Good day and welcome to The Dow Chemical Company First Quarter 2017 Earnings 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..

Good morning and welcome to The Dow Chemical Company's first quarter earnings conference call. I'm Neal Sheorey, Vice President of Investor Relations. As usual, we are making this call available to investors and the media via webcast. This call is the property of The Dow Chemical Company.

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

We have prepared slides to supplement our comments in this conference call. These slides are posted on our Investor Relations' "Financial Reporting" page. You can also access the slides through the link to our webcast.

I would like to direct your attention to the forward-looking 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. 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..

we delivered an all-time record quarterly EBITDA. We extended our EPS growth streak to four and a half years, and our volume growth streak to three and a half years. Volume and price both grew in every geographic area.

We achieved the full Dow Corning cost synergy run rate of $400 million in just 10 months versus the two years we said when we closed the transaction. Construction of our Texas cracker was completed, and the unit remains on track for startup midyear, ahead of all our competition. Sadara now has 16 units in the start-up phase.

And just today, this powerful joint venture achieved commercialization of its entire plastics franchise, with the startup of the fourth polyethylene unit.

And we've progressed our pending merger with DuPont, receiving key regulatory approvals and announcing that the intended Materials Science Company will be the first spin-off if it would not adversely impact the value of the intended spin-off transaction. Simply put, Dow's business model showed, once again, its ability to deliver under all conditions.

I'll spend some time later on the call discussing our growth strategy over the next several years as we move through the Dow-DuPont merger and spin period and emerge as the new Dow, a preeminent global Materials Science Company.

But first, I will turn the call over to Howard and Jim to discuss our quarterly performance and an update on the silicones integration.

Howard?.

Thanks, Andrew. Turning to Slide 5 and a summary of our results, sales grew to $13.2 billion, driven by price and volume gains and the addition of Dow Corning's silicones business. Pricing rose 7%, reflecting broad-based actions that led to increases in all geographic areas and in most operating segments.

Volume ex-M&A, grew 4%, reflecting consumer-led demands, particularly in our core end markets of packaging, transportation, infrastructure and consumer care. EBITDA increased 20% to $2.7 billion.

The key tailwinds in the quarter included broad-based consumer-driven demand, the addition of our new silicones business, higher equity earnings and productivity and synergies that totaled $200 million, evenly split between Dow Corning cost-synergy savings and productivity actions. We have now achieved more than $750 million of cost out since 2015.

These gains more than offset higher feedstock costs, which led to short-term margin compression, particularly in a few of our downstream businesses where pricing initiatives typically lag the raw material increases.

As we shared with you on our fourth quarter call, we also had more than $100 million of higher spending for both planned maintenance activities as well as commissioning costs in the U.S. Gulf Coast, all of which was in line with our modeling guidance.

The commissioning cost will continue in the second quarter, and I encourage you to review our updated modeling guidance in the appendix for more details. Now moving to our business highlights. On Slide 7, Dow Ag reported EBITDA of $351 million.

The highlight of the quarter was the continued increased contribution from the seeds business driven by gains in Latin American and the successful launch of ENLIST cotton in the U.S. due to strong early grower adoption.

Crop Protection reported volume growth in all geographic areas except Asia Pacific on strong demand for new product innovations and 9% growth globally in insecticides, with particular strength in Spinetoram and Spinosad in Europe and across multiple molecules in North America.

We saw lower herbicide demand in North America aligned with a projected acreage shift from corn to soybeans. The decline in Asia Pacific was primarily related to soft rice herbicide demand due to an inventory overhang created by flooding during last year's season and increasing resistance to our existing Penoxsulam technology.

Going forward, we will address the resistance issue with the launch of Rinskor Active herbicide, which features an alternative mode of action. Rinskor will be launched in time for the next growing season. Innovation is still very much valued by growers.

We saw this in the quarter with gains for our new Arylex broad leaf herbicide for use in multiple crops including cereals and strong demand for ENLIST cotton.

Looking ahead, our Crop Protection business, which represents about 70% of Dow Ag, has an industry-leading pipeline with products including Isoclast insecticide to control sap-feeding pests and Rinskor herbicide to control grass, broad leaf and sedge weeds.

Dow AgroSciences remains well position to bring at least one new-to-the-world molecule to commercialization every year. We have included a review of the business's innovation pipeline in the appendix, which highlights the breadth and depth of products that are still to come.

We still expect to deliver flat EBITDA in the first half of 2017 versus last year's first half. And I'll now turn it over to Jim to cover the rest of the businesses, and I'll come back to provide an update on the silicones introduction.

Jim?.

Thanks, Howard. Moving to Consumer Solutions on slide 8, the segment delivered record first quarter EBITDA of $500 million and its seventh consecutive quarter of growth led by Dow Automotive, Electronic Materials and the contribution from silicone.

