The Dow Chemical's (DOW) CEO Andrew Liveris on Q2 2016 Results - Earnings Call Transcript

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The Dow Chemical Co. (NYSE:DOW)

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

Neal Sheorey - Vice President, Investor Relations

Andrew Liveris - Chairman, President & Chief Executive Officer

Howard Ungerleider - Vice Chairman & Chief Financial Officer

James Fitterling - Vice Chairman & Chief Operating Officer

Analysts

Arun Viswanathan - RBC Capital Markets

P.J. Juvekar - Citi

Vincent Andrews - Morgan Stanley & Co.

Robert Koort - Goldman Sachs & Co.

Frank Mitsch - Wells Fargo Securities

Jeffrey Zekauskas - JPMorgan Securities

Peter Butler - Glen Hill Investment Research

David Begleiter - Deutsche Bank Securities, Inc.

Christopher Parkinson - Credit Suisse Securities

John Roberts - UBS Securities

Stephen Byrne - Bank of America Merrill Lynch

Duffy Fischer - Barclays Capital, Inc.

Aleksey Yefremov - Nomura Securities International, Inc.

Jonas Oxgaard - Sanford C. Bernstein & Co.

Don Carson - Susquehanna Financial Group

Hassan Ahmed - Alembic Global Advisors

Operator

Good day and welcome to the Dow Chemical Company second quarter 2016 earnings results conference call. [Operator Instructions] Also today's call is being recorded.

I would now like to turn the call over to Mr. Neal Sheorey, Vice President Investor Relations. Please go ahead, sir.

Neal Sheorey

Good morning and welcome to the Dow Chemical Company's second quarter earnings conference call. I am Neal Sheorey, Vice President of Investor Relations. As usual, we are making this call available to investors and the media via webcast. This call is property of the Dow Chemical Company. Any redistribution, retransmission 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 web page and you can also access the slides through the link to our webcast. I'd like you to direct your attention to the forward-looking statement disclaimer contained in both the press release and in the slides. In summary, it says that statements in the press release, the presentation and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provision under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. In addition, some of our comments reference non GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons exclude divestitures and acquisitions. EBITDA, EBITDA margins, return on capital and earnings comparisons exclude certain items.

I will now turn the call over to Andrew.

Andrew Liveris

Thank you, Neal. If you turn to slide three - and good morning, everyone. Let me open the review of the quarter by stepping back and just looking at our three simple and very focused goals of the year. First one, achieve our plans. Second one, close Dow Corning by midyear. And third, drive the merger milestones with DuPont for a year-end close. Simple, clear and focused.

Let's start with the plan. Dow's relentless and disciplined execution once again delivered another quarter of operating earnings growth and margin expansion, and the Dow team has again done it through a variety of challenging geopolitical and market conditions, and outpacing our peers in the process. You can see that in our results. 15 consecutive quarters of earnings growth and margin expansion. 11 consecutive quarters of volume growth. Notably, we delivered gains in all geographies, with particular strength in the United States, China and Europe.

Cash flow from operations of $2.2 billion, up nearly 60% versus the year-ago period. We are focused on every aspect of the P&L and balance sheet to deliver these numbers, with weekly operations meetings and very strong self-help actions. Our unique combination of world class innovation, diversified integration, and a narrower and deeper market focus enabled operating earnings growth in every business in our Consumer Solutions and Infrastructure Solutions segments, while the strength of our Plastics franchise was again on display. We have built Dow's portfolio to grow both the top and bottom line, even though market and economic conditions remain challenging. In those markets that are challenged, we have been implementing proactive and targeted self-help measures.

You can see this in our Ag segment, where our actions have generated earnings year to date that have outperformed the industry downturn. Another example is our recent restructuring announcement related to the Dow Corning transaction, which will reduce head count by an additional 700 positions on top of the Dow Corning synergies, to a total of 2500, and accelerate earnings growth under these volatile market conditions. Howard will review our results in more granularity in a moment, but the income and cash flow results are truly noteworthy.

Our second goal is indeed to close Dow Corning and its ownership restructuring, where we bring in a new element for growth and powerful technology platform that will further drive Dow's focus in an attractive targeted market segments, as well as enhance the earnings power of the new Dow. Soon after closing, we also increased our cost synergy target by $100 million, to $400 million. When combined with the estimated $100 million of growth synergies, we see a total of $500 million of synergies from this transaction. We achieved this goal ahead of schedule on June 1, and I'm happy to report that the integration has proceeded seamlessly.

And on our third goal, we recently received overwhelming approval for the historic DowDuPont transaction from our shareholders, illustrating the market's recognition of this unique opportunity to deliver value to all stakeholders as we drive the intended separation into three independent leading science-based companies that will redefine their respective industries.

Simply put, the Dow team is sharply focused on driving our three goals, and this quarter's report shows the results of this effort. I'll now turn the call over to Howard to cover highlights from the quarter and an update on Dow Corning. Jim will then give an update on our Plastics franchise and DowDuPont. And I'll close with our outlook and earnings growth drivers. Howard?

Howard Ungerleider

Thanks, Andrew. Good morning, everyone. On slide 5, Dow's financial performance had several noteworthy highlights in the second quarter. The team delivered operating EPS of $0.95 a share, despite the slow growth, uncertain macroeconomic environment. The Dow team found pockets of growth in all of our major geographies, and we kept our focus on driving further productivity gains, adding another $90 million of savings in the quarter. Bringing our first half savings to $180 million, tracking well above our 2016 target of $300 million. Our innovative products and solutions are also winning in the marketplace. Many of our businesses highlighted market share gains and new business wins, as evidenced by our continued volume and margin growth in the quarter.

