DuPont de Nemours Inc (DD) — Q3 2015 Earnings Call Transcript

Good morning and welcome. I'm Jack Broodo, 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 reforecast 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; and Howard Ungerleider, Vice Chairman and Chief Financial Officer. Around 7:00 AM this morning, October 22, our earnings release went out on Business Wire and was posted on the internet on dow.com. We have prepared slides to supplement our comments in this conference call. These slides are posted on our website and through the link to our webcast. Some of our comments today include statements about our expectations for the future. Those expectations involve risks and uncertainties. We cannot guarantee the accuracy of any forecast or estimates and we don't plan to update any forward-looking statements during the quarter. If you would like more information on the risks involved in forward-looking statements, please see our SEC filings. 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. The agenda for today's call is on Slide 3. I will now turn the call over to Howard.

Thanks, Jack, and good morning, everyone. Turning to Slide 4, our results this quarter demonstrate once again the value of Dow's integrated structurally hedged portfolio, our focus on execution and the strong financial position the company has built. Operating EPS rose to $0.82, an increase of 14% year-over-year. Operating EBITDA rose to $2.4 billion versus the same quarter last year on continued demand growth, margin expansion and self-help actions. Volume grew in nearly all geographic areas, reflecting stable underlying demand for Dow's innovative solutions. And operating EBITDA margins expanded in nearly all operating segments, reaching 20%, up 370 basis points year-over-year, the highest quarterly result since 2005. Our disciplined approach to price-volume management enabled us to deliver these results even in the midst of ongoing and significant top-line headwinds, with year-over-year price declines in oil of 50% and currency headwinds of 17% for the euro and 51% for the Brazilian real. The consistent earnings growth, margin expansion, and strong cash flow results we delivered in Q3 continue the steady drumbeat over the last 12 quarters, and underpin our ability to return increasing value to our owners, as illustrated on Slide 5. As we have covered in past quarters, we benchmark our quarterly results against our key financial goals that provide a clear view on our performance. Quarterly EPS has grown at a 21% CAGR over the last three years on an operating basis. It's important to note that the one-time gains resulting from portfolio actions have resulted in an additional $0.71 of as-reported EPS, above the year-to-date operating EPS of $2.58. ROC is now 11.9%, up more than 170 basis points versus the same quarter last year. We expect ongoing improvement, as our growth levers particularly on the U.S. Gulf Coast and in Saudi Arabia continue to produce and as we complete our portfolio management actions. Cash from operations reached $2.5 billion in the quarter, up $700 million or 41% versus the year-ago period, and has now reached $8 billion over the last 12 months and we continue to return this cash to shareholders. Year-to-date, Dow has returned $1.9 billion to shareholders through declared dividends and share repurchases. Additionally, our recent completion of the Dow Korean products divestment, which successfully closed on October 5, at a tax efficient value of $5 billion or a taxable equivalent value in excess of $7.5 billion. This is a significant value for a commodity business and created a win-win-win for Dow, for Olin, and for the shareholders of both companies. Overall, as a result of this transaction, our net debt went down by $3 billion, and $1.5 billion in Olin common stock was distributed to Dow's shareholders in exchange for 34.1 million shares of Dow's stock. A slide is available in the appendix for additional details. Let's please now turn to segment operating results on Slide 8. In Ag Sciences, operating EBITDA for the segment was down from the year-ago period, reflecting declines in price, the sale of AgroFresh, and a gain of $44 million from the one-time sale of a joint venture. The business saw continued strong demand for new crop protection molecules with a 40% increase in new product sales versus the same quarter last year, and an 8% increase year-to-date, led by strong growth in spinetoram insecticide. Results in the quarter also reflected significant improvement in year-over-year cost reduction actions. Overall, the ag market continues to be challenged with high inventory levels and currency pressures, more than offsetting higher volume gains in Europe, Middle East, Africa, India as well as North America. We do expect ongoing weakness to continue over the next 12 to 24 months. While conditions in Brazil ag were weak in the quarter, Dow continues to gain share, and in fact has now moved up to second place in corn seed market share. We also achieved a significant regulatory milestone with the approval of Enlist cotton. Moving to Slide 9, Consumer Solutions reported record operating EBITDA, despite a year-over-year decline in equity earnings. Dow Automotive Solutions achieved a quarterly operating EBITDA record, reflecting growth in both OEMs, as we see continued adoption of aluminum, high-strength steel, and composites as well as in our aftermarket segments. Our business continues to outpace industry growth, driven by Dow's innovative structural adhesive solutions and there is significant upside potential, as we continue to expand into adjacent applications. Consumer Care volume grew in pharma and personal care sectors, offset by sales declines in the lower-margin homecare and industrial markets as well as by ongoing currency headwinds. We continue to see demand strength in the high-value portions of our cellulosics chain. In Dow Electronic Materials, EBITDA growth in semiconductor and display was offset by declines in interconnect technologies. Display profitability was improved this quarter by self-help actions, including the intentional exit of low margin business and our focus on upgrading the portfolio. Turning now to Infrastructure Solutions on Slide 10. Overall operating EBITDA for the segment decreased, as growth within several businesses