grown EBITDA for the sixth consecutive quarter.

And the silicones business in this segment saw continued strong demand and volume gains in Asia Pacific, particularly in the automotive and electronics end markets. Moving to Infrastructure Solutions on slide 10, the segment reported record fourth quarter EBITDA, driven by the integration of Dow Corning.

Dow Building & Construction delivered volume growth on double-digit gains for cellulosics-based construction chemicals, which is now in a sold-out position. Business also delivered its second consecutive year of record EBITDA.

The silicones business in this segment reported volume growth in Asia Pacific and EMEAI on robust demands in pressure-sensitive adhesives and release liners. In Energy & Water Solutions, water volume declined year-over-year due to soft demand for reverse osmosis membranes used in industrial applications.

However, RO membrane sales grew double digits sequentially driven by increased demand in emerging geographies. Energy saw lower volume on reduced demand from refining and processing end markets, however, we did see early signs of a rebound in U.S. shale, which led to business reporting double-digit growth sequentially in this end market.

Dow Coating Materials reported volume gains in all market sectors. And in Performance Monomers, we progressed well through a large planned turnaround at our Texas site. On slide 11, Performance Materials & Chemicals reported volume growth with gains in most geographic areas, led by double-digit volume growth in Greater China.

Polyurethanes reported volume growth for the 15th consecutive quarter. This business saw a double-digit increase in demand for a higher-margin systems application. Industrial Solutions reported record sales volume in Greater China and higher equity earnings, driven by improved MEG pricing.

Moving to slide 12, Performance Plastics reported record sales volume in most businesses. Dow Packaging and Specialty Plastics delivered record quarterly and full year sales volume on ramping Sadara production, which led to double-digit growth in Greater China and strong demand in North America and EMEAI.

Dow Elastomers also reported a record quarterly and full year sales volume, driven by continued strength in the automotive end market, as well as steady growth in hot melt adhesives and share gains in athletic footwear.

We delivered these results despite a nearly $125 million impact from planned maintenance and expansion activities in the quarter, plus an additional $100 million increase in feedstocks and energy costs. We also achieved two important capacity expansions in the quarter.

In Seadrift, Texas, we completed the expansion of a polyethylene facility in December and in Plaquemine, Louisiana, during our planned turnaround at the LA-3 cracker, we expanded that plant's ethylene capacity by up to 250,000 tons by increasing the ability to crack ethane, while maintaining the flexibility to crack propane, butane and naphtha.

Since startup, we've been conducting test runs of the cracker's new capabilities and we've ramped the ethane cracking capabilities while also proving the operational reliability of the plant.

Today, I can report that we've exceeded the original design case by approving the plant's ability to crack more than 80% ethane and we've maintained the flexibility to switch between ethane and propane. This agility further maximizes our cash generation to deliver competitive advantage for our downstream businesses.

As we've said before, 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. Dow's best-in-class feedstock flexibility in the U.S. and Europe remain a key differentiator to our competitive advantage.

No one rivals Dow on this front and our results have shown this time and time again. Now, let me turn the call back over to Andrew..

Thank you, Jim, and if everyone can turn to slide 14 and turning to our outlook, where we are seeing early signs of positive momentum with the U.S.

in expansionary mode, driven by ongoing strength of the consumer and the tailwind of the new incoming Trump administration, which really has articulated a focus on structural reforms in several areas, including competitive taxes, smart regulation and fair trade rules.

As you know, I met with the President and his team earlier this week and I'm honored to be serving a leadership role in working closely with the administration to create a vibrant U.S. manufacturing sector through a robust action agenda with focus on near-term actionable plans.

Europe continues its gradual recovery despite increasing political uncertainty. Sustained growth of Asia's middle class continues to drive demand through that region and we see improvement in Latin America from its low base.

We expect demand for Dow's portfolio will continue to be strong in 2017, particularly in our downstream market-facing businesses. With our broad geographic reach, our unique innovations, and integration strength, we will see stronger growth in a world that has begun to exhibit stronger growth in the last few years.

And finally, with consumers increasingly demanding Dow's products, our strategic investments are well timed to deliver the next layers of earnings and cash flow generation. Sadara will continue ramping through 2017 to meet growth in Asia, Africa, the Middle East, India and Eastern Europe.

