Good day, and welcome to the Dow Third Quarter 2020 Earnings Call. Today's call is being recorded. I will now turn the call over to Colleen Kay, Vice President of Investor Relations. Please go ahead.

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. I am Colleen Kay, Investor Relations Vice President for Dow, and joining me on the call today are Jim Fitterling, Dow’s Chairman and Chief Executive Officer; and Howard Ungerleider, 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 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 in the Dow earnings release, in the slides that supplement our comments today, and on the Dow website. On Slide 2, you’ll see our agenda for the call. Jim will begin with the third quarter highlights and discuss the operating performance of the segments. Howard will share an update on our progress against the actions we’re taking to further enhance our financial strength and then provide our market outlook and modeling guidance. Jim will close with some remarks on Dow’s progress towards our sustainability targets and our competitive position for growth. Following that, we will take your questions. With that, I’ll turn the call over to Jim.

Thank you, Colleen, and thanks to everyone for joining us. On behalf of the Dow team, we hope that you and your families are healthy and safe. Starting on Slide 3, in the third quarter, the Dow team delivered strong operating cash flow in line with the year-ago period, despite lower earnings as a result of the pandemic. As the global economy began a gradual recovery, we captured demand growth from second quarter lows across all segments. Our polyethylene business achieved 3% volume growth year-over-year. And on a sequential basis, total company volume increased 9% with all businesses and regions achieving demand gains. We saw strength across furniture and bedding appliances, packaging, construction, and automotive end markets. These results enabled us to deliver revenue that exceeded our original guidance and a more than 700 basis point improvement in operating EBIT margin versus the prior quarter. Sequentially, every segment and business posted margin gains led by the polyurethanes business and the Packaging & Specialty Plastics segment. Dow generated solid cash flow, delivering $1.8 billion in cash flow from continuing operations. Free cash flow was $1.5 billion, up more than $150 million versus the same quarter last year, continuing our track record of improvement every quarter since spin on a year-over-year basis. Our cash flow conversion was 119% versus 96% in the same period last year. We returned $518 million to shareholders through our industry-leading dividend and continued to reduce net debt by approximately $1.1 billion in the quarter, down a total of more than $1.8 billion year-to-date. These results were underpinned by the early actions we took at the beginning of the pandemic, which enabled us to benefit from the start of the recovery. Last month, we announced details on our restructuring program, which will deliver $300 million in annual structural cost improvements. We finalized the sale of our North American rail assets in September and announced a second infrastructure divestment for select U.S Gulf Coast marine and terminal operations. Both actions are aligned with our best-owner mindset and are expected to deliver total cash proceeds of nearly $1 billion by year-end. We also enhanced our financial flexibility, increasing our cash and committed liquidity to greater than $13.5 billion and improving our liability profile with a $2 billion debt-neutral bond issuance. We now have no substantial long-term debt maturities due until the second half of 2024. And we are on target to deliver on our previously committed 2020 operational expense reduction of $500 million. Finally, we advanced our efforts in sustainability to create opportunities for growth, drive innovative solutions for our customers, and increase efficiencies throughout our operations. Dow's discipline and focus on capturing value from the unfolding recovery has positioned us to keep building on our strong performance, further enhancing our competitiveness and advancing our ambition. On Slide 4, I'll provide a review of our segment results. The improving economy, though uneven, allowed us to increase our operating rates across the enterprise, which are now approaching first quarter levels. Operating EBIT for the enterprise increased by $704 million sequentially. Volume in the Packaging & Specialty Plastics segment rose 1% year-over-year as plastic demand remained resilient, and our year-to-date polyethylene volumes exceeded the same period in 2019. While company net sales declined 10% versus the year-ago period, primarily driven by lower global energy prices, Packaging & Specialty Plastics segment price increases supported a 14% improvement in sales versus the prior quarter. Operating EBIT was $647 million, down from the year-ago period as targeted expense reductions and volume gains were more than offset by overall margin compression. However, on a sequential basis, the segment grew operating EBIT by $329 million and expanded operating EBIT margins by 630 basis points, driven by solid consumer and industrial sector rebounds. The Packaging & Specialty Plastics business captured strong year-over-year demand growth in flexible food and specialty packaging, infrastructure of consumer and transportation packaging, and health and hygiene applications. Compared to the prior quarter, the business delivered local price gains in all regions and double-digit gains in the United States, Canada, and Latin America. Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT was $104 million, down from the year-ago period due to weaker demand and margin compression. On a sequential basis, the segment grew operating EBIT by $324 million and expanded operating EBIT margins by more than 1,200 basis points driven by significant volume recovery in polyurethane applications as demand rose for durable goods and construction end markets. The polyurethanes and construction chemicals business reported a net sales decline year-over-year, despite benefiting from demand growth in furniture, bedding, and appliances. Compared to the prior quarter, the business delivered double-digit volume growth in nearly all regions with particular strength in consumer durables, construction, and automotive markets. As a result of rising demand, we increased operating rates by approximately 20% over the second quarter. The Industrial Solutions business reported lower net sales versus the year-ago period, driven by decreased local prices and volume. Sequentially, the business captured increased demand primarily from solvents and intermediate as industrial markets began to recover. And finally, the Performance Materials & Coatings segment reported operating EBIT of $75 million, down year-over-year primarily driven by margin compression in merchant siloxanes and reduced demand due to the pandemic. However, sequentially, the segment grew operating EBIT by $48 million and expanded margins by 220 basis points, led by demand recovery in formulated silicones products and coatings. The Consumer Solutions business reported a decrease in net sales versus the year-ago period. Continued resilient demand in home care applications was more than offset by weaker demand year-over-year in automotive, construction, and high-end personal care as a result of the pandemic. Compared to the prior quarter, the business delivered volume gains as industrial manufacturing activity, high-rise building projects, and mobility and transportation began to improve. The Coatings & Performance Monomers business achieved volume growth in all regions except the United States and Canada, which were flat versus the year-ago period. Demand increased in architectural coatings as residential construction market dynamics strengthened and consumers continued do-it-yourself projects. As a result, the business captured sequential double-digit gains in nearly all regions. Turning to Slide 5, our feedstock flexibility was again a key enabler of margin expansion, contributing to sequential operating EBIT margin improvement in the quarter. Feedstock costs were higher than anticipated entering the quarter. However, our flexibility and agility to optimize feeds in real-time asset-by-asset and furnace-by-furnace allowed us to capitalize on our cost curve advantage and drive incremental margins. We purposely built this capability, both people and assets around the world over many decades to take advantage of raw material and co-product market dynamics. On the U.S Gulf Coast, ethane and propane have been the cost advantage feeds for more than 90% of the time over the past decade. Dow's leading ethane and propane flex capabilities and our ability to reduce an asset's zero have given us a competitive advantage. This is especially true in these volatile derivative markets, which have constrained operators who are more reliant on NAFTA. Altogether, this will continue to drive substantial value for Dow not just in North America, but also in Europe where Dow's LPG range is four times greater than the industry. And these advantages extend to Dow sites in Argentina, Canada, and then our joint ventures in Asia Pacific and the Middle East, where we have optimized mixed feed cracker capabilities. Dow's feedstock flexibility advantage is reflected in the strength of our margins as showcased in our annual benchmarking results. And with that, let me hand it over to Howard for more color on our financial results.