Our overall operating EBITDA margin rose more than 160 basis points to 21%, our highest second quarter margin in a decade, led by gains in Consumer and Infrastructure Solutions and Performance Plastics. We also achieved multiple records in the quarter, including EBITDA records in Consumer Solutions, Infrastructure Solutions, and Performance Plastics, and a sales volume record in Performance Plastics, all of which helped the team deliver an $800 million increase in cash flow from operations in the quarter.

Taking a longer view, the progress we've made over the past 4 years has enabled us to significantly grow EPS above our target of 10% annual growth, to continue to increase free cash flow generation while fueling our future growth through targeted investments and, at the same time, return $14 billion to our shareholders through share buybacks and paid dividends.

Now, turning to our segment results on slide six, let's start with Ag. We're delivering despite high industry crop protection inventories, currency headwinds, and low crop commodity prices. Our Ag team continues to respond with targeted self-help actions that have largely offset the headwinds while maintaining the long-term growth potential of our franchise. In the second quarter, we achieved double-digit sales growth in corn seeds, but that was more than offset by soft demand in sunflower and soybeans. Crop protection volume was lower, primarily due to reduced generic herbicide demand and the impact of the AgroFresh divestiture.

For the year, we see the market declining 5% on robust yields in North America, high inventories, and low crop prices. In the second half of 2016, crop protection volume is expected to be flat, with modest pricing pressure due to lower demand for insecticides and generic herbicides. And we expect some positives in seeds as the Latin America season outlook improves.

On slide seven, Consumer Solutions continues to deliver impressive results, achieving record EBITDA of $341 million. Earnings increased in all businesses on market share gains, new business wins, and robust demand for our innovative products. Dow automotive achieved record second quarter EBITDA and double-digit volume growth, driven by strong demand for light-weighting and sound-dampening technologies and benefited from greater productions of SUVs and trucks, which contain more Dow content.

Consumer Care recorded higher earnings, led by double digit volume growth in personal care applications, solid demand in home care sectors and market share gains. Dow Electronic Materials delivered double digit EBITDA growth on share gains in the semiconductor and display end markets. And our newly integrated Consumer Solutions Silicones business captured greater market share on strong demand in the consumer care sector, notably in Europe and Asia Pacific.

On slide 8, Infrastructure Solutions also reported EBITDA growth in every business. Dow Building and Construction delivered a record quarterly EBITDA and saw volume growth in most geographies on strong demand for its construction chemicals, spray foam insulation, and continued adoption of our BLUEDGE technology.

In Energy and Water Solutions, self-help actions mitigated persistent energy headwinds, as oil and gas exploration project demand remains low. Water fundamentals, however, remain robust. Our new Saudi RO membrane plant is at full rates, positioning us well to meet demand in emerging geographies. We also saw improvement in Performance Monomers, reflecting our aggressive self-help measures including our purposeful reduction in merchant sales exposure. Dow Coating Materials grew volume in all sectors and our new vinyl acrylic binders are enabling share gains and diversification into value add applications. Finally, our new Infrastructure Solutions Silicones business saw strong demand in the construction sector, enabling higher first half EBITDA.

On slide 9, Performance Materials & Chemicals had several moving parts in the quarter. Equity earnings were over $100 million lower, consistent with our modeling guidance, due to the change in ownership of MEGlobal coupled with lower MEG prices and Sadara startup costs. When you take into account these two items, the core polyurethanes business performed well, as it continued to increasingly tilt toward its higher value specialty portfolio.

The business delivered double digit volume growth in its systems houses on strong consumer demand, particularly in Asia Pacific, enabled by our new polyols plant in Thailand. This benefit, however, was offset by margin compression in the upstream portion of the business, where supply balances have loosened and turnaround and maintenance costs were higher due to a planned outage in Europe and a short unplanned outage in Brazil. In Industrial Solutions, putting the impacts on equity earnings to one side, our core business delivered flat earnings as disciplined self-help actions offset challenging industrial end market conditions.

Turning to Performance Plastics on slide 10, reported record second quarter EBITDA with volume gains across most businesses and all geographies. Packaging and Specialty Plastics achieved several second quarter records, including EBITDA and sales volume, enabled by operational excellence, reflecting an aligned team focused on manufacturing reliability and producing incremental volume in a robust demand environment. Additionally, the business recovered margin in Latin America on demand growth.

Dow Elastomers volume increases from strong demand for its innovative technologies in automotive, hot melt adhesives and athletic footwear were balanced by the impact to production from higher turnaround activity in the quarter. Dow Electrical and Telecommunications delivered volume growth across all geographies, led by double digit gains in the Americas on continued demand for fiber optic, coax, and jacketing solutions.

Turning now to slide 12, as Andrew stated, our teams successfully closed the ownership restructuring of Dow Corning in June. As we worked together more closely with the Dow Corning team, we discovered even more opportunities to streamline, giving us the confidence to increase our cost synergy target by $100 million to $400 million with 1800 role reductions directly related to Dow Corning. We expect to achieve a 70% run rate within 12 months of closing and the full cost synergy run rate within 24 months. The gross synergies of $100 million will be captured within 36 months. This transaction will unlock significant value for Dow shareholders and it is expected to be accretive to our EPS, operating cash flow, and free cash flow in year one. And at full synergy run rate, it is expected to add greater than $1 billion of EBITDA to our bottom line.