Dow Automotive achieved an all-time quarterly EBITDA record driven by its 16th consecutive quarter of volume gain, as the business's growth continues to outpace the automotive end market. Consumer Solutions – Silicones delivered strong results led by volume gains in Asia Pacific, particularly in the automotive end market.

Electronic Materials delivered its seventh consecutive quarter of EBITDA growth on continued above-market volume gain driven by new business wins and share gain.

Infrastructure Solutions on slide nine achieved record quarterly EBITDA of $511 million driven by volume growth, the contribution from silicone and the benefit from on-purpose propylene production. Building & Construction delivered volume growth on strong demand, particularly for commercial application.

The silicones business reported volume growth on robust demand for pressure-sensitive adhesives, label-stock release liners and Building & Construction application. Silicones also benefited from the significant cost synergy savings, and our Performance Monomers business benefited from tighter industry fundamentals and reduced turnaround spending.

Performance Materials & Chemicals on Slide 10 delivered a year-over-year EBITDA increase of $100 million. Equity earnings and volume gains in all geographic areas and all businesses more than offset margin compression in some of the products.

Polyurethanes achieved double-digit growth on continued robust demand for systems application, particularly in building insulation and household appliances as well as tight market conditions in isocyanate.

Industrial Solutions grew volume in high-value applications for textiles, lubricants and electronics, with double-digit volume growth in Asia Pacific. The business also reported higher equity earnings.

On Slide 11, Performance Plastic's EBITDA was flat year-over-year as volume growth and price gains offset increased feedstock cost, and we absorbed more than $100 million of headwinds in the quarter. These headwinds were evenly split between planned maintenance and turnaround spending and U.S. Gulf Coast commissioning cost.

Packaging and Specialty Plastics achieved record first quarter sales volume and its 11th consecutive quarter of sales volume growth. The business expanded variable margin as polyethylene supply-demand fundamentals remained tight, and chain inventory continued at low levels.

Elastomers also reported record first quarter sales volume and its ninth consecutive quarter of sales volume growth, led by strong demand in transportation, packaging and high-performance athletic footwear applications. I'll now turn it back to Howard for an update on the silicones integration..

Thanks, Jim. Turning to Slide 13, I want to thank the Dow Corning and the Dow teams for their efforts to drive a seamless integration. It continues to exceed our expectations, and as you clearly see, based on the result, we have accelerated the cost-synergy realization.

In fact, we hit our $400 million run-rate target in the quarter and saw approximately $100 million of realized savings drop to the bottom-line. And we delivered this more than a year earlier than planned, which reflects Dow's strong project management skills and bodes well for the implementation phase of the Dow-DuPont merger.

With the cost synergies achieved, our mindset increasingly focuses on growth. Here, too, we're ahead of plan and are seeing early commercial wins and robust volume growth, and this is just the beginning.

Turning to slide 14, you'll recall that our stated goal is at least $100 million in growth synergies by the end of year three from the close of the silicones transaction. In 2016, we rapidly defined our growth synergy playbook. As part of that process, we identified and are now tracking more than 400 distinct growth opportunities.

We have a clear line of sight to attaining our target, and our execution plans are well underway. We see the growth synergy initiatives delivering at least $400 million of additional revenue, with more than 70% of that aligned to our core end markets.

And, in fact, we've already secured some early wins in Automotive, Building and Construction as well as Home and Personal Care. One example is LIQUIDARMOR LT. The Dow Building and Construction team recently launched this flashing and sealant for the commercial building market.

This new to the world product takes advantage of silicones' low-temperature flexibility and can be applied in weather as cold as negative 20 degrees Fahrenheit, meaning year-round.

We've also achieved synergy wins in automotive brake fluid applications, feeding solutions, as well as into multiple home and personal care applications with brand owners around the world. You can expect our teams to continue to show the same disciplined mindset on growth that rapidly delivered the cost synergies well ahead of schedule.

With that, I'll turn the call back to Andrew..

we have enhanced product commercialization and rapid prototyping, catalyzed by our investments in proprietary high-throughput R&D capability. Dow now launches more than 5,000 new products each year and executes more than 2 million experiments annually. We have boosted our IP portfolio to ensure that our innovations are protected and unique.

We received 754 U.S. patent grants in 2016, an all-time record for Dow, and our eighth consecutive year of record patent grant. And we continue to attract the best minds. Since 2010, we have recruited more than 600 PhDs and post docs from the top 20 U.S. technology universities alone.

These results reflect the steadfast commitment to our strategy, our core consumer-led markets and our customers. And the success we've had is hitting the bottom-line.

We have had many examples where innovation-led profitable growth has fundamentally reinvented our businesses, driving both longstanding demand growth and significant EBITDA margin expansion. And our results over these last 18 quarters bear testimony to the margin and cash opportunities for these new products over the next 5 years.