Thanks, Jim, and good morning, everyone. Moving to Slide 6. Through 2020, we have continued to improve our liquidity and liability profiles, execute against our unique cash levers and strengthen our competitive cost structure. Our discipline delivered a cash flow conversion of 117% on a trailing 12-month basis, which is more than doubled since spin. This cash generation has further strengthened our financial profile. We increased total cash and available committed liquidity by $1.5 billion at quarter-end to more than $13.5 billion, representing a 28% increase over the end of 2019. Over the same period, we also reduced net debt by $1.8 billion with an in-quarter reduction of $1.1 billion. As Jim mentioned, we also continued to prudently manage our liability profile as well. We extended our next substantive debt maturity out by another year now to mid-2024 with a debt-neutral bond issuance in the quarter. This disciplined approach to prioritizing cash has enabled us to continue to improve our balance sheet, even through the pandemic, something that has been a challenge for many in our industry. In fact, our best-in-class free cash flow yield and conversion rate have driven a further reduction in our net debt to cap ratio since the year-end 2019, reflecting our improved leverage and positioning us well for the recovery. We also continued to advance our unique Dow cash levers, which are set to deliver over $1.5 billion in discreet cash tailwinds for the year. Entering the third quarter, we had already delivered more than $700 million in cash. We were able to close our rail infrastructure assets sale three months earlier than originally planned, resulting in a cash proceeds of more than $300 million. And we announced plans to divest select marine and terminal infrastructure assets. The targeted close for this transaction is early December with more than $600 million in cash proceeds expected. These transactions strategically targeted non-product producing assets and demonstrate our best owner mindset and culture of benchmarking, while locking in long-term cost advantage access to these services. Early in the year, we took additional actions to further streamline our cost structure and boost our competitiveness in response to the COVID-19 pandemic. Last quarter, we increased our 2020 operating expense reduction target to $500 million and we are on track, having delivered approximately 60% year-to-date. And our focus on releasing cash from our balance sheet has resulted in a decrease of more than $700 million in working capital over the last 12 months. This has been aided by our structure of working capital interventions, which contributed to the $137 million release of cash for the quarter, even with sequentially higher sales. We will continue to target additional structural working capital improvements going forward. We also finalized our restructuring program in the quarter, recording a $575 million charge comprised of severance, exit and disposal activities, and asset write-downs. With a two-year payback period, the program is expected to deliver total annualized EBITDA savings of more than $300 million achieving a run rate of 50% by mid-2021 and substantially complete by the end of 2021. The asset shutdowns target primarily small-scale production facilities as we continue to balance supply to regional needs and will not impact our ability to meet customer demand. Altogether, our actions are producing increased financial flexibility and enhancing our competitiveness as the economic recovery gains momentum. Now moving to Sadara on Slide 7. Consistent with the growth captured in our core packaging and polyurethane businesses from the ongoing economic recovery, Sadara is also benefiting from end market resilience and market supply tightness. As a result, the JV's financial and operational performance continues to improve, with an equity earnings uplift of approximately $100 million year-over-year. Dow's expected contribution for 2020 has now been reduced by 20% to no more than $400 million. In addition, the structural changes that will be implemented to enhance Sadara's long-term feedstock flexibility through additional ethane and an extension of natural gasoline lean allocation will improve its position on the global cost curve. Dow, Saudi Aramco and Sadara continue to make good progress toward debt reprofiling with the lenders. We remain on target to have an agreement to reprofile Sadara's project financing debt by year-end. Turning to our market outlook on Slide 8. In the first half of the year, we took aggressive action in response to the pandemic to reduce production to match demand, well ahead of the industry. The economic recovery has generally progressed as we expected. However, the pace in the third quarter, particularly in durable good end markets was faster than anticipated. In response, we quickly increased operating rates by double digits across the enterprise from the June low. This deliberate approach has enabled us to build cash and reduce net debt. Going forward, Dow is positioned to capture a significant upside as the economic recovery strengthens. Indicators are signaling stabilization in key markets and geographies. PMI, for example, has increased across China, EMEA and the US and the US housing market is up 20% year-on-year. The underlying demand trends combined with continued low inventories are leading to tight market conditions, which presents additional opportunity for our portfolio to ramp our operating rates higher. Turning to our modeling guidance on Slide 9. Moving to the fourth quarter, we expect the economic recovery will continue to improve, driving sequentially higher business results, but tempered by typical seasonality, which has historically been anywhere from a 3% to 5% sequential impact on sales and a 5% to 10% impact on EBIT. For modeling purposes, we suggest using the midpoint of those ranges. And as the quarter progresses, if things materially change, we'll be sure to provide an update. We see total sales in the range of $9.5 billion to $9.8 billion. The strength we saw in the third quarter in key value chains like polyethylene and isocyanates is expected to continue as durable good end market demand further rebounds and packaging demand continues to be resilient. As usual, we're highlighting the key EBIT drivers in the quarter on a sequential basis. In the Packaging & Specialty Plastics segment, we expect robust consumer-driven purchasing behaviors to continue for our packaging applications. And with industry inventory levels at five-year lows, we see support for the recently nominated October price increase. In the Industrial Intermediates & Infrastructure segment, continuing demand recovery in the automotive, construction, and furniture and bedding markets should continue to support price increases in the fourth quarter with some offsetting seasonality. And finally, in the Performance Materials & Coating segment, as usual, normal seasonality in the Northern hemisphere will be a headwind for coatings in the quarter. However, orders in automotive, electronics, and construction end markets should provide demand gains for our differentiated silicone offerings. We do expect $100 million higher turnaround spend sequentially as we had a delay from the third quarter due to the hurricanes on the US Gulf Coast. However, we are still on track to lower our turnaround costs by $100 million for the full year versus 2019 and deliver our $500 million expense savings as well. I'd like to emphasize that this near-term guidance is based on our assumptions for a continued yet uneven recovery. We expect to rebound off of first half lows that benefited our third-quarter results to continue, growing at a moderate pace from the fourth quarter, absent any significant second wave pandemic impacts. We remain confident that the decisive actions Dow has taken this year will continue to differentiate us in that environment. With that, I'll turn it back to Jim.