Finally, in order to leave ample time for Q&A at the end of the call, we have included our usual model and guidance slide in the appendix of the deck. I'll now turn it over to Jim.

James Fitterling

Thank you, Howard. I'll start with the most important growth lever, our Plastics franchise. The dynamics across the polyethylene chain can shift significantly over time and it's critical to remain agile and adaptive with this industry. The long-term winners are the players that own the entire chain integration and can manage the swings through feedstock flexibility, diversification and differentiation, and global reach. And our results have shown that Dow does this exceptionally well time and time again, maximizing our returns while reducing our long term earnings volatility. As value in the chain shifts over time, our direct customer intimacy, innovation in application development and technical support differentiate our earnings unlike all of our competitors.

On slide 15, I'll go through our polyethylene view. Consistent with the view that we've held since the beginning of the year, we see polyethylene balances remaining stable over the next few years. Demand growth continues globally as consumers expect the higher food safety standards, better sustainability of plastic packaging relative to the alternatives, and improvements in packaging functionality and convenience that polyethylene provides. On the ethylene supply side, our view takes into account that the leading industry consultants forecast capacity additions that overstate what actually gets built. We saw this play out just a few years ago. And we think that incremental delays and project postponements will happen once again. In fact, we've already seen evidence of this.

We believe that both ethylene and polyethylene rates will remain high globally, and we continue to expect higher operating rates in polyethylene than in ethylene. And, as we've seen this year, there may be some regional differences.

Earlier this year, some called for very weak conditions in the second half of the year. We did not hold that view. And today margins remain firm globally and inventories are below average. I will state once again that we see continuing good conditions with expected seasonality over the next few years.

In this environment, the Sadara additions will position us well to capture growth where growth exists. The 26 units at this world scale facility, the largest of its kind ever built in a single phase, continue to come online. We're in a ramp in start-up activity right now. We have qualified 25 polyethylene products to date and have shipped polyethylene from the first two trains to nearly 100 customers in more than 25 countries. The multi feed cracker is now in the early phases of start-up and we expect commercial operation in the third quarter. All construction at the Sadara site should be complete by year end, with commissioning thereafter. We are happy with the progress made to date and will continue to provide updates as we get closer to year end.

I'll give my comments with DowDuPont on slide 16. We continue to make significant progress on the transaction and the pursuit of the intended separation into three independent publicly traded companies. All key deliverables remain on track and just last week both companies received overwhelming support from our respective shareholders to approve the merger. We continue to focus on preparations for day one, developing the financials for the intended spends and also driving the regulatory approval process. As I've said before, the vast majority of Dow people are focused on day-to-day business results and our teams are doing a great job of making sure these transactions do not take away from our sharp focus to deliver the 2016 financial plan.

With that, I'll turn it back to Andrew for our outlook and earnings drivers.

Andrew Liveris

Yeah, thank you, Jim. If you turn to slide 18, our earnings growth drivers are very visible to us, clearly definable, and will be appearing in our bottom line results over these next few years. Just to remind you, from 2012 to 2015, Dow has delivered an EPS growth CAGR of 22% per year based on an intervention mindset on productivity and portfolio management. Aggressive self-help actions, if you like. During this time, our R&D innovation agenda delivered new products and technologies and upgrading our margin from 13% to 20% in this same period and growing core volumes on average 2% per year.

As you can see from this quarter's results, we are at a $10 billion EBITDA run rate. Building from 2015's results and adding our specific actions, interventions and projects we grow the new Dow's EBITDA post intended spin to greater than $15 billion of EBITDA and 25% EBITDA margin. You can see here what we count. Productivity pre-merger, the U.S. Gulf Coast and Sadara investments at steady run rate, the Dow Corning transaction and the DowDuPont transaction, which are materials synergies target of $1.5 billion plus DuPont's performance materials business minus Dow's agricultural sciences and electronic materials business.

Note that we do not count any growth synergies, any market organic growth, or any new innovation contribution. These new earning streams are in motion and are known to us and described to you. And we will do all of this in a market and global economy that is mixed at best. Our outlook is that this won't change.

Volatility and macro uncertainties are the new norm. But Dow will deliver as it has these last many years, by firmly executing against our earnings growth drivers. And we will continue to grow earnings before, during, and after the merger and its intended spins. We have the team to do so. We have not been, nor will we be, distracted in delivering value for our shareholders.

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

Neal Sheorey

Thank you, Andrew. Now we will move on to your question. 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?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

Good morning. Thank you.

Andrew Liveris

Good morning.

Arun Viswanathan

I just want to get your thoughts on ethylene and polyethylene in the next two quarters. We have seen, potentially, some turnarounds here in the first half and some of those are potentially moderating here in the second half. What's your outlook for pricing in polyethylene over the next quarter or two? Do you expect some moderation in pricing in the third quarter and fourth quarter as operating rates tick down?

Andrew Liveris

Go ahead, Jim.

James Fitterling

Thanks, Arun. Look, every - in Plastics, the story, I think, is still demand. And demand has been strong, and our volume growth of 13% reflects that. In fact, we had growth in all geographic areas, especially in EMEAI and Asia Pacific, and also this year in Latin America. So, hopeful that we're seeing a rebound in the developing economies right now. And our operating EBITDA is up 7% versus same quarter last year. Compared to previous quarter, pricing is up. Compared to same quarter last year, pricing is off about a penny. So, I think you're seeing that reflected - the polyethylene price reflects that robust demand. And then my point on inventories, I mean, the derivative demand is much tighter than the ethylene demand, and we think that's going to remain the case.