was offset by declines in equity earnings, reflecting a one-time tax credit Dow Corning received in the third quarter of 2014. Dow Building and Construction reported record quarterly operating EBITDA as well as volume growth in most regions, particularly in cellulosics and spray foam technologies. Our innovative product lines are driving growth that is outpacing that of global construction markets, and our proprietary flame retardant technology is capturing attractive licensing income. Dow Coating Materials reported volume gains in most regions led by double-digit growth in EMEAI. The business has expanded its market participation with a robust innovation pipeline in new vinyl acrylic binders and rheology modifiers across a broad range of customers. On a global scale, Performance Monomers continues to remain in industry-wide trough-like conditions. Energy and Water Solutions reported double-digit volume growth in emerging markets for reverse osmosis solutions, partially offsetting declines in energy sales in North America. Turning to Slide 11, Performance Materials and Chemicals reported a decline in EBITDA, reflecting the impact of divestitures and lower MEG pricing. Strong volume in Asia as well as in a majority of businesses was more than offset by global pricing pressures and ongoing currency headwinds. Industrial Solutions reported earnings declines due to compressed glycol margin and weakness in North America oil and gas drilling demand. Polyurethanes once again continued to deliver strong volume growth, with share gains due to broader market participation, expanding system house sales, the start-up of our Thailand polyols plant as well as underlying fundamental demand growth in EMEA and Asia-Pacific. On Slide 12, Performance Plastics EBITDA achieved record levels due to robust demand in all businesses. Dow Packaging and Specialty Plastics reported a record quarterly operating EBITDA, as the business captured gains from demand growth in emerging markets, high operating rates, strong asset reliability, and tight inventory across the chain. Dow Elastomers delivered a second consecutive quarterly operating EBITDA record, due to demand in key markets such as transportation, high-end footwear, and infrastructure. Dow Electrical and Telecommunications also reported volume growth in North America and EMEAI, as new home sales and construction spending rates trended higher. Turning to Slide 13, we want to illustrate the importance over time of owning the full polyolefin value chain. As you can see, the source of income has shifted over time. It's hard to predict which bucket the value will come from in any given period. In the 2002 trough, for example, the ethylene to naphtha spread was high in very weak markets, with some contribution from the oil to gas spread. Our differentiation in 2002 was much lower than it is today. In the strong markets of 2005, there was virtually no oil to gas spread. In 2009, Dow retained market share and decent trough margins due to product differentiation, while competitors that didn't own the differentiation or the feedstock flexibility struggled to the brink of insolvency. In 2014, the oil to gas spread was the main driver of margins, but full chain integration and differentiation played an important role. This differentiation for Dow is based on unique polymers, catalyst, process and comonomer combinations. In 2015, the margin has been shifting to both the polymer and the differentiation, as supply-demand tightness, especially across the integrated chain, continues to progress even in a climate of soft GDP. The Dow strategy has been to continue to be a leader in all three of the margin opportunity buckets, leveraging the Dow material science backbone to provide differentiation that amplifies that performance. I also want to take a minute and share our latest outlook on supply demand for the ethylene and polyethylene value chain on Slide 14. This outlook utilizes the most recent GDP forecast, assumes historical growth multiples to GDP, a gradually recovering China, as well as the latest data on capacity additions. Integrated polyethylene and elastomer balances are tight today and the outlook indicates these balances will stay tight for at least the next several years. Additionally, tightness is likely to come from an industry operating reliability issues, both at the monomer and polymer stages of the value chain. As we have discussed many times, much of these assets are old and unplanned outages across the sector have been and likely will continue to happen at relatively higher frequencies. With these tight industry balances, any significant unexpected operating event will be met by shortages and a pricing response, which has certainly had an impact on conditions in the U.S., Europe, and Asia in the last two years. The bottom line in our view is that Dow is well-positioned for favorable ethylene and polyethylene industry conditions through at least 2020, based on current announcements and timing to complete the projects. Before I turn it over to Andrew, let me provide some modeling guidance heading into fourth quarter on Slide 15. I'll just cover some highlights. On a year-over-year basis, the fourth quarter will be impacted by divestitures, mainly AgroFresh, Angus, Sodium Borohydride, and Dow Chlorine Products in three material ways. First on the revenue line, please remember, revenue will be lower by between $1.3 billion and $1.8 billion. We also expect to realize a negative impact on EBITDA of between $150 million and $225 million. And depreciation and amortization will be lower by between $35 million and $50 million. The other item I'd like to point out is the tax rate for the fourth quarter will likely be between 24% and 27% on an operating basis. If Congress enacts the extenders R&D benefit before year-end, we will settle at the lower end of the range. As you all know, we closed the Dow Chlorine Products transaction on October 5, which will have a tax impact on the as-reported earnings in the fourth quarter. Consequently, we expect our as-reported tax rate will be between 10% to 13%. Once again, we provided the popular macroeconomic heat map in the appendix of the presentation. And now, I'd like to turn the call over to Andrew, who will provide an update on our outlook as well as our strategic drivers for the next 24 months.