Turning to Slide 19, the second pillar of our strategy for the next 5 years is our integration. And here, too, we have invested significantly to ensure we maintain our unmatched strength. Our growth investments in the U.S.

Gulf Coast and the Middle East create a multiplier effect by broadening our market and geographic access and enhancing our competitive advantage in key regions around the world. These investments create powerful and cost-advantaged manufacturing hubs, where we can deploy our unique technology capabilities and capture growth where growth exists.

In both cases, we are bringing forward the industry's broadest and most differentiated derivatives slate. These are not ordinary investments, but rather they are carefully crafted to take advantage of the consumer-led demand drivers in our core markets.

Both of these megaprojects are on the cusp of shifting to earnings tailwind, as they fully come online, activating this critical element of our compelling growth story. And as you have come to expect from Dow, as we turn the page on these investments, we're not resting on our laurels.

We still see vast potential in these markets and the regions they serve, and these investments provide a springboard to drive the next chapter of Dow's growth trajectory. We will be announcing this next phase of this investment very soon.

Slide 20 says this strategy of innovation, integration and growth investment to drive narrower and deeper to our core markets has delivered at the bottom line with increasing earnings and cash flows. Looking at our financial scorecard today, you see the significant progress we have made since 2012. Dow has improved its ROC by 390 basis points.

We have delivered an EPS CAGR of 18%. We have taken out nearly $3 billion through productivity, cost control and synergies. We have maintained a strong liquidity and financial position, and the core Dow cash engine is thriving.

Free cash flow has doubled from $1.5 billion to now $3 billion on a trailing 12-month basis, while at the same time, we had funded our key growth projects. This trajectory will be further enhanced as our CapEx returns to DNA levels and our aforementioned growth projects become operational.

Slide 21, and so today, as we look forward, the strength of our future trajectory is evident. We have an enterprise that has delivered greater than $10 billion of EBITDA on a trailing 12-month basis and has a full arsenal of growth investments to deliver the next level of earnings growth to $15 billion and beyond.

And as we realize these higher earnings, cash flow from operations will be further enhanced by up to $5 billion, providing a higher base to invest in our growth and reward our shareholders.

We have an enterprise with a consistent strategy rooted in integration and innovation, driven by a narrower and deeper presence in our core markets and committed to continuous productivity. And we can deliver this next phase without the significant investment headwinds of the previous 5 years.

On Slide 22, as we look into and well beyond our intended merge and spin transaction with DuPont, this is our North Star, our winning strategy, our winning portfolio and a suite of growth investment and a winning team with a strong execution mindset, and it continues to guide our path forward.

Therefore, our growth strategy going forward remains grounded in these fundamental elements. We will deliver strong cash flow as our current growth investments at Sadara and in the U.S. Gulf Coast come online. We will continue to drive narrower and deeper into our core Materials Science end market.

We will further bolster our world-class innovation and industry-leading integration. We will deliver our cost synergies from the Dow-DuPont merger and maintain a mindset of continuous productivity.

And we will soon deliver the world's leading Materials Science Company, a growth company rooted in the strategy that we are executing against today and that positions us well to maximize shareholder value creation in the future. A strong earnings growth story, a strong cash flow story and a focused growth company.

And with that, Neal, let's turn to Q&A..

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

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

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

Thank you. And our first question, we'll hear from David Begleiter with Deutsche Bank..

Good morning.

Andrew and Jim, on the ethylene chain, the ethylene cycle, as we head to the back half of the year, how are you viewing the strength in the cycle, and h ow that might be sustained or whatever?.

Good morning, David. Look, the ethylene cycle continues to look attractive to us even in the slower growth environment. And our view on oil, obviously is in kind of a low-to-mid oil pricing environment. Operating rates are still hanging in there at 90%, even with new capacities coming online.

And that's with the look that monomers are going to come on probably ahead of the polymer capacity. So I think our view is continued strength in the ethylene cycle and continued strength in the polymer market..

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

Thanks and good morning.

Just on the Texas cracker, when do you think you'll actually be selling commercial volumes of polyethylene, and how fast do you think you'll ramp up, or when do you think you'll ramp up to sort of complete utilization?.

Morning, Vince. On the U.S. Gulf Coast, we're about 50% through the commissioning phase of the Texas 9 cracker right now. So we're targeting mid-year to have ethylene. We have two plastics plants that will come up at the same time as that plant.

We have a high pressure, low density plant for kind of a next-generation low density product to bring to the market, similar to the fourth plant that Andrew mentioned in Sadara that started up just this week.