Thank you, Howard. Please turn to Slide 10. In addition to our strong financial performance throughout this turbulent year, Dow also launched breakthrough sustainability targets earlier this year, focused on reducing our carbon footprint and addressing plastic waste. Sustainability is not a new concept to Dow. In fact, for decades, it has been a defining factor in how we make decisions, run our operations, and innovate new products. These new targets reflect our longstanding commitment to apply our material science expertise to address the world's most pressing issues. We announced our intention to reduce Dow's net annual carbon emissions by 15% by 2030, and achieve carbon neutrality by 2050. New enabling process technologies will bring carbon efficiencies to our operations and provide higher earnings such as our FCDH technology being scaled up at our cracker in Plaquemine, Louisiana, as well as increasing Dow's renewable energy purchases at very competitive costs across the United States and Latin America and accelerating technology to electrify ethylene steam crackers. We also continuously innovate new products and solutions to help our customers meet their sustainability commitments and lower their carbon emissions. For example, our SunSpheres bio SPF booster and MaizeCare style polymers are products that meet our customer's requirements for more sustainable personal care solutions. Secondly, we announced several actions to further our leadership role in driving a more circular economy. By 2030, Dow will help stop the waste by enabling 1 million metric tons of plastics to be collected, reused, or recycled through direct actions and partnerships. For example, our work with partners around the globe to construct the infrastructure, like polymer modified asphalt roads and to make products with post-consumer recycled plastic. And by 2035, we will close the loop enabling 100% of Dow products sold into packaging applications to be reusable or recyclable. We are developing circular economy solutions such as investing in advanced recycling and offering recycled plastics with our recycle ready technology as part of our product portfolio. We are already seeing the benefits of our actions as the market adoptions for these new solutions continue to grow and enabled us to drive lower costs and higher sales throughout our businesses. Sustainability will continue to be a critical driver of long-term value for Dow and our shareholders. In closing, on Slide 11, our strengthened financial flexibility, disciplined focus on cash, and the actions we have taken to reduce structural costs position us well to continue delivering value for Dow and our shareholders. Most of our markets have already seen significant improvement. And as the recovery broadens, we will begin to see higher margins as differentiated parts of our portfolio returned to more normalized growth. Our functional polymers, polyurethane systems, and silicones businesses as highlighted in our annual benchmarking deliver premium margins and represent significant EBITDA and margin uplift as social and workplace activities resume and durable goods demand continues to increase. In the meantime, we remain focused on strengthening our financial position, unlocking additional cash upside, and successfully reprofiling Sadara's debt. This financial flexibility will further enhance our competitiveness as we move forward, affording us an ability to seize the right opportunities for growth. We're also advancing Dow's commitment to ESG as we pursue our long-term ambition to become the most innovative, customer-centric, inclusive, and sustainable material science company in the world. Driving long-term growth as consumer demand rises for innovative, more sustainable solutions. These actions are underpinned by a unique consumer-focused portfolio that has broad geographic product and market reach, as well as industry-leading feedstock flexibility combined with our focus on low capital intensity investments, digitalization, and innovation. We will continue to drive superior performance relative to our peers. Now I'll turn it back to Colleen to set up the Q&A.