Thank you, Howard. In Slide 16, you'll just see in a few moments I'm going to share the next series of goals that our Board and our management have come up with for our portfolio transformation over these next two to three years. So if you reference Slide 17, at our Investor Day 2014, we summarized what you could expect from Dow for the next 12 months. This series of commitments was a continuum from our 2013 strategy reviews undertaken by our Board, which culminated in the series of choices in our growth engines and our self-help actions. What underpinned those reviews in 2013 and was reinforced by our statements at the Investor forum in 2014 is that we are an emergent and are a cash flow story; that our portfolio fine-tuning would continue with an acute focus on carving out our chlorine chain and cleaning up our joint ventures; that we would raise our divestment target to $7 billion to $8.5 billion; and that we would continue to fund innovation and organic growth with no big M&A; and that we would return cash to our shareholders with dividend increases and share buybacks. Slide 18 is a readout of how we did versus what we said. We have over-achieved our targets and there is no gap between what we said and what we did. We have built a portfolio that has as its foundation both integration and intervention and is structurally hedged to handle all economic conditions, and as already referenced, is a cash flow machine. Let's look at Slide 19. As a result of these achievements, the Dow board and management have deliberated on our focus for the next 24 to 36 months. We build a simple roadmap for this period. The goals on this page are very clear. Our execution focus of these last three years has been granular and laser-like. This will continue. First, our productivity goal of $1 billion of cost reductions over three years starting in 2015 will be delivered through Dow's previously announced change management program, Dow 10.0. Second, our large assets in Sadara and on the U.S. Gulf Coast are commencing their commissioning phases. These huge new assets would change from being investment headwinds to cash and earnings tailwinds. Our CapEx will be ranged down to new depreciation levels over the next two years. We anticipate no new mega projects during these next five years. Third, we would conclude our joint venture portfolio work by providing full clarity on our large joint ventures and their future in Dow. Turning to Slide 20, on Kuwaiti, these large, highly profitable JVs will pivot through equity restructuring and move to a growth focus. Our partners in Kuwaiti are excited about the opportunity to consolidate all of their JVs under one ownership umbrella, retain Dow as a minority partner moving forward to a growth path while extracting synergies in their consolidation. The deal structure on this slide will yield over $3 billion of pre-tax proceeds to Dow by mid-2016 with $1.5 billion by the end of 2015. On Slide 21, our joint venture of 72 years, Dow Corning, is a tremendous asset with a focus on specialty materials and specialty chemicals, and, of course, polysilicon by the Hemlock joint venture. Dow and Corning are in discussions around a potential transaction involving Corning's ownership in Dow Corning. We will have more to say on this in the not too distant future. Slide 22, Dow's portfolio work over these last five years has been to methodically exit commodity cyclical value chains, such as those in styrene, butadiene, chlorine and all their derivatives. As you can see on Slide 23, these commodities exhibit no predictability either on their input price, which is mostly oil-based, or their output price, which would be commoditized and genericized and have no technology advantage. We have been successful in repositioning the portfolio to growth markets with clear integration and technology differentiation. Slide 23 shows how we have divested $15 billion of primarily high-beta businesses over these last six years. What is clear to us is that our owners are continuing to look at ways that enterprises like Dow, with all of our intended complexity, can not only create value, but actually release that value. We are very proud of what Dow has built in the agricultural market via Dow AgroSciences. This business has doubled EBITDA over the last five years and has the most envied technology pipeline in chemistry and in traits. By all accounts, this is a successful business with a bright