And we also have another plastics plant that's coming on for our Elite branded Performance Plastics technologies, which go into high performance food packaging, specialty packaging, and our hygiene and medical applications. So both of those will come on mid-year. And then we move with the next phase of (24:47) in the first part of 2018.

We'll have two more plastics plant in the first part of 2018 as well as a de-bottleneck on some gas phase assets, which we'll be making bimodal pipe products for high pressure pipe application..

And, next, we will hear from Hassan Ahmed with Alembic Global..

Good morning, Andrew..

Good morning..

Andrew, obviously, as we sort of look at the cycle, there seems to be increased capacity addition momentum in 2018 and 2019 and sort of a tapering off thereafter. So my question really is – a) what are you thinking in terms of the next wave of capacity additions? Will you be partaking in that? Question one.

And associated with that, would be that obviously we're seeing increased activity in Saudi Arabia. Obviously, Aramco has – your joint venture partner, has very aggressive capacity growth plans within petrochemicals as a part of their Vision 2030. But, similarly, you're seeing more and more of the Middle Eastern companies come out here as well.

We recently heard SABIC announcing plans for a cracker here in the U.S. Epic (26:03) has announced plans as well. So just where will these capacity additions be? Will you be partaking in them? Would love to hear your thoughts..

Well, thank you, Hassan. I'll start, and Jim can round off. We definitely will be participating, and I foreshadowed that in my remarks.

And I also foreshadowed that as we have done these massive investments, which are, in essence, one grassroots in Sadara and one brownfield in Texas and also in Louisiana, we've had a mind's eye to when these come up, what's the next load of capacity? And you should think of us then as incremental from here because we have these big bases.

And there's a lot of work that's been done to define how we get that in place over the next 5 years. And we're reviewing all of that now, and we're going to have something to say about it very soon.

You can assume that we're going to be a leader in making sure that we keep our share where it is, if not grow it, especially with these high-end products that we can make, elastomers and the C8s, and some of the more specialty end-uses in packaging, which we see a strong growth market.

As regards to Saudi Arabia and Aramco, this clearly a drive by not just Aramco, but as you mentioned, SABIC and others. They're playing in more the low-end type business and the more petrochemical business and the more commodity business, which is fine.

We can participate in some of that with them with Aramco as a licensor, maybe as a small equity player. But in the high-end product line, we are their partner of choice. And we're definitely talking to them now quite actively about after we get Sadara through the lender's reliability test what does it look like beyond.

And as our partnership evolves, you can assume that The Dow Chemical Company and Saudi Aramco will stay very, very tight together. We are their preferred partner, and we like doing business with them.

Jim, did you want to add?.

The only thing I would add, Hassan, is we've got a broad range of incremental projects that Andrew spoke of that we'll be looking at here.

And additionally, as soon as we can close on the Dow-DuPont deal, we'll want to bring them into that discussion and understand how we can bolt-on some growth capacity for DuPont Performance Materials that we'll need be going into the merged company condition..

And next, we'll move to Frank Mitsch with Wells Fargo Securities..

Hey, good morning, gentlemen. Nice start to the year..

Good morning..

Jim, when you're talking about the Performance Plastics segment, obviously, the top-line was fairly robust. And you did mention that there was a $100 million negative impact from maintenance expenses as well as commissioning of new – of the new facilities.

I was wondering if you could talk about the underlying margins and what you saw in Q1 and, equally, if not more importantly, what your expectations are given market dynamics for Q2?.

Sure, Frank, happy to. The underlying business was very strong. The volume was up 5%. The price was up 15%. At the same time, remember that feedstocks year-over-year were up about 40%.

So the underlying business performance was closer to a $1.1 billion EBITDA number, before you take those headwinds of the greater than $100 million that we had for commissioning and start-up costs. And on turnaround and maintenance costs, we had the Terneuzen cracker down. It's the first turnaround we've had in Terneuzen for tenure.

So obviously that's a sizeable turnaround, and we started that in the first quarter. And then commissioning and startup for Gulf – the Texas 9 cracker, as I mentioned right now, we're about halfway through that. That will complete in the second quarter. So you're going to see some commissioning and start-up costs in the second quarter as well.

With that increase in feedstocks cost though and as I talked about the underlying earnings, plastics actually increased variable margins in the quarter. So their price and volume moves were very strong, and they did a good job in that space. They just had these one-time costs that hit them..

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

Thanks very much..

Morning..

Hi. Good morning. I think, Andrew that you plan to retire as CEO of The Dow Chemical Company on June 30.

Are you open to playing a different leadership role following that retirement, or do you think your career will take a different direction?.

Well, thank you, Jeff. That's about as direct a question I've had on the topic. Look, clearly, we – we the Board, the Board of the company decides what happens here. And with the delayed close, there has been an awful lot of dialogue. We're not ready to say anything yet, but we will have something to say very shortly.