In fact, we continue to see announcements of projects flight out of the pipeline. I reflected that in my comments. We continue to see delays, forecasted later start-ups, projects being completely taken out of the forecast for ethylene. So I think, to your point about back half of the year, I think you're going to see more of the same that you have seen. We see a little bit of seasonality toward the end of the year typically, but usually third quarter is a strong quarter for us in the Plastics franchise.

Andrew Liveris

If I could just jump on real quickly, Jim, just the way you should think about the way we put the two slides in the deck for this reason. The way Jim just described it is, we are number one in this game, and we understand supply-demand on the ground.

When Iran was talked about five years ago, people like the consultants had statements. That never happened. We knew what was going on with supply side. So, I think the way Jim and all of us are talking about this is, these next many years, the delays are going to create the conditions that we've just seen these last few years. We can make money in this chain very nicely, thank you very much, based on demand drivers and supply drivers being in the right place, plus our differentiation. Post 2020, there might be a few more start-ups, but I don't think many of you are modeling 2020. So, let's work on understanding that the dynamic right now is quite favorable.

Operator

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

P.J. Juvekar

Yes, good morning.

Andrew Liveris

Morning.

P.J. Juvekar

Yes, hi. Neither of you talked about the America-created polyethylene, where North America would export more to Latin America. But if Latin America demand remains weak, where do you think U.S. polyethylene have to go to balance the market?

And just secondly, on your polyethylene or ethylene plant, is your plant on time? Thank you.

Andrew Liveris

Go ahead, Jim. You get the second polyethylene question.

James Fitterling

Yeah, P.J., thanks for the question. Our demand in Latin America is actually up 4% in the quarter. So, we see pretty strong volumes in Latin America, and I think we're going to continue to see Latin America come back. Obviously, the impact of the lower GDP has a little bit of a market sentimental impact on what happens with the consumer market. But, when you look at the currency impacts in Latin America and, for that matter, in most of the developing world, most of the inflationary impacts of those currency changes have already been felt. And that's, I think, what leads into our comments that we think, in the emerging geographies, we're seeing a bottom and, hopefully, a recovery from this point on.

Meanwhile, the United States, given the energy feedstock competitiveness, is still one of the lowest cost places in the world to make these products. And so, we still have the ability to export, based on our global reach, to all parts of the world. And based on the fact that we're focusing on the higher value end markets, where most of the new capacity that's coming on is coming on in the really highly commoditized segment, it gives us the added benefit of the power of innovation. So, when you look at that power of innovation and the competitiveness of scale that we have, I think we're well-positioned to take advantage of this whole market situation.

Relative to your point on our timing, our Sadara plants are up, and the cracker is in the startup phase right now. In fact, the systems are running. And we're in the phase right before you really bring on the rest of the furnaces. We've got things inventoried in the hydrocarbons unit, and we're drying out the rest of the plant and getting ready to go. So, you're going to see polyethylene running here. And our hope is that polyethylene turns favorable, more of a tailwind for the plastics business in the back half of the year.

U.S. Gulf Coast, the cracker project is making tremendous progress. I think we're well above the 70% to completion rate. And as we said, we're going to have that up by mid next year. And the polyethylene plants are coming along very nicely. I was just down in Plaquemine last month, and I've been down in Texas the last couple of months, and we're making tremendous progress on those. So, I think our timing is very consistent with every previous report we've given you on those plants.

Operator

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

Vincent Andrews

Thanks. Andrew, I was wondering if I could ask you, on trade, in this presidential election, there's an awful lot of back and forth about trade policy, whether it's TPP, or China, or what have you. As you think about that sort of environment over the next couple of years and you think about Dow's business, is there anything that's being discussed right now that's concerning to you at all?

Andrew Liveris

Look, there's a lot being discussed or not discussed that's concerning, but you all know the season you're in. So, when we get to the next administration and we engage, we'll engage on all the things that matter to the company. Notably, trade. Just a little reminder, Vincent, because I've been asked this question a few times. Just a little reminder that the United States has actually put in very few trade agreements in the last 10 years. Actually, 3 specific bi-lats and one multi-lat in the works but not yet done. So, I would tell you we haven't really been exposed to the positives of trade and most of it is the way Jim answered the other question, which is we're on the ground pretty much everywhere else.

And so regionalization, the sum of all the places you're in, which is 37 countries for Dow. We're on the ground with physical facilities in 37 countries, means we have local market access under all sorts of trade environments. And there are great trade agreements going on between Asian countries and European Union and elsewhere. So we benefit from all of those.

I would like to see the U.S. get to a multi-lat trade agreement, the TPP, but we're not counting on it. I think what we're going to see here is a lot of uncertainties in the political environment. I grew up in Asia where there were trade barriers everywhere. So, Dow has the strategy to operate and generate profit in economies that grow wherever there is growth. And we have the diversification of geographic mix to take a few countries being on the downside of growth, i.e., like Brazil right now, and of course manage the upside, like the U.S. and China right now. So I'm not particularly concerned about the rhetoric that's going on right now.

Operator

And Bob Koort with Goldman Sachs will have our next question.

Robert Koort

Thank you. Andrew, you guys have had some pretty remarkable auto end market growth rates, certainly exceeding global production. Is this certain product wins, is it certain customer platform wins and how sustainable do you see that?