future. Despite Dow AgroSciences being a low-beta business, there is a rationale in our opinion that given the potential synergies in a newly consolidating agricultural market, an attractive opportunity to release value may be upon us. As a result, the company is only considering those prospects that will extract further value from this business, while comparing it to the value of retaining the business. Slide 24, 25, the final point on our emphasis goals over the next 24 to 36 months is captured by the notion that we are generating a lot of cash and have more down in that future. Slide 25 shows we have been a returner of cash to you, our shareholders. This will continue. We are pleased to announce our dividend increase of $2 to $1.84 a share. This represents a new historic dividend level. We will continue to accelerate our share buybacks. We will continue to return cash to you. We have no plans or any new big CapEx or large M&A in this timeframe. We have built a structurally hedged portfolio with tremendous organic growth drivers. Slide 26 gives you a sense of these growth drives. We believe they're unique. We have built three strong integrated pillars of value that uniquely define our enterprise. We start with cost-advantaged monomers in geographies with attractive markets. In the second pillar, we have selected industry-leading science and engineering that enable us to create value differentiation with our customers. In the third pillar, we selected attractive growth segments of key markets to lower volatility and drive reliability of earnings and cash flow. The first and second pillars define our integration. The second and third pillars define and leverage our innovation. The key is that no one else in this sector brings both operational and commercial excellence across all three pillars. Looking at Slide 28, our broad scope of scientific capabilities creates a highly competitive hurdle, not easily replicated or imitated, creating a benefit for both Dow, and more importantly, Dow's customers. Looking ahead, we believe the market outlook favors the products, technologies and geographic position of the Dow portfolio. If you look at the market outlook on Slide 29, we expect ongoing expansion of growth opportunities that will enable Dow to continue to capture that growth, mostly in markets such as China, the United States, and Europe, despite challenges in soft pockets around the world, such as those in Brazil. We anticipate strength in construction, packaging, and transportation markets, as well as in electronics as the interconnectivity of the world continues to increase and Dow is well-positioned to manage and, in fact, win from the weakness in agriculture. Our forecasts indicate that there will be gradual recovery in the oil markets. Gas-based cracking will continue to be advantageous. In the midst of all of this, our new investments on the U.S. Gulf Coast and in Saudi Arabia are coming online at exactly the right time, further boosting Dow's ability to capture and expand margins. The bottom line is this: today's macroeconomic realities mean that the importance of driving differentiation into the portfolio will only increase, and companies that aim to win will need to invest in innovative solutions and work closely with customers. Overall, Dow's strategy, our integrated portfolio, our innovation engine, and our proven track record of execution are delivering results. As always, capturing growth where growth exists is not the only way that we would demonstrate consistent earnings growth and strong cash flow. Our self-help and productivity actions underpin all of our operational and execution tactics. Now, third-quarter results highlight this intense focus on delivering the potential of Dow: 12 consecutive quarters of EPS, EBITDA, and margin growth; eight consecutive quarters of volume growth; the highest EBITDA margin results since 2005. The Dow machine is generating strong cash flows and returning that cash to its owners. Today's announcements outline for you the next 24 to 36 months of actions that will drive continued results and demonstrate our commitment to being exceptional stewards of the opportunities in our hands, while combining exceptional capital utilization with our drive to return cash to Dow's owners across the intermediate, mid, and long-term horizons. Our team has distinguished itself by its performance and it will continue to do so. With that, Jack, let's turn to Q&A.