So if you beg our indulgence, that's a pretty important question you just asked. And nothing to do with my importance, everything to do with where we are in closing the merger. So we are talking at the Board level, and we'll have something to say very soon..

And, next, we'll move on to John Roberts with UBS. Mr. Roberts, your line is open..

We'll move to the next question, please..

We'll move on to Steve Byrne with Bank of America..

Hi. I just wanted to drill in a little bit on materials co. Would you expect that materials co.

would invest in downstream specialty products facilities adjacent to Sadara, similar to your Consumer and Infrastructure Solutions businesses, but just in that region? And then similar, on materials co., what would you anticipate revenues out of that spinco to be based off of value-based pricing versus commodity pricing? Can you roughly split between those two buckets?.

I'll let Jim take the second piece. But Steven, the Saudi-related question and what happens in the construct of our three enterprises post-spin, there is a strong inclination here that the Saudis want to go downstream and want to diversify as part of their Vision 2030. We at Dow have been helping them with that strategy.

And in fact we've got some of our own investments downstream, including our membranes facility that we have built there, which is 100% owned, as well as a coatings plant that is under construction that's in our Infrastructure Solutions business. So there's no question that they have interest in the next step of value.

We haven't had large discussions about this as a merge co and future spincos yet. I think there's no question that all the spincos, but particularly the specialty co.

and the materials co., would have interest in looking at what value creation can occur by being alongside the world's largest industrial complex that has a very low-cost footprint and is very integrated.

So I'm sure those conversations will be brokered at the right time, but nothing right now because, of course, where we are right now in our creation of merge co. and spinco.

Jim, did you want to add anything on pricing?.

On your question on value pricing, greater than 60% of the materials co. portfolio today is consumer driven, and I would already consider in a value pricing type of an environment. When you bring in DuPont Performance Materials and you look at a pro forma of materials co., it's going to be north of $50 billion of revenue.

And I would venture that DuPont Performance Materials is going to increase the amount of value pricing as a percent of the consumer-driven applications. So our intent is to continue to go downstream in innovation. As Andrew talked about, we're still investing in R&D.

We've got a robust pipeline of new products coming out, automotive, transportation, energy-efficient building products and our food and specialty packaging products, high-pressure pipe. These are all areas that are value-added markets for us, and some of the highest returns that we have in the company..

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

Good morning. This is actually Emily Wagner on for Don. You guys confirmed that the total synergy number for the combined company would remain at $3 billion.

Could you give us a bit more detail regarding where the additional synergies are coming from in the Materials and Specialty business?.

Yeah. Look, thank you, Emily. We aren't ready to give you the details and the high-level breakdown that was reaffirmed by DuPont the other day, which is the Materials piece will go from $1.5 billion to $1.6 billion.

The Ag, which saw the biggest hit from the remedy – the conditional remedy out of the European Union, we also know there is obviously some more to come there with China and Brazil. So Ag has lifted its number even with those remedies to $1 billion, and then spec co. to $0.4 billion. So that adds up to $3 billion.

We knew going in that there is a lot more there than what we announced. We said $3 billion was the floor. Now that we've had a lot of remedy action, we are still confident we can speak to the $3 billion. When we get to close, we'll look under the tent.

There is a few things that we're hopeful we'll find, especially in the procurement area and leverage cost. So that's work that Jim and Howard and others will be doing with their DuPont counterparts. But we can reaffirm the $3 billion, which is, I think, the most important thing we will say on that question..

And, next, we'll move on to Laurence Alexander with Jefferies..

Good morning. I just want to parse out one of the things you said in your opening remarks. For the $15 billion of EBITDA longer term, I think, you indicated that you do need a certain number of additional projects to get there.

Roughly, how much CapEx are you thinking of to support that bridge?.

Yeah. Howard, you haven't had a chance to speak. So why don't we get you to there? And maybe, Jim, you can back up..

Sure, Andrew. Good morning, Laurence. So I mean, look, we've – last year, we peaked at CapEx at $3.8 billion. Just a friendly reminder, that was $100 million less than we had committed to externally. So it was a $3.9 million target, and we spent $3.8 million. This year, we're on trajectory to spend $3.4 billion.

And our DNA, as the projects that we've talked about that Andrew and Jim both talked about on the call, as those roll off, our DNA will increase. So you can expect that we can deliver those kinds of EBITDA growth in line with spending at roughly DNA in the $3 billion to 3.4 billion range from a CapEx standpoint..

I would agree with Howard. And I think given the nature of what we've got in front of us, the next three or so years being incremental projects, albeit some of them pretty good sized increments, we can do it within those numbers..

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

Great. Thanks, guys. Just had a question on Slide 26, your outlook for Q2. It looks like Corning is tracking well ahead of your expectations, but some of the start-up commissioning costs are a little bit stronger.