Andrew Liveris

Good morning, Bob. And thank you for the question. I'll take the first piece of it and then I'll pass it over to Jim. Look, I'm very proud of Dow automotive and our transportation platform in general. It's a great example of the entire company. Steve Henderson and his team, in the last ten years, have changed the mix.

So to answer your question, is yes. It's a change in mix. It's a change in technology platforms. It's a change in product mix and change in positioning with the OEMs, both geographic repositioning as well as particularly where you are in the supply chain. And we are speaking to light-weighting and we're speaking to fuel efficiency, and we are speaking to value add in the car or in the truck or whatever. And so we've got a lot of great programs. Jim, you might want to reference a couple of them.

James Fitterling

Yeah, Bob, it's a great question. And, look, we still believe that automotive this year is going to have a production level that's above last year, even if it's just slightly above, and sales continue to be strong there. We've always had the leading supply in glass bonding. So that business continues to perform exceptionally well. And the addition of crash durable adhesives, I can't underestimate how much of a growth driver that is for this business, not just in - I mean, we've highlighted our experience with Ford in the F150, where we're bonding aluminum to a steel structure. And not just light-weighting the vehicle, but improving the crash safety rating of that vehicle, a class of vehicles that's not known for high crash safety ratings.

But that applies in other dissimilar materials, so whether you're talking about carbon fiber composites on a steel frame, that application still applies. And as we continue to see others focus on light-weighting and our driving force in automotive has been and continues to be a seat at the design table with the brand owners, so that we can actually get out there and get our products specced in. We are continuing to see strong growth drivers in those businesses. And that is before we even think about what we can do with the power of Dow Corning Silicones in the mix.

Operator

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

Frank Mitsch

Good morning, gentlemen, and nice results here.

Andrew Liveris

Good morning, Frank.

Frank Mitsch

Andrew, if I were to be told a few months ago that you guys were going to post 13% volume growth in Performance Plastics, my first question would be, what operating rates are you guys at? And is that pretty much taking you to capacity? Or is there some that's coming out of inventory? Can you give us some sense as to where you stand, how much more there is to go, if any?

Andrew Liveris

Jim, why don't you take the ball on the tee and put it down the fairway.

James Fitterling

Well, Frank, I appreciate the question, because our team is very, very focused. And they've been doing a heck of a job. And I mean that right out to operations and manufacturing.

This year, year to date, at virtually the same operating rate as we had last year, we produced 2 billion pounds more production out of our assets. Now, 25% of that is PDH, so take that out of the equation. This quarter, we produced a billion pounds more out of the same asset base. And so we - this is Dow's DNA. This is what we do best and what we have always done, and I call it the competitiveness of scale, getting that extra percent out of a machine, doing it reliably, doing it safely, working that product mix, working the product waterfalls. Nobody does that better than we do. And the team is firing on all cylinders right now. And really looking forward to two trains of Sadara being up in the back half of the year, because customers are ready for that product.

Operator

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

Jeffrey Zekauskas

Hi, good morning. Two questions. My understanding is your PDH unit has had difficulties in producing since you brought it onstream. Can you talk about what those difficulties are and when they might be remedied? And in terms of your Texas 9 project that you say will be complete midyear next year, do you mean mechanically complete? That is, when do you expect it to be producing commercially?

Andrew Liveris

Go ahead, Jim. Take both.

James Fitterling

Yeah, Jeff, that's a good question on PDH. And you'll recall that we did get that plant up in December and got it up in record time. And as I just mentioned on Frank's question, we produced over 500 million pounds of propylene out of that unit this year. The technology itself is working very well. The catalyst, the reactor performance is strong, in fact the conversion rates are higher than we expected out of the catalyst. So that all looks good. We had two unit operations inside the plant that gave us some trouble. One heat exchanger, which we referred to earlier this year. And then we just had a problem with a dryer bed in the unit where we had to make some mechanical improvements in there. I don't think any of those are fundamental long term problems. I think they're just the normal problems of start-up of a massive unit. And those of you who have been down there have seen the size of that thing.

So, we've got vendors and our support from EOP all over it. And we're expected to be up next week, the week of August 8, and it's looking good right now. So, we're very hopeful. The team is very hopeful that we've not only solved a couple of mechanical problems, but made a couple of improvements along the way.

Andrew Liveris

And just on Texas 9, we're mechanically complete in a year.

James Fitterling

No, you're going to be mechanically complete on Texas 9 at the beginning of second quarter next year. And then, of course, you've got to do the commissioning and start-up. And that takes you, usually, better part of a quarter to get it up and running. So, we're right on schedule with operational by midyear next year, Jeff.

Andrew Liveris

Thank you, Jeff.

Operator

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

Peter Butler

Good morning.

Andrew Liveris

Good morning.

Peter Butler

If the pending DowDuPont merger, in effect, has dealt you guys a new hand of cards, how do you, as you look back, how do you evaluate the new hand? And does this have the possibilities of really making a huge disconnect in your future that you could be on the cusp of a really good earnings and cash flow story, I think.

Andrew Liveris

Peter the last slide in the deck, which I went through, was to give you guys a great visibility the way we're thinking about your question, which is, as we put together these historic transactions, the Dow Corning one just closed, and, of course, you're seeing a little bit of the positive effect of that already in our synergy increase there, is our confidence in delivering against the EBITDA that's in the slide in the deck.