Thank you, Andrew. Now, we will move on to your questions. 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, could you explain the Q&A procedure?

Howard, I like your win-win-win comment.

It was PJ. I mean, it was a tremendous transaction for both Dow, for Olin, and for all of our shareholders, I mean really it was.

So my question is on ag. Andrew, you mentioned that you want fair value, and there's pressure to do something. But is it the right time to divest ag, given that ag markets are depressed? And then on seeds, it doesn't make any money today, but you have this great pipeline, so how do you capture all that in your divestiture comments?

You've got to take it from the two angles that we are taking it with. You've just given us one angle, which is the retention angle. In consolidating ag market, the affordability of R&D budgets, and the capturing of synergies is another angle. If you look at our total market cap and you look at the contribution of Dow AgroSciences, both revenue and EBITDA, then projected EBITDA, you could take some multiples and say that as a percent of market cap is higher than as percent of either revenues or profit in the enterprise. That begs value release, and we have talked to many, all of our owners about that. You can trust upon us, so all of our owners, that we will definitely compare it, as I've said in my remarks, to the value of retention. We believe that over time, the hurdle of doing business in this sector will only keep increasing. We've done a phenomenal job through collaboration of building our capabilities and we've done a tremendous job, as you acknowledged, on building the pipeline of both chemistry and traits. We will extract full value in whatever construct we come out with that beats anything towards retention.

Your outlook comments include an indication of a widening oil/gas spread benefiting your polyethylene chain. I was wondering what your thoughts were on the outlook for a looming surge of anthracite-based petrochemical production, and do you see that as an opportunity for China to become more competitive in this area? Any leverage you think they can pull to lower the variable cost of that industry?

I really appreciate the question and it's a recurring question. Actually, way back in '03, '04, China's coal-to-olefins projects were looming large, especially with the oil and gas price structures that existed back then. Look, we have been part of it. We have actually assisted one of our partners there to actually move through the approval process. We have, at one point in time, even considered participating ourselves. But in our view, despite the variable cost comment you just made, it is unlikely to be any new projects being brought forward. These are very hard to run, highly polluting projects, very water-intensive. They're all in the wrong place. We believe that their ability to operate is suspect, as already witnessed by the one that's online. If you throw on top of that that there will be sub-world scale on the derivative side and actually be mostly in the commodity areas like glycol and gas-based, commodity-based polyethylenes and polyprop, it will have little or no effect on the value chain comparisons to either the Middle East production or the U.S. production, which we are part of.

Andrew, I was just going to say, that I'm not sure who is doing a better job of managing, you or Terry Collins of the Mets, so key point.

Terry is a Midland guy. He's born and bred in Midland.

I did not know that. Sorry, Howard, about the Yankees.

But are you going to write the check for Cespedes? I mean, I think Detroit helped the Mets this season.

We are very grateful and we're keeping Murphy. Andrew, you made the comment no large M&A, and then obviously you indicated that you are in discussions with Corning. I was wondering if you could, at least, conceptually speak about the positioning of the Dow Corning joint venture within Dow proper, the logic behind it, what your expectations might be if in fact you are able to execute on that.

Yes, 72-year JV. Despite the comments on execution with the Mets, we are not foreshadowing an easy execution play here in terms of the partnership being such a strong one. But the good news is both partners know the company inside out, as you might imagine having been on the Boards of this company for a long time. We know the company. Look, Frank, it's just down the road here in Midland, Michigan. These synergies are very unique and are available to one partner, i.e. Dow. And then, of course, there's more than that. There's the point you just made about market synergy. As we've rebuilt our portfolio these last many years, Dow Corning has become a much more logical fit on the market side, that wasn't true 10 years ago. Clearly, whether it's in the consumer sector, the infrastructure sector, there's electronic materials, building construction, home and personal care, we also see growth synergies on the market side. This will only happen if it's value accretive to both companies. The win-win-win of Olin, if we can construct it here, something might happen. We've been very public about JVs and bringing them on balance sheet or off balance sheet. The Kuwaiti announcement is obviously moving in the other direction. We anticipate that if something happens here, it will only happen because it's hugely value creating.

Maybe I can ask Frank's question in a different way. If there are no large M&A transactions that you plan, but there is something that you plan with Dow Corning, is it that we would rule out that Dow would buy the piece of Dow Corning, that it doesn't own because you don't plan to make large acquisitions, or is that not the right inference?

I want to clarify that there is no ambiguity in our two statements. There are no significant mergers and acquisitions aside from our joint venture activities. We have consistently communicated that our joint ventures are separate, and we will either consolidate or deconsolidate those. Some may view that as significant M&A, but we do not consider it that way because it pertains to a joint venture. I understand your concern, and while there could be a cash outlay involved, that would only occur if it significantly enhances value.