Is that kind of a fair characterization? I mean maybe you can just help us walk through some of your expectations for Q2 and the rest of the year? Thanks..

Howard, now you go and then Jim can back up..

Yes, sure. I mean, thanks for highlighting slide 26. I think that's an important slide when you look at the moving parts. I think you've characterized it right. I mean, the underlying volume growth and pricing growth is there, and that should continue. Dow Corning on the silicone's integration that continues.

I mean, if you look at the silicones business, since we've owned it, it's grown volumes 6%. So you pick your GDP number, that's roughly 2x global GDP, I would say, at this point. When you look at the second quarter, you definitely are going to have headwinds on both finishing the commissioning of the U.S.

Gulf Coast, the Texas-9 cracker and also the Terneuzen cracker that will go through the second quarter. It started in March, but there will be a big chunk of downtime in the second quarter. So that's why we're showing you the headwinds that are non-operating between the planned turnaround and the commissioning costs for Q2..

The only thing I would add, Howard, is that we had pricing momentum through the first quarter. So we ended March at better pricing than we had through the first quarter, so we take that into second quarter. And, as you know, some of these products as you have a pretty sizable step-up in input costs, they don't get passed through within a month.

Some of them take a couple of months to pass through, so you'll see some of that come through in second quarter..

Peter Butler with Glen Hill Investments will have our next question..

Hey, good morning, guys. In getting closer to the consumer increasing your market share in faster growth sectors, how much of an advantage do you guys have having your own sales force, your global sales force organization on the ground? Particularly compared to less advantage smaller competitors.

For example, does it produce the extra several cents on polyethylene that your legendary CEO, Ben Branch, was always looking for?.

Yes. May he rest in peace. Thank you, Peter. So I'll let Jim take that last piece of your question, but I do want to highlight a very important point I'll use as an example. So Sadara, we've been watching, of course, and building and constructing these 26 units for the last five years.

But in parallel, Saudi Aramco gave us the marketing rights and sales rights because we're a trusted on the ground direct supplier to end use customers. We don't use agents. We don't use distributors. We use our own sales force. And we're on the ground in pretty much every country out there – 162, to be precise.

And these direct interactions we have – I talked about China on the Cramer segment I did today.

The fact that we're in Western China, the fact that we're opening up in Urumqi China – go look it up on your map – we have this ability to create new demand, and we can create new demand and we have built a marketing plan and a sales plan with Sadara so that when Sadara starts up every one of its units, we have the warehouses, we have the direct sellers, we have the incremental selling plan, we have the new customers.

We have brought the customers to Sadara. We have lined up all the sales such that all these units can start up and run pretty much flat out.

That's Dow's sales machine and marketing machine, which was built decades ago, we've doubled down and tripled down on it, especially in the newer emerging geographies, whether they be Africa, whether they be the Middle East itself, whether they be the near Middle East, India and then, of course, Asia. Now, all of that is Dow playbook 101.

And this is what I think we've been very, very good at in creating value-driven premiums for our newer portfolio. Over 60% of our portfolio now really is directly driven by end use consumer demand. So we work with our paint customers on their customers' needs, whether it be in China or whether it be in the United States.

That functionality is driven by our innovation engine across the product mix and, in particular, the reorientation of plastics.

So Jim, why don't you speak now to this premium that we have whether it's driven by packaging or elastomers?.

The activity in sales, technical service and applications development exist in every region that we do business. So the labs are local. Customers can come into those labs and work together with us, and we can customize solutions for them.

And also we target markets where we can achieve value for the return on business rather than just filling up assets with commodity products. The combination of those two things allows us to achieve higher returns on the polyethylene margins than our competitors. And, obviously, we're not an oil company or we're not a natural gas company.

So we don't have that advantage. But we try to cover that with our feedstock flexibility on the integration end. But far and away, the vast majority of our investment is in downstream innovation, more application development and more solutions for these customers. The great example is automotive.

We've already launched products in automotive that have chemistries from both Dow Corning and our Dow Automotive business. LIQUIDARMOR that Howard mentioned, silicones and acrylates, combinatorial chemistries to get us new Building & Construction products, already in packaging where Dow Corning had a big presence you already see that happen.

When we bring DuPont Performance Materials into this, it's going to be huge..

And next, we'll hear from Duffy Fischer with Barclays..

Yes, good morning. I wanted to drill down on your marketing agreement with the Saudis. How is that going to play out kind of at the sales line, the EBITDA line and the cash flow line as you report? We've got some production today.

Are you seeing those sales roll through from your marketing agreement already? And how will that ramp? And then, do you have to take the working capital on your balance sheet to fill up all of those warehouses you were talking about? So just how should we think about that sales agreement flowing through your financials?.

Howard?.