Dow Corning adds new market channels and a technology tool kit that enhances our core Materials Sciences businesses. And the U.S. Gulf projects bolster our Performance Plastics franchise in the Americas with the industry's broadest and most differentiated derivative slate.

Turning to slide 15, taking a high view and elevating from the near-term outlook, what you have seen from Dow is that it is the consistency and agility of our business model that has proven time and again to be the key driver of our consistent outperformance versus our peers in the market, no matter what the macros throw at us.

This business model was reviewed and reaffirmed by our board and executive management team in 2013 and we've been executing against it with a relentless focus on specific goals.

Grow earnings, significantly tilt our portfolio toward attractive, consumer-driven end markets, upgrade the quality of our business by divesting low ROC non-strategic assets, drive a culture of continuous productivity, enhance our portfolio with high-quality complementary market-focused businesses, such as Dow Corning silicones franchise, and execute integration and innovation investments to capture growth for the future.

When we set out on this path, we knew that our success would ultimately be reflected in the value we unlocked for our shareholders and our success is evident, not just this quarter, not just this year, but for these last four years. The results of our actions are clear and they're powerful.

Speaking in specifics, our portfolio is now 60% driven by consumer-led markets. We've delivered a 7% EBITDA CAGR since 2012 and have seen our average margin improve 700 basis points over that timeframe. We've grown EPS at an 18% CAGR, nearly double our 10% target.

We've returned more than $16 billion of cash to our owners and our TSR has outperformed the S&P 500 and the S&P Chemicals Index on a one-year, three-year and five-year basis.

And as we close the fourth year of executing this growth roadmap, we have positioned the portfolio with our mantra being to deliver stable EPS and EBITDA growth across all market conditions. Looking forward, the Dow team remains focused on continuing this path of execution, growth and shareholder returns.

Turning to slide 16, this brings me to our 2017 priorities, which are clear and well defined. One, deliver on our operating and financial plan. Two, close the DowDuPont merger, which we expect will occur in the first half of 2017 and quickly drive toward the intended spins. And three, capitalize on our growth investments; U.S.

Gulf Coast, Sadara, Dow Corning and our innovation pipeline. Dow has never been better positioned to win for our shareholders, our customers and our employees. The task is clear, and we have the right strategy, the right portfolio and the right team. We will deliver. 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.

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

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

Good morning, gentlemen, an impressive end to the year..

Thanks..

Hey, we're seeing a lot of publicity regarding the European Union's view on the transaction, and the deadline is now March 14. We're not hearing that much regarding the U.S. and China.

I'd appreciate, I guess, your characterization of how your discussions are with the various significant regulatory agencies out there, and the confidence level you have in being able to complete the transaction with DuPont in the first part of this year..

Yes, thank you, Frank. Look, the long pole in the tent has always been the EC clearance, EU clearance. And they are obviously very public as they go through their various milestones. That's very different to other agencies around the world. And we've got clearance in significant number, double-digit number of agencies around the world.

But the DOJ or the U.S. and the Chinese MOFCOM are being paralleled with the EC. So we have teams working on that. They don't have the publicity. I was in China just last week, and we are confident that as we saw the EC regulatory issues, and as Ed said on his call, we're confident we can solve them.

We're confident that we can get to the right answer that satisfies their innovation remedy request, which, as he said, was speaking to R&D capability of whatever we end up divesting. We believe we can find that sweet spot. And once we've done that, the others will fall in.

But we certainly do believe, as he said, and we reaffirm, and there's no dialog between the two companies. We're working hand in glove on this. We clearly can see that this could be a Q2 close, and we understand that..

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

Morning, Andrew. Just wanted to follow up on the pending merger. Look, I mean, since, call it December 2015, when the merger was announced, clearly the world has changed a lot. Be it the EU side of things, be it higher oil prices, new regime in the U.S., Brexit, et cetera, et cetera.

So all of this said, how are you thinking about the synergy calculus? Be it the cost synergies, the growth synergies.

Have those numbers changed a bit? Are they higher in your mind? Are they lower? Can you comment about that?.

Well, I'm going to pass on to Jim, who's running that entire program, but just to preface his comments with one that may be obvious to all of you, but maybe not. Because we've had this extended time, both companies decided to get into it ahead of the close.

So, Ed and his team are taking out costs, we're taking out costs, and we're making sure we're counting those against the $3 billion we've all committed. We're not waiting for the approval. Now, you might argue that some of those can't be optimized, because we can't talk to each other on certain things for obvious reasons.