Is, in fact, your stock market goal to become a sustainable earnings growth story to replace the old Dow cyclical growth story? And if so, could you talk some about what remains to be done on your M&A and restructuring program? What might reasonably happen in the next, say, year-and-a-half?

So the three-year goals that we punched out today are very clear. We believe that the Kuwait joint venture and the way we're restructuring that will yield cash. For them, it will yield growth. So, it's a win-win-win. We believe that we have bolt-on M&A in our future but no big M&A, to Jeff's question, other than whatever we end up doing with Dow Corning. We believe that Sadara and U.S. Gulf Coast, which by the way Sadara is already sold out on first product, and we are pre-marketing as we speak on polyethylene. We're bringing those assets on at exactly the right time. The $3 billion EBITDA run rate from the US Gulf Coast assets and the $700 million net income boost steady-state run rate on Sadara is new cash flow. The way we should all think about the company is that it's going to be a cash flow machine these next several years. As you can already see, our cash flows are being boosted substantially. Any degree of monetization on ag of any sort, that just adds even further. This is all going to be returned to the shareholder. We're going to be a consistent dividend payer at a payout ratio of roughly 45%, and we're going to be a buyer of our shares, while our shares in our view are undervalued. The collective view is you generate cash, you spend that cash to grow organically. We have done that. We've got a lot of organic growth in our innovation pipeline, and we'll keep returning cash to our shareholders.

Andrew, nearer term, can you discuss polyethylene price expectations for Q4 volumes as well? And Performance Plastics, how do you view the business versus Q3 sequentially on an EBITDA basis?

I would say, look, when you think about polyethylene around the world, and I'd point you to the slide and some of the prepared comments. November price increases are in the market, positive sentiment is building. I think Andrew made some comments in some of his interviews earlier this morning about Dow and other producers in Europe closing their order book. So October order books for Dow have been closed for about two weeks and a few other producers as well. That tells you a couple of things. One, inventory through the chain is low and fundamental underlying demand in Europe is good. We've had really strong demand in Asia. I mean, at a company level, this is a company comment, not specific to polyethylene, we had 12% volume growth in China versus the same quarter a year ago, and our packaging business was north of 20%. You're seeing demand growth in Asia, you're seeing demand growth in Europe. The U.S. economy still is a bright spot. You've got unplanned events happening. There was a big issue in Brazil in the last week, so that just reinforces a point. Margins over the next several years should continue to move up, that is the expectation. Fundamental underlying demand will outstrip the additional supply growth, and that's our view.

A question on ag, just on near-term. On Slide 15, you talk about 3% to 5% down sequentially. So are you expecting ag to lose money again in fourth quarter, kind of a reversal from last year? And then more broadly, as you look to restructure ag or monetize your position, is DCP the model, where you might do a Reverse Morris Trust, and then distribute the shares in the combined entity to Dow shareholders so they can continue to participate in the growth of ag?

Why don't I take the first question, then I'll throw it to Andrew for the strategic. But when you think about ag, no, I don't think we're going to lose money in the fourth quarter. But it is soft. The market is soft, highly-competitive price environment. We're still dealing with significant currency headwinds. I mean, Brazil in the third quarter was a 50% drop versus a year ago. You've got economic issues in Brazil. Argentina is certainly where we potentially have a devaluation coming here in the fourth quarter after the elections, so we've got to get through that. My point would be in a down market we are winning. We're winning with our new molecules on the chemistry side. I highlighted earlier that we are now number two in Brazil corn. That's a new fact. We were number three, now we're number two. I think we are really seeing the pipeline start to come through the market on both the chemistry side and the biotech side. Andrew, do you want to go head with strategy?

Yes. And, Don, look, we're open to all constructs. That was a great construct with a win-win-win of Olin. So we're open to all constructs that release more value, and actually that value stays with the shareholders. It doesn't atrophy away in a tax disadvantage deal.

Two-part question on Performance Plastics, if I may. Obviously, a nice sequential bump-up in EBITDA. So the first question is that you mentioned in the press release that Europe, obviously, European margins were strong. How did North America fare? Was it sort of flat or down? Just trying to get a sense of how feedstock flexibility within North America sort of played a role in the quarter. So that's the first one. The second one is, as you look at 2016, there seems to be a pretty heavy turnaround schedule on the ethylene side of things globally. So do you expect to see effective utilization rates tighten materially from here, particularly through the first half of 2016?

