Dow Inc.

Good morning, everyone. Thank you for joining us to discuss the third quarter financial results for Dow. We're making this call available via webcast, and we have prepared slides to supplement our comments during this conference call. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. Speaking on the call today are Jim Fitterling, Dow's Chief Executive Officer, and Howard Ungerleiter, President and Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the earnings news release and slides. During our call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. DOW's Forms 10-Q and 10-K include detailed discussions of principal risks and uncertainties which may cause such differences. Unless otherwise specified, All historical financial measures presented today are on a pro forma basis, and all financials, where applicable, exclude significant items. We'll also refer to non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures is contained on the Dow earnings release in the slides that supplement our comments today and on the Dow website. On slide two, you'll see our agenda for the call. Jim will start with an overview of Dow's third quarter and operating segment performance. Howard will then move into a financial overview of the quarter and will also provide some comments on modeling guidance and discuss Dow's progress against some of our key financial targets. And finally, Jim will provide a progress update on Dow's cost and growth targets and then close with a discussion on our forward-looking views. Following that, there will be plenty of time for your questions. With that, I'll turn the call over to Jim.

Thanks, Neil, and thanks, everyone, for joining us this morning. Starting on slide three, our results in the third quarter demonstrate the Dow team's focus on managing the levers within our control while also making progress against our operational, financial, and strategic priorities that we laid out for the new Dow at our investor day last year. At that time, we presented a clear set of priorities and targets along with a playbook to drive our execution. Since then, we have been diligently delivering on that plan. In the third quarter, we achieved top-line performance that was in line with our guidance and bottom line results that exceeded expectations. In doing so, we delivered strong improvements from Q2 to Q3 across the board, EBIT margin, earnings, and free cash flow. Here are some other notable highlights from our results. First, we continued to capture demand growth, particularly in sectors closer to the consumer where conditions remained favorable. Excluding hydrocarbons and energy, Dow's volume rose by 1% in the quarter, led by consumer growth in packaging, polyurethanes, and silicones applications. Second, we grew earnings and margins sequentially, led by our plastics franchise. We leveraged our industry-leading feedstock flexibility in the United States and Europe. In Europe, we capitalized on the LPG Advantage versus NAPTA, and on the U.S. Gulf Coast, we made full use of new butane capabilities that we put in place earlier this year. And we successfully achieved zero NAPTA cracking this quarter, expanding our flexibility and avoiding an otherwise costly feedstock penalty. Additionally, we focused on recapturing price, a key improvement toward the end of the quarter in polyethylene. Third, we continued to drive down our cost structure. We reached a significant milestone in the quarter, successfully completing our $1.365 billion cost synergy program. Furthermore, we removed another $40 million of stranded cost in the quarter. And fourth, Our results this quarter showed the ability of Dow's portfolio to generate strong cash flow. We generated $1.8 billion in cash flow from continuing operations and $1.3 billion in free cash flow. We improved our earnings to cash flow conversion, as well as working capital improvements provided a source of cash. The cash flow story this quarter is a noteworthy highlight, and Howard will unpack this later in the call. We accomplished all of this while navigating a business environment with limited visibility, and while overcoming operational limitations in Argentina, where both of our crackers were down through the third quarter following a countrywide power outage in late June. And finally, we made important progress in our litigation with Nova Chemicals and NRD leveraging priorities. In September, a judgment was entered in Alberta, Canada, ordering Nova Chemicals to pay Dow approximately $1.1 billion. On October 10th, Dow received the related cash payment of approximately $800 million. Subsequently, we issued a make-whole call for the full redemption of $1.25 billion of notes due in 2021, further reducing debt. This was another important step forward in strengthening our financial profile. Altogether, our results demonstrate the strengths of the Dow portfolio and our continued focus on executing the operational, financial, and strategic playbook that we laid out a year ago. Now moving on to our segment results and the business performance in the quarter. On slide four, packaging and specialty plastics expanded operating EBIT margin nearly 200 basis points year over year. Our results reflected demand growth in packaging applications, margin expansion, cost synergies, and contributions from new capacity on the U.S. Gulf Coast, which more than offset lower equity earnings. And notably, on a sequential basis, EBIT grew 4% and operating EBIT margin expanded 100 basis points. Further, the results are particularly notable considering that the segment overcame a $100 million headwind from a