So there is a need to make sure that we ground the $3 billion as a rolling number, counting the stuff we've done ahead, but I'll let Jim comment on the confidence level of that number as we sit here today.

Jim?.

Yes, I would say the confidence number is very high. The team, through the end of third quarter, had documented more than 380 integration synergy projects, so we have a good view to what we need to do once we get to close.

Obviously, many of those can't be implemented until we get to close, but as Andrew said, whatever we can accelerate in the near-term, we're trying to accelerate independently.

A good example of that would be as the DowDuPont approval is extended, we really shifted some resources internally to go heavy on what we could do with Dow Corning to accelerate that integration, and you see that in this quarter's results.

And that has allowed us to get some things done earlier than we expected on Dow Corning, and those resources will now be available once we close the DowDuPont deal to move forward..

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

Yes, good morning..

Morning, P.J..

Is your Texas-9 cracker on time for mid-2017 startup, and when do you begin to see the full benefit of PDH, as well as Sadara and what's your latest estimate on EBITDA contribution there? Thank you..

Go ahead, Jim..

Texas-9 is on track. I was down there two weeks ago. We've crossed 95% mechanical completion, and greater than 50% of the unit operations inside that plant are already into commissioning and startup, and we're turning over units every week. It's really, really coming together strong.

PDH, after our early part of the year incidents as PDH, it ran very strong. It ran at nameplate for most of the rest of the year, and so it continues to be able to deliver the capabilities that we said. And obviously, the limit of that is the propane, propylene instantaneous market spreads, which right now continue to be pretty good.

So we're in good shape on both of those..

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

Yes, thank you.

With respect to the European Commission concerns, how would you rank their concerns from your view? Overlap between pipeline and patents between the companies, conversely the potential rationalization of pipeline products versus maybe a third bucket being the number of companies out there that are discovering new molecules in crop protection.

Those three buckets, if you would, please..

Yes, Steve, see, that's way too much detail than I'm going to offer you in terms of an answer, but I can give you a high level view that, as Ed said, this is focused in on crop protection, and it's really focused in on discovery.

So, when we sit in front of them and talk through what the two companies bring to the table on discovery and product development, the innovation thesis gets tackled pretty fast, because we're both innovators and we'll become even better innovators when we're together.

And so what they really are asking about is towards the third point you made, which is they want to make sure that whatever comes out of this, that we don't have less innovation. That's their innovation thesis. There are points of agreement and points of disagreement, but we're converging.

We're converging on points of agreement and disagreement, and I'm very confident with this 10-day extension, we're going to get to an outcome that satisfies all shareholders and of course the regulatory authorities..

And next, we'll move on to Jeff Zekauskas with JPMorgan..

Hi, good morning. I see sequentially your pension liability went up by $1.6 billion. I would think that pension expense, pension liability might have moderated because of the interest rate environment.

So why is that? And then secondly, if your Texas-9 cracker is effectively almost mechanically complete, your CapEx should probably come down quite a lot next year.

So what do you spend on CapEx this year, and what do you plan to spend on CapEx next year for 2017?.

Howard?.

Yes, good morning, Jeff. Look, I mean on pension, what you're seeing there on the balance sheet is really just a year-end mark-to-market true-up for the full year. When you think about it on a go-forward basis, our pension would get to be fully funded with less than a 200 basis point increase in rates, which you could expect in the next several years.

I'm not going to call exactly when. On a pension expense standpoint for 2017, you should expect about a $450 million expense for the full year, and then actually, our cash contributions for pension in 2017 should be about $150 million lower 2017 versus 2016, so that will be a cash flow tailwind going into 2017 sequentially.

In terms of CapEx, we had a target in 2016 of $3.9 billion. We actually did $100 million better than that. We spent $3.8 billion. About 2/3 of that was on growth. And you're exactly right. As those CapEx projects start to roll off into operations, our CapEx for 2017 will be down.

For modeling purposes, I would use a $3.4 billion number, so about a $400 million decrease from 2016..

And, Jim, just add some color on that last point..

Yes, I'd say, Jeff, don't forget that we still have four world scale plastics plants that are being finished and that will come on sequentially with the cracker – a couple of them with the cracker and then a couple more as the year progresses. So we've got to finish that CapEx spend too..