Howard, why don't you take those?

I mean, certainly Europe margins were strong in the third quarter. North America came off a little bit, but not as much as everybody was expecting or the third-party pundits were pontificating. We've got North American operating rates in the industry are in the either the very high 80s or low-to-even mid-90s. The ACC data showed below 40 days of inventory. That tells us that fundamental underlying demand is there. We are taking advantage of that. If you project forward the next few years, we've added in on our slide all the new capacity. I think, frankly, we've been conservative. We added nine crackers on the Gulf Coast coming on between now and 2020. I don't think it's going to be nine, but we wanted to stress test it, and operating rates still go higher from here between now and 2020.

Why is the new executive leadership council separate from the Office of the Chairman/CEO? Could you talk a little bit about the shuffling you did there?

Look, I wouldn't over-read anything about team structures. Every company does its own thing. The most important part of the team announcement you saw today, John, is the team at the top. The top three of this company, Howard, Jim, and I, we're going to run the company. Howard and Jim have got significant responsibilities, new responsibilities. I'm very excited about that. It's a very strong team. Actually, we've had this team in place for a long time now, and they continue to show exceptional performance, as this quarter has shown. But the team that also reports to the CEO or the governance functions, some of the key functions that now report to Jim and Howard, we're going to pull that together as an executive leadership council that gets together and makes sure that we leverage every aspect of this company. Well, the three of us have everything. There was a term used at Dow for historians, from back in the 70s and early 80s, called a troika. I don't know whether that means anything to anyone, but you can call us that if you like. The three of us run the company in terms of the big decisions and the operational decisions.

Maybe you just gave at least one of them a headline.

Andrew, I'm curious, as you look about the JVs, and then maybe doing something with ag, historically, Dow has been pretty flexible. So is there an opportunity to maybe use earn-outs or other mechanisms, if you can't come to an agreement on current values for those assets? And then secondly, I'm guessing as we go through earnings season we're not going to find many companies that produce the numbers you showed in China, the numbers Howard talked about in the architectural paint markets in Europe. So can you give us some sense of were there some one-offs, was there some trade opportunities, arbitrages or what kind of confidence do you have that you can sustain those really pretty surprisingly strong volume trends?

I'll take the first one and give Howard the second. There is no question that the Dow AgroSciences property is at the top of that beta pyramid, low beta that you saw on one of the slides in the deck. We've nurtured it, grown it, cared for it, fed it in terms of R&D, and it's grown, and it now has a technology pipeline. Over many years, the Board has done extensive reviews, certainly no less than semiannually, and some big deep dives, where we spent days at a time to look at the ag market because it's been obvious for 15 years, 10 years ago, that another round of consolidation will come one day. Whenever it does, Dow should be able to answer the questions of releasing the value in the portfolio in the best available construct. Yes, all options are available to us, including the one you just spoke about. Howard, do you want to take the polyethylene thing and the China thing?

On the flexibility side, I would just say, Bob, we have had a track record of being flexible with our divestitures. You look at in just in the last 12 months, Angus and SBH were straight divests. You look at AgroFresh, which was a SPAC, I think we're the first Fortune 50 company to do that. I think at the time we announced $900 million of value for AgroFresh, embedded in that transaction was an earn-out. So that will bring future value, assuming AgroFresh delivers on its financial plan, which we're confident that they will. There is also a tax receivable agreement. When you add the value of the earn-out and the tax receivable agreement, that brings the AgroFresh value on an NPV back to Dow of north of $1 billion. The Olin RMT just shows that we're willing to look at everything. This management team has a very large focus on return on capital, and we've been increasing ROC between 100 basis points and 150 basis points a year. Our focus is any transaction we do, we want it to help in EVA momentum and ROC increase.

The China question? It simply plays to our portfolio. If you think about where China is, they've exited this heavy industry phase, and it really is all about light industry/consumer. Think about our materials, whether it's RO membranes in water, whether it's our elastomers, or whether it's our architectural paints, where 10 years ago you would sell very low-end paint to a developer looking to spray an entire building. Today, people in China, making the choice in their apartments or homes for 10 years are looking for technology. They are looking for things, whether it's our FORMASHIELD to take formaldehyde out of the air and trap it in the formulation or one-coat hiding. These are the kinds of products that we have, and you're starting to really see that through each of the three quarters of the year.