Thank you, Jim. Now let's move on to your questions.

Thank you. Our first question will come from David Begleiter with Deutsche Bank.

Good morning. Jim and Howard, in terms of your capital allocation as your strength has improved, especially with the debt refinancing, you have a lot of free cash over the next 2, 3 years. How do you expect to use that cash? Which could be buybacks, could be some bolt-on M&As, could be investment in the business organically. Thank you.

Good morning, David. Thanks for the question. Obviously, we've done a great job managing cash and delivering cash from the machine. As you say, we've paid down about $2 billion of debt this year. So as we look at next year and in the next couple of years, we're working on scenarios where we could be able to, with discipline, increase that CapEx from the $1.25 billion that we have this year. Most of that $1.25 billion is going to safely and reliably operate the plants today and growth capital in downstream businesses like our Industrial Solutions business, polyurethane systems, and formulated silicones businesses. As we free up a little bit more CapEx, it's going to go into quick payback projects, especially anything that hits reliability and really improves things like cracker reliability come to the bottom line pretty quickly. So you should see that. And then once we get back above COVID demand growth levels, we'll start to look at more downstream CapEx investment. I would say we'll open it up gradually and we'll ramp it as we see the demand improve. As far as M&A, I would think any bolt-on M&A would be relatively small. I don't know, Howard, if you want to comment on that.

Yes, there won’t be any major mergers and acquisitions. In addition to maintaining our strong dividend, we also plan to continue reducing our debt. We haven't set a specific target for next year yet, but as you mentioned, we're currently ahead of our goals for this year. We'll likely establish a target during our next earnings call, which will probably be in the range of $500 million to $1 billion based on our current outlook.