And David Begleiter with Deutsche Bank will have our next question..

Thank you. Andrew and Jim, on that same topic, a lot of moving parts in ethylene, polyethylene in the first half of the year. What's your view on the ethylene chain in the U.S. in the first half of the year in terms of potential margin erosion or margin stabilization, given new capacity coming on stream on the polyethylene side? Thank you..

Go ahead, Jim..

David, if anything, the ethylene chain looks like it's staying where it is in terms of operating rate, if not tightening up as we move into the year. We've already seen geographically we've seen some tightening in Asia Pacific and we know that things are going to balance a little bit in North America as we move through the year.

There are a couple of plastics plants that will get completed this year. There's been really some length in ethylene in North America as the incremental debottlenecks on the ethylene side and people back integrating themselves have freed up some merchant ethylene.

I think through the year, most of that's going to dry up and you're going to start to see ethylene strengthen in North America. And Europe has been balanced and is staying steady and I'd say the growth outlooks for Europe are nice steady increases and it's going to be constructive as we believe oil will be constructive through the year..

Yes, and don't forget, we've been bringing up Sadara polyethylene all through the year and that's been well placed and prices have filled out very nicely, thank you very much. So, the big new capacity coming on includes us and we're not seeing any weakness in the chain.

I think we've always said, the ethylene, shape of the ethylene curve this time around is more a plateau than peak and valley. And so, we're seeing it mostly because of these delays that Jim referenced..

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

Morning..

Morning..

Your equity earnings were really quite impressive, particularly Hemlock.

And we were wondering, well, what drove that, and on the Hemlock particularly, is any of that some of the contracts enforced by courts or is it true recurring earnings?.

Go ahead, Howard..

Yes, so look, equity earnings were up over $100 million versus the same quarter last year. And really, a few key drivers are our Kuwait JVs did very well. Our Thai JVs did very well. Sadara was actually in line with our modeling guidance, but it was a headwind year-on-year. And you're right, Jonas, Hemlock had a seasonally strong fourth quarter.

It was a combination of just continued improvement in polycrystalline prices, good demand, but then there was a little bit of lumpy revenue in there for some of the deferred contracts. So, all of that is not recurring..

And we'll move on to Christopher Parkinson with Credit Suisse. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC Thank you.

You've clearly executed well on Automotive Systems, but can you just offer a little more insights on the cadence of the annualized build rates on a regional basis or your exhortations there; general trends on your content per vehicle, as well as any preliminary exhortations on the compatibility and synergies with DuPont? Thank you..

Go ahead, Jim..

Yes, thank you, Christopher, for the question. It was a very strong year in the United States in auto builds, and SUVs, and light truck builders. It was in Europe and we saw growth coming back at the end of the year in China. China was relatively strong. Some question as you go forward in terms of what the tax credit reduction will do in China.

Our expectation is flat with 2016 in China. Europe and U.S. probably up slightly 1%. At the end of the year, we watched very closely on auto builds for inventories with sedans, primarily, and what happened there.

But actually, the sedans moved out relatively well with some increased rebates, and so the businesses plateaued to slower growth but at a very, very high level. And surprisingly to the positive, we saw an uptick in Brazil in the fourth quarter and that's the first uptick we've seen there and I'm going to guess three years.

So, I think, all in all, a very strong market. Our content, I mentioned on the call we're growing at about four times the rate of the industry average.

That's really driven by the amount of use for crash-durable adhesives as it goes into higher performing vehicles, SUVs, crossovers, the light duty vehicles, trucks and that really feeds to our sweet spot. So we're continuing to innovate to grow that content per vehicle..

And John Roberts with UBS will have our next question..

Thank you. On the $3 billion merger cost savings, you've never given a regional breakdown, but can you tell us if it's consistent with the new priority on maintaining U.S. jobs or do you have to shuffle things a little there? And could we get some new Dow U.S. project announcements, given the priority on U.S.

investment?.

I'll take the back – good morning, John. I'm going to take the back end of your question and then flip to Jim. So, look, we haven't changed anything in our geographic mix based on potential new policies, as I think some of you may have caught my Cramer clip today, that question came up.

I said, look, at the end of the day, we're going to achieve cost synergies, which actually does mean head count reduction. So, we don't fit the Presidential agenda right away, but we're creating growth companies that will create growth opportunities.