One comment first. I would stay away from the troika. I would suggest respectfully a triumvirate. Much better. That said, I was curious on the ag side, have you already started discussions with potential partners, other owners, or where are you on that timeline?

So Jonas, literally, since the Monsanto Syngenta conversations began in May, you could imagine that every player talks to everyone. On the previous call, I think it was the last quarter's earnings call, I basically said Dow will have a seat at the table. So, yes, we're all talking to everyone. There’s no imminent deal. I just want you to obviously listen to the questions that were asked a couple of times about, is this a good time, is this the right value, etc. All that is very key questions that we have to answer for our shareholders. But look, the answer is, everyone is talking to everyone.

I unfortunately have another follow-on question on the ag situation. It sounds like you're considering either a sale or keeping it internally. Are you also considering intermediate options such as a spin-off or a sub-IPO tracking stock, those types of things? Particularly in the event if the timing or the bid/ask spreads would suggest it might make sense to wait a little bit longer before complete monetization?

Thank you, Vincent, for allowing my shortest answer, yes.

If I could just follow-up on the price declines and crop chemistry vis-à-vis the inventory levels, how much of that do you think is just a function of weather-related demand issues? How much of it is a function of maybe in Brazil, the financing issues? And are you extending more credit to farmers or bartering or those types of things? How much of it is just sort of the dollar has made, maybe in the past made purchasing power and pricing power higher, and now that tide's gone out a bit? How do you sort of shuffle the deck between those buckets?

Yes, you've essentially answered the question. It is influenced by currency fluctuations and lower crop prices, which means that farmers leasing land in Brazil are struggling to turn a profit. When you factor in weather conditions along with these issues, it creates a very tough situation after three years of strong yields and high inventories.

Regarding your flame retardant technology, you're gaining some new license revenue there. I was wondering if you could just comment on where you see that technology going in the future. Do you think you can grow it outside of Europe?

I would say, yes, the medium- to long-term plan is that's going to be global technology. We're seeing nice licensing income. It plays right into our technology material science strength. That has been a nice tailwind for building and construction, and we see that continuing to expand over time.

What is the EBITDA associated with any global stake being sold? And also, could you comment on the magnitude of the equate stake sale as well, how does it compare in terms of proceeds and EBITDA?

So we don't look at it on an EBITDA basis. Do we, Howard?

I would say this, Phase 1. The beautiful thing, and why I would differentiate in terms of JV consolidation, deconsolidation, it's hidden EBITDA. Remember, because of equity accounting, you don't see the EBITDA of our joint ventures. You only see our percentage ownership of the net income after tax of the joint ventures in our EBITDA. When you look at Phase 1 that we announced today, you're talking about probably in the range of $30 million to $50 million of lost Dow EBITDA in exchange for the $1.5 billion of proceeds. It's a pretty nice EVA positive.

Thank you, everyone, for your questions. Andrew, did you have some closing remarks?

Yes, I do. We packed a lot into this call. We appreciate your questions. You've got our earnings release. You've also got our pathway for the next two or three years release as well. We have a company that's closing out one year early from its goals that we announced in 2013. Our divestment targets were exceeded. We are now in the position of talking about the next two or three years with great clarity, and that clarity has been provided on the call. This is a company that has delivered on its promises. There's no gap between what we've said and what we've done, and we intend to continue that. We're getting little to no help from a consistent economy. Witness all the questions on volatility. Look at the proof points of our portfolio performing in this economy, which we now have got quite a few quarters in a row. Those who worried about low oil, look at our results. Those who worried about China going away, look at our results. The results of the company and the consistency of performance enables us, as a Board, and management team to continue to deliver that growth in terms of earnings and cash flow. We are a strong cash flow machine, getting stronger back to you. There is no big M&A. We will consolidate JVs where it makes sense. There is no need to think about this company directing itself to anything in terms of big CapEx. We've got the big projects starting up. We have done this the last five years with your perseverance, and we are starting up some of the biggest industrial chemical complexes of all time, the one in Saudi Arabia, and of course, the big expansion on the US Gulf Coast. We're advantaged on the inputs and outputs. That's a structurally hedged portfolio that's very unique to this enterprise. We commit to you consistent return to shareholders, consistent return of that cash over these last five years. Last but not least, I am very proud of the team announcements we've made today. We have the team to drive this company for the next five to 10 years in place. It's a team that has consistently grown and delivered for you, the shareholder, and I'm very proud of that. Thank you.

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