Yes, thanks, Duffy, for the question.

If you go to Slide 26, we tried to give you little bit of modeling guidance, because you're right, because we do – we have responsibility to market the Sadara product everywhere outside of what we call the Middle East Zone, which is the countries around Saudi Arabia, including Saudi Arabia where Sadara will market for themselves.

In the first quarter, about 20 basis points of our EBITDA margin dropped. So we had a 61 basis point margin drop year-on-year. 20 basis points of that was due to just the Sadara revenue ramping, because we essentially make a distributor-type or an agency-type commission on those sales. We preserve the profit.

We get the 35% of Sadara's profit flowing to our equity earnings. So there is a little bit of disconnect between the two. At this point, I would say for the full year, you should expect about $1.5 billion of revenue coming into Dow's revenue from Sadara.

And for the second quarter, we're calling between a 25 basis point and a 50 basis point margin compression on the Dow total bottom-line. Your question around working capital, it should balance itself out. Obviously, we've got to fill the pipeline, so there's a little bit of a build here in the first 90 days or 120 days of each asset coming up.

But once they line out, it should be neutral on a Dow working capital basis..

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

Thank you. You've significantly cleaned up the JV accounting with the Dow Corning and MEGlobal actions. But even before SADAF, you look at slide 30, you still have a number of other JVs.

Are we essentially done with the portfolio actions at the JVs?.

No. Certainly, thank you for the statement. That was one of our goals, but we were in triple-digit numbers of JVs when we started this five, seven years ago. We're down now to double digits, but that's still a lot of double digits. We have a long tail.

So Jim and Howard have been leading an effort and especially the financial group to get us out of the smaller ones. The big ones – there is still some work to be done there, and so we're – we won't say which ones, but we definitely are not stopped to answer your question..

And we'll move on to Alex Yefremov with Nomura Instinet..

Good morning. Thank you. You mentioned margin compression in both Infrastructure and Consumer in the first quarter.

Is it fair to say that from at least raw material margin perspective, first quarter would mark the low point for this year, adjusting for seasonality?.

Do you want to go?.

Yeah. Morning, Aleksey. I would say they've experienced a real spike in a couple of key raw materials. Propylene spiked pretty heavily in the first quarter. And then in Building and Construction where the Styrofoam brand installation is one of the big products, they saw a huge spike in styrene monomer, which hit them for polystyrene raw materials.

They got prices moving through, but they didn't get enough through in the first quarter to cover all that. I think you'll see some of that improve as we go into the second quarter. I think that's the biggest issue there. The demand is strong. So I don't think there is any issue in terms of demand weakness..

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

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

Morning..

I had a question for you on your slide 28. You have a chart at the bottom right showing PE inventories in the U.S., and it looks like you've shown enough years there to hopefully get a full cycle in there. And it looks like, right now, you're trending towards the bottom of that range.

So my question for you is, given – in context, a lot of the consultant data seems to call for pretty big price reductions in the back half of this year, and yet we seem to be at the low end of this inventory range.

How do you feel that those price discussions have historically played out when you are at the lower end of that range, and maybe what we should expect to see over the next couple of months?.

Go ahead, Jim..

Yeah. So you're right. Chain margins are low. And in fact, if you went back to last year's charts on this, almost 75% of the data points on last year's charts were at the bottom end of that five-year range. So we continue in that space. There hasn't been much new polymer capacity added. There's been more new monomer capacity than polymer capacity.

So these things get disconnected from time to time. Plus I think where you've got the new capacity coming on you're seeing some mix shift around the world. So you've got new capacity coming on in Northeast Asia and in Middle East. And you're bringing product back into the U.S. Gulf Coast. So you're seeing some movement in the regional prices.

But we still see strong price momentum heading into Q2. We have North America looking like it's up $0.03, Latin America, similar, and Europe up about €30 a ton. So we're looking as we go into the quarter for continued price movement end of the quarter. Volumes are very strong..

And next, we'll hear from Chris Parkinson with Credit Suisse. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC Perfect. Thank you. You hit on this a little, but just within Consumer Solutions, you saw pretty good growth across care, auto and silicones.

But could you just comment across just the specific raw material headwinds you're seeing in that business, pricing pass through efforts, and just the rough cadence of how you see these themes evolving? Any color would be appreciated. Thanks..

Well, I would say in Consumer Solutions, probably, the biggest pass-through items are going to be when you get into areas where you have the propylene chain impacted. So you saw propylene prices, in some cases, spike pretty substantially in the quarter. And some of the pricing there is indexed to pricing, so it trails the increase in propylene prices.

I think you've also got one bit of margin compression in there on a year-over-year basis. We had a unit in Europe called SAFECHEM that we had sold, so that comes out of Consumer Solutions.