And a good example of that is what we've already announced on Dow Corning with a new R&D center here in Michigan to build on the synergies of Dow Corning and being part of the materials company. So, that's a good example of innovation going ahead of, if you like, the growth curve there.

What we've got to do here is get these companies formed, we've got to make them competitive, and then they can grow, and they'll grow along the paradigm of hopefully friendlier policies here in the United States. And I can already see that this administration is going to move fast on taking out regulatory costs and giving us better tax regiments.

That's all tailwind to these new companies as we set them up that will lift our growth synergies with time.

Jim?.

And, John, I would say we haven't released regional targets for the synergies. We do have regional targets and we do have regional teams that will implement those. I don't see anything so far that would change what we're looking to do from a regional basis. A lot of the integration is not driven around our capacity as a growth model.

So it's meant for growth. More of it was driven towards back office efficiencies and productivity, but we'll keep an eye to that as that landscape changes..

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

Thanks. Good morning.

Hopefully, you can give us an update on feedstock outlook for ethane and propane, both sort of the shorter-term issues we've seen this year with ethane falling off a fair amount and propane I think running up more than expected? And then, how you're thinking about it exiting 2017 into 2018 as the new capacity comes online, anything changed about your view versus prior calls?.

Go ahead, Jim..

Thanks, Vincent. Our view is still the same in the long-term for 2017, that there's plenty of ethane to run the crackers to the forecast period even with the exports and the new crackers that are coming on. And if anything, U.S. propane is going to be continuing to lengthen.

It's going to take an awful lot of propane export to balance this market, we think. We think the length in propane is going to continue as we projected.

As we sit here right now, in the short-term, there's been some move of ethane back into rejection, which I would say I believe is a Q1 phenomenon and I think it's going to sort itself out over the next few weeks. I think it's really related to Mont Belvieu storage and a little bit of logistical capabilities.

Once that sorts itself out, we think it will move back to normal. Crack spreads for ethane, we're moving up towards $0.70 a million Btu. They've now gone back toward rejection. Our long-term look was they were going to be $0.70 a million Btu to $1 a million Btu in this year..

Jim, you may want to mention our flex project..

Yes, and on LA-3, obviously we've increased the capability to crack ethane in LA-3, which gives us 250,000 tons more ethylene out of that unit. It raises that unit's ethane cracking capability above 80%. That unit also has a really strong propane cracking flexibility as well as naphtha.

It's the most flexible unit in our fleet now and that's going to provide big advantages in Louisiana, which if anything, from time to time gets tight in that pocket..

And next, we'll move on to Don Carson with Susquehanna Financial..

Yes, thank you..

Good morning..

Andrew, wanted to go back to your view of the polyethylene and ethylene cycles. I look at the charts you have on slide 21. You seem very different than the industry, both in terms of when you see the downturn and how far rates go down. Specifically, you've got 2017 really as the trough in operating rates globally for both ethylene and polyethylene.

Most consultants are looking at 2018/2019 as kind of the trough.

So what gives you a different view on the cycle? Do you think that the industry forecasts are overstating the capacity visions or are you more optimistic on demand growth?.

Yes, so we'll take two slices of that question because it's a hugely important one. Thank you, Don, and I'll give you the slice that all of us here at Dow have been working on for a long time, and Jim and his team spend every day on this.

So, what our granularity – and by the way, to your point, we've been different to notable industry consultants for a long time. And I want to point out to you that we've been right and they haven't. And so, we have a granular view on the ground around the world, in particular, of course, where all the new builds are occurring.

And of course we're participating in some of those new builds in a big way. But we understand what's going on in terms of steel on the ground, and we understand in terms of what it will take to RTO.

And we also understand where people are in that process, and we have the granularity, which is our proprietary data, and we're keeping it to ourselves, but that comes out in this chart that you're referring to.

And when you look at the big new builds that were announced a few years back and where they all are, and they're adds on the supply side, that speaks to some of the shape of that curve that you referenced on slide 21.

So, it doesn't have an aggressive demand side assumption, and if the aggressive demand side assumption on GDP started lifting, and by the way, we think that's actually getting quite likely, as we reported in our numbers, we're seeing momentum into 2017 in the global economy, and we're seeing momentum here in the United States. And the U.S.