And the DowDuPont transaction, the two becoming three powerful companies based on the synergies that we'll get as well as the complementarity and the growth vehicles that we created, Materials Science, Agricultural Science and Specialties. I know you heard Ed the other day. We're working pedal to the metal to get those metrics in place, the milestones in place. The board reviews and the way we'll run the merged companies with advisory committees. All those metrics, so we're aligned to implement, beat to close, beat to synergy, beat to spin. And those details, granular details, with the powerful shareholder vote approval we got last week, over 97% approval in our case and in DuPont's case. This is just an indicator. This is a lot of EBITDA that's going to come at both the merged company and the intended spins. And we gave you a road map to the new Dow Materials Science company on that last slide, which shows you 25% EBITDA margins and greater than $15 billion.

Operator

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

David Begleiter

Thank you, good morning. Andrew and Jim, maybe just talk about what's next on the ethylene capacity front. Sadara is almost done. Texas 9 will be ramping up next year. Is the next increment capacity in Saudi Arabia or, like [indiscernible] is doing, will it be in the U.S. from your perspective for Dow Chemical?

Andrew Liveris

Yeah, I'll give Jim a shot as well. Look, I think supply and command, Jim's already spoken to that, so we won't be redundant there. But we think about this as get these units up, satisfy the demand that's out there. Ethylene/polyethylene/plastics are growing very nicely as a factor to GDP. And as the number one player in the world, we're always looking for our increments. And we're going to have some very nice increments available to us for the next investment cycle. But fair to say our very big focus is getting these units up and running, and then we'll calibrate what they are. We've got ideas, and Jim and his team are working on those. Jim, you might want to add some thoughts there.

James Fitterling

You know, David, I'd say right now, we typically tend to look at two things; obviously, where you're going to have the low cost feedstocks. And so places like the United States certainly, the Middle East, Canada potentially, Argentina potentially, are all locations where you're going to have access to low cost feedstocks. The good news for us is, we're in all of those places and we have the ability to expand in all those places. And Andrew said, some of that is very incremental for us.

So certainly in Canada and the U.S. Gulf Coast, we have opportunities for increment, and then we have the footprint in all of those places to be able to do something full scale, if that's what we decide to do. Right now, we have a lot coming at us over this next few years, and we want to make sure that we take best advantage of the investment that we've already made.

Operator

Next we'll move on to Christopher Parkinson with Credit Suisse.

Christopher Parkinson

Perfect. Thank you very much. Do you have any quick updates on the ENLIST approval process for either cultivation or importation? And also, where do you stand with licensee agreements? And then also, sorry to sneak another one in, real quick, if you have any comments on the progress of active crop protection launches, specifically the ones in 2018 and the registration processes, it would also be greatly appreciated. Thank you.

Andrew Liveris

I'll let Howard get into the Q&A here, as the resident Ag expert. Go ahead, Howard.

Howard Ungerleider

I was waiting for the first Ag question. Good morning, Chris. On ENLIST and the approval in China, we continue to wait import approval for the ENLIST corn trait in China. We believe we've provided everything to the Ministry of Agriculture with all the data that they have requested. So we can't tell you when, but technically, with all the data, we believe we're ready to receive the approval. In terms of your ENLIST license question. So, look on corn, Monsanto has a non-exclusive royalty-bearing license to access thousand list corn traits.

On soybean, the plan is to utilize our own channel and other soybean seed companies, both in the U.S. and Latin America. And we're partnering with the strong regional companies, both in the U.S. and Latin America. And with cotton, we're going to market with the DAS brands, so PhytoGen. And remember, cotton accounts for 10% of the ENLIST acres that we're projecting. So, full speed ahead, but we are waiting for the China approval.

Operator

And next we'll hear from John Roberts with UBS.

John Roberts

Thank you.

Andrew Liveris

Hi, John.

John Roberts

DowDuPont reportedly has offered some Ag concessions to the E.U. regulators. Could you tell us if they only address normal horizontal market share concerns, or are there any vertical market share concerns that you need to think about?

Andrew Liveris

Yeah, John. Thank you. No, we can't disclose that. In essence, the regulatory approval process and what we're doing in terms of remedies, there was couple of statements out there. But look, just rest assured, as Ed said the other day, we're deep into this process. E.U. a key jurisdiction, and we're quite conscious of some of their concerns, which you'd expect.

The one thing that we're very clear on is what this is and what this isn't. What this is the creation of three growth companies, not one mega merger. So the details around that are obviously very detailed, and they do get into questions like yours. And rest assured that we've got all sorts of thoughts on how we can get to close by year-end, and we're still confident we can do that.

Operator

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

Stephen Byrne

I have another Ag question for you, Howard. Continuing with the question on ENLIST. There are some reports recently of some soybean damage from the drift of dicamba from your competitor's herbicide tolerance product. Can you comment on whether that risk of drift from 2,4-D is as great of a concern for you guys, or is it less?

Howard Ungerleider

Yeah. I would just say, Steve, we feel really good about the ENLIST technology platform. Remember it's both a seed as well as the over the top ENLIST Duo herbicide. And when you do that combination - our view on the herbicide, on ENLIST Duo, we have reduced volatility and reduced drift. All the field forward trials that we've done in the U.S. and Canada have proven that out, on top of all the test plots that we have done internally within Dow Ag, so we feel very good about that.

Operator

And we'll move on with Duffy Fischer with Barclays.

Duffy Fischer

Yeah, good morning, fellows.

Andrew Liveris

Good morning.