We also saw – in the silicones segment, we also saw strong volumes and good pricing movements in the quarter, so I think we're going to see that as we move into second quarter..

And P.J. Juvekar with Citi will have our next question..

Yes. Hi. Good morning. Just a couple of questions on ethylene, one short term and one long term. In the short term, can you compare the profitability in the first quarter of your U.S.

versus European crackers, given that naphtha was advantaged for a while? And then on the long term, as new crackers start up on the Gulf Coast and Sadara, what is the future of MTO and CTO plants in China, obviously this is high-cost capacity, and do we need that during 2018 and 2019? Thank you..

Go ahead, Jim..

I'd say two things, P.J. On Europe, on the question specifically on Europe, I think the propane naphtha spreads have changed a lot through the quarter on Europe. And so at one point in the quarter in Europe, naphtha prices were fairly high. We crack a lot more LPGs over in Europe than we have historically.

But as you know, we had Terneuzen down for turnaround. So it's a little bit hard to take all that back to the feedstock fundamentals. Once we get Europe – Terneuzen back up and running, I think, we'll see that. But on the issue of propane in the near term, I think that has pushed propane prices up.

So relative to last year, the propane costs are a little bit higher even on that LPG spread. So I think you see a little bit of compression there on the ethylene side on Europe. And on the U.S, we had at different points in time naphtha, propane, butane and ethane. We've alternated between all four of them being the most favored crack in the U.S.

Gulf Coast, which speaks to why we have feedstock flexibility, so we can move around with that. Right now, we're back to ethane being favored..

And on the China thing, just my direct exposure to the Chinese administration suggests their connectivity to emissions and emissions control is strong. So even though they have got the CTO/MTO capacity P.J., they're slowing it down quite a lot. And most of the stuff that's out up is really commodity low-value polyethylene.

So it doesn't really impact much of the supply-demand balances. So I do believe that they're very serious about emissions. And that is part of the reason we're growing in China. We have a lot of good product to supply markets that control emissions like energy efficiency building materials.

So all of that to tell you that we're not as concerned about the rate of that..

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

Yes. Good morning. Your Performance Materials & Chemicals segment posted strong results relative to the street expectations and also year-over-year. So wondering if you could talk through your outlook for the polyurethanes business specifically. It seems to me you have a number of moving parts there in terms of industry outages in MDI.

And I think you cited strength in systems, PDH uplift, etcetera.

So how would you characterize the sustainability or durability that you saw in 1Q, as you look through the latter nine months of the year?.

Yeah. Thanks, Kevin. The volume trends are very strong. If you look in polyurethanes, the systems volumes and the MDI volumes are both double-digit growth. And as you mentioned in North America we're going to be a little bit limited on MDI and PO, because we have a planned turnaround there. But the pricing momentum has been strong in those spots.

And even when we come back, realize that we're not a merchant MDI seller. We're selling into the systems market and into formulated end product. So compared to some of our competitors who are big merchants, MDI sellers, we may look a little bit different there.

The other thing I'd say, besides the volume and price moves, our equity earnings improved in this segment. And also, we're capturing some of the margins from on-purpose propylene.

So at points in time in the first quarter, the spreads on propane propylene were as much as $0.30 a pound and we ran the unit at greater than 95% of capacity in the first quarter. So that helped too..

And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. Neal Sheorey for any additional or closing remarks..

Thanks very much, Rochelle.

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

Yes. I do want to go back to the questions, I hit at it, but I just want to wrap it all together. Slide 22 does the best job of wrapping it all together.

The way you should be thinking about our year going forward is the 18 quarters in a row, we've got merge co running in front of us, so delivering the cost synergies, point number four on that slide, is job 1, 2 and 3, I mentioned that.

Also getting everything ready for spin, including a comprehensive portfolio review as soon as practical so that we can really look at what markets align to what parts of the portfolio. We haven't had good views to that because we haven't been able to get together.

And so we're very committed to working on that together so we can get the right shareholder story for the right time to deliver the right results.

And then going forward, through the merge into the spin, the question on what's in the out years here, when the out years is only 2 or 3 years away in terms of CapEx and OpEx and all the things that we want to keep investing in.

Incrementalizing our big, big investments of these last many years, the point number one, we're going to be delivering very strong cash flows from these incredible investments that we've been putting in place these last 5 years. We've delivered earnings growth. We've delivered strong cash flow increases.

We've delivered shareholder remuneration, and we have right in front of us, tailwinds from those investments. So we're going to bring CapEx down to depreciation. We're going to invest in our downstreams where it makes sense.

We're going to do that incrementally, and we're going to deliver the shareholder returns that we've been promising and have delivered, in fact, in these last many years. So that slide says a lot, and I want you to focus in on the commitments we are making and the financial underpinning of what that implies..

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

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