GDP assumption we have embedded in some of these numbers is quite low. And so what we see on the supply side in terms of delays, we see delays with MTO and what's going on in China because of emissions and their commitment to Paris. We see Iranian operating challenges, and they have – I was just in Saudi Arabia yesterday.

Was that yesterday? Yes, yesterday, and I had a report out from the Minister of Energy there on their view of oil and gas, and specifically to the Iranian production. And I would tell you, our partner there of course is pretty much in the market and knows it a lot.

So, their view, our view on oil price, on gas price, on regional prices, on supply side, on Iran, on what's going on in the Middle East in general, is right connected with them.

So we believe that the shape of this curve, as I said earlier, is a plateau through a combination of supply side delays and then of course a fairly conservative assumption on demand side, that if it starts correcting itself, we'll actually see the capacity that we're bringing on be well consumed, as already they are out of Sadara.

Jim, did you want to add some granularity?.

I would only add that polyethylene capacity has not come on in any meaningful way, so it's really constricted a little bit, the ethylene capacity. The ethylene operating rates have been high and steady at 87%, 88%, 89% for the industry, and some of us have been running stronger than that, where we've had the ability to convert the material.

As you have more polyethylene capacity come on, that ethylene is going to tighten up. So I don't see this as a trough. I see it more of an adjustment to all of these increments and all of these capacity adds that are coming on over the next three years..

Thanks, Jim..

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

Good morning. This is Ryan Berney on for Bob..

Morning..

I was hoping you could provide a little bit of an update on your outlook for pricing in your Ag segment for 2017, particularly on the Crop Protection side, where it sounds like maybe there was a little bit of pricing pressure this quarter..

Yes, Howard..

Yes, look. Thanks a lot for the question. When I look at the fourth quarter from an ag perspective, the Dow AgroSciences team did an exceptional job of delivering year-on-year earnings growth in a tough market. When I look out to the first quarter, look, the highly competitive pricing environment is going to continue.

Crop commodity prices remain below historical averages, as you know, and farmer profitability remains under pressure. What I would say is you should expect to see the same thing in 2017 that you saw from the Dow AgroSciences team in the fourth quarter and for the full year. Record fourth quarter EBITDA, record full year EBITDA.

It's about innovation and bringing new molecules, specifically Isoclast and Arylex to market with the full Enlist cotton launch. That's going to be additive. We've got product line extensions in our herbicides and insecticides, and then continued self help.

So we feel really good about Dow AgroSciences' ability to outperform in what is likely to be another tough year for the Ag sector..

And next, we'll move on to Arun Viswanathan with RBC Capital Markets..

Great, thanks, good morning. I just had a question. Andrew, you said last year that you were planning on stepping down at the end of the second quarter. Maybe you can just give us an update on your plans. You did say that you've made some changes in the senior leadership team for proposed DowDuPont.

Anything else you can share with the management on the new entity as well, that'd be helpful. Thank you..

I think the board of our company, as well as, of course, the board of DuPont, which I can't speak for, but certainly, the two companies actually have had at least two sessions together, are being very, very, very mindful of regulatory approval as being the sine qua non gate for all the questions you just asked.

So we are very ready, both in terms of board deployment and executive management deployment, and right now we have nothing new to announce in terms of changes to timing other than the focus I just mentioned.

We'll close, and then we'll be out of the gate, actually, running start already on synergies, deliver the synergies and get the 18-month timeline on spin. And actually, we are very driven, Ed and I and our teams, to actually once we stage-gate regulatory, to spend meaningful time on even that 18 month to spin.

We know that the market is expecting these three companies, and to be formed in the most competitive way possible, which means front-loading the synergies.

We have delivered a synergy plan to our boards that front-loads the synergies so that we can get the extraction of value by being together, while at the same time prepping everyone, boards, executive management, to be ready to run the new enterprises.

I'm very committed to delivering all of that for our board, and at the right moment, we'll have the appropriate announcements on anything else..

And next, we'll move on to Peter Butler with Glen Hill Investment..

Andrew, is management execution in the post-merger company a concern to you, or do you see good execution producing financial results, including cost savings, that come in a lot better than what Wall Street has been discounting?.

All right, Peter, thank you. Good morning. Look, one of the benefits of taking a little longer to get this closed is the two teams have been working together now for a fairly long time, since December of 2015. And as the year progressed last year, we had what, Jim, over 800 people deployed from the two companies working together on granular detail.