Duffy Fischer

You gave a lot of helpful guidance on the slide in the back around Dow Corning, but I was wondering if you could kind of help quarterly, just because as we annualize this the first year, we don't have good year-over-year data for it. That $800 million and some of the synergies rolling through, how will that impact quarterly in Q3 and Q4?

Andrew Liveris

Well, I'll give you a second quarter look on Dow Corning, Duffy, and thanks for the question. In the second quarter, the Dow Corning on the EBITDA line was about $100 million tailwind for us. Now that included a little bit of purchasing step-up related activity, so you can't take that and roll it through for the full back half of the year. I would say remember, though, all of our divestitures that we had through the last year. So there was about $100 million of headwinds on divestitures. So those pretty much offset each other.

On the EPS line in the second quarter, Dow Corning was about a $0.02 EPS tailwind, because you take that $100 million, you have to raise - we borrowed additional money to fund the deal, so you got a higher interest cost and then, of course, you got purchase step-up accounting as well that's a little bit of an offset. So, on the EPS line it was a $0.02 tailwind for us in the second quarter.

Operator

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

Aleksey Yefremov

Good morning. Thank you. Turning back to Sadara. Could you tell us what is the current plan for having the entire project be up and running, and also what do you expect the net equity contribution for Sadara to be next year. Is it going to be a tailwind or a headwind?

Andrew Liveris

I'll let Jim pile on. I just wanted to just - he said something earlier which gives me opportunity to repeat what he said and then double down on it. So, Howard and I made a trip out there just this last weekend and we had a thorough review with the project team. Jim's on the board and he's the lead for Dow on that board.

The new energy minister, Khalid Al-Falih, the previous CEO of Aramco, was present for a whole day. We are into the granular detail of starting up 25 units all in parallel and many of them, there's over 500 Dow people on the site to assist the local Saudis in getting it all up and running. Very impressed with the quality of the Saudi workforce, by the way. It's first class. We train them around the world, they're great. And we've got the human resources on the ground and, of course, we're now working on the most important one of them all which is getting the mix feed cracker up and running. And then Jim may comment on that.

Actually they fed ethane in while we were there for the first time. And not often that you want to see a ground flare burning ethylene, but everyone was celebrating the burning of ethylene through the ground flare. That's just a little piece of detail for you to let you know there's real things happening on that site.

Now the handoffs, the multistage handoffs, the fact that we're allowing most of this year and all of next year to get these handoffs before we're all the way done. There's going to be a lot of those handoffs on the interfaces. And, Jim, you may want to comment on the complexity and what we expect.

James Fitterling

Right. So as soon as this cracker comes up, we've got the two PE plants ready to run. And then a third PE plant will be ready to run before the end of the year. So that will consume quite a bit of ethylene. And then EO and PO derivatives come on next, and they're going to be complete in the end of third quarter beginning of fourth quarter. They have a start-up phase to go through, and so you can expect to see them in the first quarter of 2017.

And then as we go down the aromatics chain, you'll start to see isocyanates and some of the other derivatives come on by mid next year. So, throughout the end of this year and through most of next year, we're going to be sequentially starting up these units in this big integrated complex to bring the whole thing up and running. Right now, construction is 99.5% complete. So mechanical completions, every week we're handing over units to the project team and the operations team. So we look in good shape to get it up and running. The point on tailwind, our view is still you're going to see equity earnings out of Sadara of $400 million to $500 million in that timeframe when they're all up and running.

Howard Ungerleider

Yeah, I would just say, in terms of - Jim's guidance was a long-term point on earnings, so we still feel really good about Sadara. If you want to talk about this year punctually, year-on-year 2016 versus 2015, it's likely to be about a $250 million enterprise level headwind for us sequentially, and probably about a $400 million cash flow headwind for us, just as we fund the completion and start-up costs associated with the whole integrated site.

Operator

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

Jonas Oxgaard

Hi, guys. Congrats on the quarter.

Andrew Liveris

Thank you.

Jonas Oxgaard

Question. Your friends over at DuPont guided, on Tuesday that they would be unable to finish the 2 billion share buyback due to volume restrictions. Is that also true for you guys?

Andrew Liveris

Go ahead, Howard.

Howard Ungerleider

Yeah, Jonas, good morning. I would say, yeah, we're going to be synchronized in our stock buyback, right? As you know well, until the shareholder vote, we've been required to be out of the market. We're very pleased, and Andrew talked about the shareholder vote earlier in the call. So we're pleased that that's behind us.

So, right now, we're not going to do any kind of an ASR. We're going to go open market purchases. So, obviously, the next step is, we need the trading window to open. As soon as the trading window opens, we do intend fully to buy back stock, but within the volume limits that we have. And, obviously, the summer months, volume tends to be a little bit light. But we intend to buy as much as we possibly can, in sync with DuPont, in line with the volume.

Operator

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

Don Carson

Yes, Howard, another question on Ag. You talked about some headwinds, but there are some positives out there, too, like the reais turning in the second half. You talk of flat crop protection chemical volumes. So how do you see Ag earnings unfolding in the second half of this year and into next year, also with the headwind of lower grain prices?

Howard Ungerleider

Yeah, I mean, look, we've been aggressive in reducing costs. The long-term growth drivers in the business are robust, right? I mean, population growth, limited arable land, urbanization, water scarcity. I mean, you know, Don, better than probably anybody on this call, why we feel so good about the Ag market. I would say, we still believe that the market overall is going to decline 5%. But our team, the Dow Ag team, have really been focused on a combination of productivity, self-help, as well as introduction of new molecules on the crop protection side, as well as growing as much as we can as quickly as we can on the seed front.