combination of lost ethylene production and repair costs in Argentina. Our two crackers there are now back up and running. In the third quarter, we saw a continuation of solid demand in packaging application. The packaging and specialty plastics business grew volume by 4% year over year. We again saw growth in industrial and consumer packaging, flexible food and specialty packaging, and health and hygiene applications. Regionally, volume growth this quarter was led by Asia Pacific and EMEA. In hydrocarbons and energy, the business reported both lower volume and local price. The volume declines were an outcome of our drive for lighter feed slates in Europe, which led to lower coproduct production volume. In addition, we had slightly lower merchant ethylene sales in the United States as a result of enhanced ethylene integration enabled by our new derivative capacity. On slide five, industrial intermediates and infrastructure operating EBIT declined versus the year-ago period, primarily due to margin compression in the polyurethane component and MEG, as well as lower demand in industrial end markets. In industrial solutions, volume declined modestly as a result of lower demand in energy, agriculture, and automotive end markets. This was partly offset by growth in catalyst applications, and demand in pharma and markets. The business reported a significant drop in its equity earnings, driven by margin compression for MEG at our Kuwait joint ventures. Polyurethanes and construction chemical sales declined on lower local pricing in all regions, led by lower components prices. However, the business achieved volume growth, driven by gains in the United States and Canada on improved MDI supply year-over-year, as well as continued demand growth in polyurethane systems. Our growth in systems reflects the business's focus on driving its downstream agenda and moving the portfolio from merchant component sales to higher-value formulated systems. It has been a multi-year journey, and the progress we've made so far has been impressive. This quarter marked the 25th consecutive quarter of year-over-year volume growth for the systems business. And finally, on slide six, performance materials and coatings operating EBIT fell from the year-ago period primarily due to siloxanes margin compression and lower demand in coatings and monomers. Consumer solutions sales declined as volume gains in Asia Pacific and the U.S. and Canada were more than offset by local price declines in all regions, mainly driven by lower siloxanes prices. The business reported volume growth in infrastructure and markets and improved demand for siloxanes in Asia Pacific. This was partly offset by soft demand in the automotive and consumer electronics and markets. coatings and performance monomers reported a volume decline. On the coating side, the business saw lower demand in the U.S. and Canada in architectural coatings and soft demand in Asia Pacific in industrial coatings and markets. I'll now turn it over to Howard to discuss our financial performance in the quarter, modeling guidance, and the progress that we made against some of our key financial targets.

Thanks, Jim, and good morning, everyone. Turning to slide seven, Net sales were $10.8 billion, in line with our guidance. The decline was primarily driven by lower local pricing. Volume declined 2% year over year. This was largely driven by changes in hydrocarbons and energy related to our cracker feed slates, combined with lower ethylene trade sales volume. Excluding hydrocarbons and energy, volume was up 1% versus a year ago period, driven by growth in packaging, polyurethanes, and silicones applications. Sequentially, demand was higher in packaging and specialty plastics and in industrial intermediates and infrastructure. Local price declined 12%, primarily due to decreases in lower global energy prices year over year. Currency decreased sales by 1% as a result of the strengthening of the U.S. dollar against the euro. The earnings impact of currency was offset by year-over-year tailwinds from a lower tax rate and reduced interest expense. Equity losses were $44 million, a year-over-year headwind of nearly $180 million. The decrease was primarily due to lower results at the Kuwait joint ventures driven by margin compression and MEG and polyethylene. Equity losses at Sadara also increased primarily due to the impact of a third-party industrial gas supplier issue, which has since been resolved. In the appendix of our earnings deck, we have included our additional disclosure for our three principal joint ventures, which provides further details on their results. Overall, operating EBIT was $1.1 billion. Tailwinds in the quarter included savings from cost synergies and stranded cost removal, as well as contributions from new capacity on the U.S. Gold Coast. These gains were more than offset by a year-over-year margin compression in siloxanes and isocyanates, lower equity earnings, and the impact from the Argentina outage. On a sequential basis, operating EBIT rose 5% or nearly $60 million, representing our first sequential EBIT increase in more than a year. Our operating EBIT margin also expanded 80 basis points, led by margin expansion in packaging and specialty plastics. We generated $1.8 billion of cash from continuing operations, which reflected a reduced headwind from integration and separation spending, and a $700 million release of cash from working capital. Relative to the year-ago period, our cash from continuing operations was up $1.6 billion, But recall that we made a voluntary pension contribution last year of $1.1 billion. After