And our confidence in each other has been increasing and increasing and increasing, from Ed and I, all the way through our teams, Jim and his counterpart, Howard and his counterpart.

And the executive managements, of course, we're obviously the drivers of getting all of this done, but I'm very impressed with the quality of the people that we are working together with. We've had mutual town halls. Ed's been to some of our soon-to-be SpecCo sites and ag sites. We've been there together in a couple of instances.

I think, Jim, next week we have a few more of those where we'll be going to Performance Materials sites from DuPont, and we'll be talking with our people. We clearly understand the uncertainty cloud that basically goes with a long delay to close, but we have not let that be an excuse, to answer your question.

We will execute in an execution culture, and we are very pleased to see the strength of DuPont's results this last year or so. They've been tremendous. They've been outperforming. I think we've been doing the same as we establish our records. So, two performance cultures coming together should be synergistic to more than two..

And Duffy Fischer with Barclays will have our next question..

Yes, good morning.

If we could go back to Ag for a second, with your launch of Enlist over cotton this year, can you just remind us, across both cotton and soybeans, kind of what you think the competitive dynamics will be, your dual herbicide stack versus the competitors? And in Latin America, is Conquesta (48:48) still on track to launch in 2018?.

The answer to the last question is a short yes, Duffy, on the 2018 launch. Look, relative to Enlist, we feel really good about the technology. As you know, we've had great success with our Farm Forward trials in corn. We've got a stewarded launch now in corn.

We're going to do a full launch of Enlist cotton now that we've got the trait and the herbicide registered. You heard in the prepared remarks that we now have 34 states that have approved the full package.

So we feel very good about Enlist, and relative to the competitive set when you think about the lower drift and the lower volatility of our technology, we've had overwhelming positive feedback from all the farmers..

And we do have time for two more questions. We'll hear from Alex Yefremov with Instinet Nomura..

Good morning, thank you. In your coatings and consumer products businesses, your margins expanded as raw materials fell.

Now that some of these raw materials are rising, how sustainable are your margins?.

Jim..

Thanks, Aleksey, for that question. Coatings demand has been strong, and we've been continuing to expand that franchise. As we talked about last year, our attempt there is to try to take more of our monomers position and move it into downstream differentiated coatings and we're doing that, including new capacities in China, Southeast Asia.

So, that's been a positive. Building & Construction, even though single family homes in the U.S. have not been strong, you've seen a lot of growth in Building & Construction in new applications, new product, LIQUIDARMOR, that was just announced last year, which is doing well for sealing gaps on commercial and new family homes.

But also spray foams has taken off, both at the DIY counter inside of Lowe's, Home Depot, as well as in low pressure applications for contractors coming in and really taking buildings and retrofitting, going into the attic space, sealing them up, tightening them up.

And I would say the only drag that we've had in this sector has been Energy & Water as it relates to the oil and gas sector, which we think is turning the corner. Prices are moving up in the first quarter.

I think that's a strong indication of the demand growth, and I think we'll be able to maintain, and we have to always watch here, propylene is the thing that we have to watch here. Our PDH capacity gives us some flexibility, a hedge against that and that helps..

And our final question today will come from Kevin McCarthy with Vertical Research Partners..

Good morning. Thank you. Andrew, I was wondering if you might be willing to drill down another layer on some of the structural reforms on the table for the U.S. market.

For example, what might implementation of border adjustment mean for Dow Chemical, if that passes as part of tax reform? And with regard to regulations and fair trade, are there specific issues, policy actions, or markets that you might have your eyes on as the year progresses that we should be watching as relevant for investors for Dow Chemical?.

Yes, thank you.

Appreciate the question, Kevin, and certainly this is not only topic du jour, but it's real-time, right? So we're five or six days into this new administration and clearly the privilege I have, as I said on the call, that I've been asked to lead this Manufacturing Advisory Group, which as you know it was his first meeting on Monday morning.

And so, the President is very serious, as is his team, in around the five or six pillars of competitiveness that gets some air time in the press. But certainly the specificity of your question starts to point directionally to some solution space topic.

So, starting in no particular order, the regulatory reform one is the one I'm most excited about, because he's asking lots of questions about to all the sectors that are in front of him, inclusive of the autos that have had another bite at the apple on Tuesday.