So we feel good about the back half. I mean, it's still a tough Ag macro. You talked a little bit about some of the potential, headwind movement and tailwind in Latin America, and I would agree with that. Our goal is to outperform the competition. That's what the team is focused on.

Neal Sheorey

And Rochelle, we have time for one more question.

Operator

Okay. Next, we'll hear from Hassan Ahmed with Alembic Global.

Hassan Ahmed

Morning, Andrew. I somehow made it. Andrew, a bunch of questions, obviously, on ethylene, polyethylene supply-demand fundamentals. Jim alluded to sort of this point earlier in the call that over the last couple of months we've sort of seen and heard a fair degree of cynicism around ethylene supply-demand fundamentals. But part and parcel with that cynicism is the feedstock side of things as well.

There seems to be this perception that ethane is going get tight very quickly. And I've heard numbers like $0.50 to $0.60 a gallon imminently being thrown around. Now, you clearly have a slide in the deck talking about your views on ethane being long. So, A, would love for you to talk a bit about why you feel ethane's going to be long. And, B, what sort of energy pricing stack are you using when you're coming up with your ethane supply-demand sort of analysis?

Andrew Liveris

Go ahead, Jim, and I'll add a couple comments when you're done.

James Fitterling

Thanks. And thanks. I think it's a very good question, Hassan, and it's the reason we put that in the back of the deck. I'm glad you looked at that. I think a couple of things. Obviously, on the demand side for ethane, my comments about what's happening with project delays and things are sliding out the timing, impacts a little bit of that demand picture. But the power of feedstock flexibility here is what we always talk about in Dow, and one of the reasons we invest the way that we do, is that propane and natural gas play a big role in this too. So, propane right now is capping ethane.

And the other dynamic that you see happening, is that propane exports out of the U.S. are really flooding and exhausting some of the available buyers that are in that market. And natural gas prices are low. And the supply, even with the rig counts down, the supply has continued to be very strong, and now we're starting to see rig counts pick up a little bit. So our view here is that, despite the exports, despite all the other things happening, you're still going to be long propane and ethane. And you're going to be longer nat gas and propane than you are ethane. And when you're long propane, and propane is in the crack slate, that's advantage Dow. And so that's what we play for. Obviously, we have the flexibility to go back into ethane when that's possible.

But look, there's more gas supply, at low cost, that's coming on every day. Not just in the U.S. It's coming on in the Middle East, it's in Australia. It's putting pressure on these gas prices, and that's going to help us out.

Andrew Liveris

Yeah, and I just want to add a comment there, because it enables us to repeat, the 15 quarters in a row of EPS growth year-on-year has come under all environments at $100, and all environments at low $30. And there's been corrections out there, because the view is - the basis of your question, Hassan, is that in some way, where naphtha is versus ethane, where naphtha is versus propane, is linked to where oil is versus gas.

And what we have seen, and what we have said, and what we've now performed against under these diverse environments is, firstly, our geographic mix helps us. Secondly, our feedstock flexibility enables us. Thirdly, we've added to that flexibility, i.e. propane in Europe, for a great example of that. And we see propane as long as far as the eye can see. And, lastly, and very importantly, low oil price over time has enabled consumer demand. It took a while, but it's here. U.S. consumers are spending because they've got more money in their pockets. That's also happening in countries like China, which is becoming more consumer-led..

So, a low oil price with the enablement of feedstock flexibility on the Dow side, with ethane, propane, some butane, here certainly in the U.S., and our feedstock flexibility engine in Europe, means we can maximize profits in the chain. That key slide that Jim had in his deck. So, we can make money as long as there is demand. There is demand. The feedstock input-output thing, we're managing to maximize profit, maximize margin, which is a price volume trade-off in that chain, and we're doing it successfully now under all environments.

Operator

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

Neal Sheorey

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

Andrew Liveris

Yeah, I would like to pick up on Hassan's question and go a little forward and lean into the company's strong performance in the quarter as a harbinger. 15 quarters in a row, Consumer Solutions, Infrastructure Solutions, and Plastics performed, and they performed in tangent with a consumer-led economy. We have the portfolio to keep performing and keep strong performance. But we're not resting there. Self-help actions for many years on reducing cost, taking productivity to the bottom line, keeping it sticky. The 2500 positions we're reducing, i.e., the 700 extra on top of the Dow Corning announcement is a great example of how we're continuing to work the cost engine, not just feedstocks but actual costs, so that we can stay in a margin expansion mode, now 15 in a row.

This has not only yielded margin, but the working capital side of this, you got to look at what we have done. We produced 1 billion more pounds in the quarter from a year ago. 2 billion pounds more from the same machine from the first half point of view. Those extra pounds and that operating rate and disciplined working capital is generating this extra free cash flow that will feed the share buyback question that Howard answered. And we're very committed to working capital management, cash flow management, free cash flow generation to keep working the balance sheet, so we increase share buybacks. And then this strong demand environment will continue.

Look, it's not a great global economy, but it's a consumer-led economy and our products speak to it. And our new plants will come online at the right time. So, all of our interventions and actions are producing and they are continuing to produce. Dow Corning, accretive in the first month. Synergies raised already. The merger on track. And with a great see-through to these three new entities. These three great growth entities. We're firing on all cylinders and we will continue to do so.

Neal Sheorey

Thank you, Andrew. And thank you, everyone on the call, 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.

Operator

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

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