adjusting for this, the underlying operations delivered a $500 million increase in cash flow versus the same quarter last year. And finally, we returned $600 million to our owners in the quarter, including $500 million of paid dividends and $100 million of share repurchases. Since then, we have completed $400 million of share repurchases, and we remain on track to achieve our target of $500 million for the year. Moving to slide eight in our modeling guidance for the fourth quarter, as we have for the past couple of quarters, we're again providing our segment guidance on a sequential basis to reflect the most relevant comparison in today's environment. At the total Dow level, we see four EBIT tailwinds sequentially, as headwinds from normal fourth quarter seasonality in coatings and infrastructure markets and modest impacts from turnarounds are offset by nearly 150 million of add-backs from one-time events in the third quarter. including the impact of our outage in Argentina. In performance materials and coatings, we expect siloxanes pricing to remain at about the same level as we exited the third quarter. In coatings and monomers, we expect to see the normal seasonal reduction in profitability, and the business will also absorb one-third of the impact from our planned PDH turnaround that is currently underway. Moving to industrial intermediates and infrastructure, this segment will absorb the remainder of the PDH turnaround impact. and MEG prices on average are projected to be similar to the third quarter. And finally, in the packaging and specialty plastic segment, we see feedstock price trends continuing to drive lighter cracker feed slates in the U.S. and Europe, which will continue to reduce our top-line sales of co-products. We expect a modest sequential headwind as we complete a large turnaround in the Netherlands, and we anticipate reduced catalyst and licensing earnings in the quarter, which by their nature are lumpy. On the positive side, our Argentina assets are now back online, so they will once again be positively contributing to our results. Turning to slide nine, there are two areas where I'd like to highlight the progress we've made against our financial targets. The first is our capital structure, specifically the deleveraging and liability management we've done this year. As you'll recall from our investor day last year, we outlined our capital structure priorities and our deleveraging targets. And as you see on this slide, we have been delivering on our plan, making significant progress in improving and smoothing our debt maturity profile and maintaining our liquidity position. We have opportunistically refinanced upcoming maturities, and we secured the option to extend the outstanding $2 billion on our term loan by an additional two years to the second half of 2023. So far this year, we have completed $2 billion of gross deleveraging And with our recent $1.25 billion debt redemption announcement, which was supported by the cash proceeds we received from NOVA, we will complete more than $3 billion of gross deleveraging by the end of this year. The result of these actions is that we do not have a significant debt maturity due until 2022, and we have maintained our strong liquidity position, which is more than $10 billion. These accomplishments align to the financial priorities we outlined a year ago, maintaining a strong capital structure, reducing risk, lowering interest expense, and preserving our financial strength and flexibility. Moving to slide 10, the second financial highlight is the progress we have made in our cash flow generation and the potential we see to improve further from here. Looking at the trailing 12 months, we have delivered $3.2 billion of free cash flow, but our results do not yet fully reflect our underlying potential. The reason for this, as we highlighted at the start of the year, is that we have had short-term cash headwinds from two discrete factors, post-spin integration and separation activities, and interest expense. On both fronts, peak spending is behind us. Through the third quarter, we have spent more than $1 billion on integration and separation spending in 2019, and we expect a full year spend to be in the range of $1.2 billion, in line with our target for the year. This spending is beginning to recede. And looking ahead, we expect a 2020 cash spend to be in the range of $200 to $300 million, or a year-over-year release of cash of about $1 billion. And on interest expense, as I highlighted, we have accomplished a substantial amount of deleveraging and liability management. This has put us in a position today where we see our 2020 run rate interest expense being $100 million lower than where we started in 2019. These two factors alone represent more than $1 billion of cash flow uplift in 2020. that are completely within our control and independent of market conditions. We also continue to pursue non-operational cash inflows, notably the additional litigation we have pending with NOVA, and our teams continue to also focus on operational improvements, such as greater working capital efficiency. These improvements will not only boost gross cash flow, but should also lift our earnings to cash conversion. Our focus on cash is paying off, and all other things equal, our free cash flow is poised to expand. This additional flexibility preserves our ability to deliver against our financial priorities, including our strong shareholder returns and further deleveraging. Now I'd like to hand it back to Jim to discuss our progress on our cost and growth priorities, as well as our near-term outlook.