The regulatory costs on manufacturers in the country per employee, almost $20,000 per employee cost of federal regulations. That compares to just short of $10,000 per employee by all firms as a whole. So, manufacturers bid two times the federal regulatory costs than do all other companies.

So the manufacturers have specific statements on the sorts of regs that have been coming out, especially these last eight years, that have really crippled us in terms of locating factories in the United States despite a decent growing U.S. market. So that speaks to imminency.

I believe 30 days, 60 days you're going to see decisions from the administration that start to lift some of these regulatory burdens, I think a lot of that can be done through executive orders. So that's topic one.

Topic two, anything to do with tax reform is built into what's going on with the blueprint out of the House, and the Senate, and the Ryan Plan. But in addition, the President's got some specific statements and views on, in particular, the border tax. He has some views on border tax, the Ryan Plan speaks to border adjustment tax.

The border adjustment tax, which is your question, will be, for us, a big positive. We're a big exporter out of the United States. That will immediately accrue to our bottom line as a significant tax advantage for us.

And so, frankly, we're quite big supporters of it, but different sectors are not and so there is a lot between here and enactment of something like that. Certainly, punitive measures as it relates to border tax specific to certain sectors or certain companies, that's not the agenda that's going to be driven here.

Bilateral trade will be, and putting in place bilateral trade agreements that speak to border adjustment tax per the Ryan Plan. We're big proponents for what you're going to see. There will be something on the loss side of that. There will be stuff that we lose in terms of depreciation assets and claiming those, maybe a little bit on the R&D side.

So we're going to have to watch all of that, but we have a seat at the table and we'll be definitely very, very vocal on some of those things. And then, not taking too much more time on the call, on infrastructure, we'll be a big beneficiary. Increases on investment here in the United States.

And infrastructure, many of the businesses in the Infrastructure Solutions business will benefit from that. Building & Construction business, the Coatings business, those are all going to be beneficiaries of more spend here in the U.S. And then, energy policy. As we move through energy policy that takes off regulations.

I mean, the Keystone Pipeline decision alone is a big positive for us and we've got certain things we can now go do that actually unlock more supply side, take out the cost of supply. And then, on top of that, help us, if you like, look at expansion opportunities against the shale gas opportunity for our businesses here in the U.S.

But, all of that has to be taken through the Department of Energy and the work will be done there, especially as it relates to the climate change agenda, which will also be on the table. I don't have enough time to go through it all, but just to give you some flavor of the topics that are being discussed as recent as this week..

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

Sure, thank you, Rochelle. I'll now turn the call back to Andrew for some final remarks..

There's a lot that can be said in final remarks, but you've got to home in on 2016 as another record year, seminal year for The Dow Chemical Company. The portfolio we've put in place these last many years as we shed low cost – I'm sorry, commodity-oriented, low ROC businesses that have been part of our commodity portfolio for more than a dozen years.

We've been shedding those and replacing them with high value IROC businesses. And you can see we're a portfolio for all seasons. We literally are firing on all cylinders.

There's no question that our self-help programs, and productivity, and our innovation agenda, our integration investments that Jim talked about as it relates to the feedstock flexibility, have enabled us to set record EBITDA margins, record EBITDA. And as we exit the quarter, in fourth quarter we exited with momentum.

Just volume of growth alone, 13 straight quarters, is impressive and amazing, but think about China number. We grew 27% year-on-year in China in the fourth quarter. Everyone is bemoaning what's going on in China.

We've got an expansion strategy in China that's going to all of the geographies of China, opening up offices, and we're the first there and selling products to the tune of the volume growth that I just mentioned. And that's without acquisition numbers. With acquisition numbers, our volume in China grew 56%. So we are really growing where growth is.

In addition, we are a cash story. The cash we're returning to our shareholders, the cash flow that's being generated. Remember, we've had the headwind of investments these last many years.

And as Don Carson said in his question, as your CapEx starts coming down, as we go down the CapEx cycle, as we release more cash from these new capacities coming on at about the right time, then that will add just more and more cash that we can deliver to all of you, our shareholders.

So these smart portfolio moves, this fortress balance sheet we've created, this focus on shareholder return, the record dividend we're at, and the record share price, if I can close on that thought, is to reward you, our shareholders. And 2017 will be yet again another breakout year for Dow as we move towards closing the merger..

All right, thank you very much, 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 comments 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..