Next, we will go to Jonas Oxgaard with Bernstein.

Good morning, guys.

Hi, Jonas.

I have a two-part question on Sadara. I’m looking at the closures you had, and you're talking about $400 million cash in. If I'm looking at the combined EBITDA, even if I assume Q4 is the same as Q3, it's only about $160 million with $250 million of interest and your debt is not going down. So my first part of the question is where has all that cash gone? Is that to do the changes in the plant that you're talking about? And then the second part of the question is how should I think about 2021 here then? You're talking about cash sustainable cash flows, which I'm assuming means zero cash-in from Dow. How do you plan to get there? That seems to require a pretty significant increase in EBITDA for '21.

Yes, Jonas, I'm going to let Howard unpack it. But just remember the cash that's going into Sadara is our portion of the principal repayments on the project financing, which is why the debt reprofiling by the end of the year is a big target for us. So, Howard, why don’t you unpack like the EBITDA recon and also progress on how we're doing on debt reprofiling.

Yes, Jonas, good morning. Let me start with Sadara's operational performance. Their third-quarter numbers showed a $100 million improvement in equity earnings compared to the same quarter last year, along with sequential improvement. They are currently on track to perform better in 2020 than in 2019, which is not something many in our industry can claim. Their operational performance is strong, with cost reductions and benefits from the increase in demand in the durable goods sector of the urethane chain, along with steady demand in our packaging business. Regarding the financials, project financing means they have around $1 billion in principal due each year, and this money is being directed towards paying down that principal. We're focused on reprofiling, and we've made significant progress with the export credit agencies in the syndicate during the third quarter. We are now engaging with commercial lenders and investors, and we expect to finalize a deal by the end of the year. We're optimistic about this. Our goal is for Sadara to achieve cash flow self-sufficiency by January 1, and we're on track to achieve that. There is still work to be done, but we are making progress. The teams from Saudi Aramco, Sadara, and Dow treasury are collaborating effectively with the lenders in the syndicate. More updates will follow, but the progress so far has been promising.

Next, we will move on to Vincent Andrews with Morgan Stanley.

Thanks and good morning, everyone. Building on your comments about the strength in polyethylene markets and your expectations for pricing in October, could you help us understand how you see the rest of the quarter developing? Typically, in November and December, we often observe some price declines. Do you anticipate that there will be price declines, or do you believe the demand strength you're experiencing is strong enough to keep those declines minimal despite the significant Chinese capacity coming online? Additionally, what is your outlook for ethane with the new crackers starting up and others restarting after the hurricane outages? Thanks.

Good morning, Vincent. Good question. Let me start with the first part and then address ethane. One reason for our improved performance in the third quarter was that demand remained stronger for a longer period than we anticipated, and inventories were lower than expected. We also experienced higher operating rates at Dow and across the industry. Additionally, there was a significant amount of capacity offline at the end of the third quarter. I expect demand to continue to be strong. It has been consistently stronger year-over-year throughout the year, even during the second quarter, which experienced a sharp downturn. This positive trend is encouraging for pricing in the upcoming quarter. I anticipate that our average price will likely increase slightly. It started low and ended around $0.12 through the third quarter. I believe we will maintain that level and possibly see a slight increase on average for the quarter. On the topic of ethane, there has been much speculation regarding its future. I see natural gas prices stabilizing around current levels, potentially rising to about $3.50 over the winter, but I don't expect a significant spike. Regarding ethane, it's important to note that as frac spreads improve, more ethane enters the market. In June and July, frac spreads reached $1.50 per million BTU, which allowed 300,000 barrels per day of ethane to flow into the market. Therefore, I expect frac spreads to rise slightly, and we may see ethane prices increase by a few cents in the fourth quarter from recent levels. As these frac spreads go up, additional capacity will likely be introduced into the market.

And next we will move on to Jeff Zekauskas with JPMorgan.

Thank you very much. In your geographic breakdown of growth, the results were different from my expectations. In the U.S. and Canada, your volumes declined by 9%, while in Europe, they increased by 4%, and Asia remained flat. I would have anticipated stronger performance in Asia, weaker results in Europe, and possibly stronger figures in the U.S. Could you discuss these overall trends and whether you foresee them continuing? Additionally, for Howard, accrued and other liabilities rose from $2.7 billion to $3.4 billion this quarter. What is a typical figure for accrued and other liabilities for Dow on a sequential basis?

Good morning, Jeff. I'll take the geographic question and I'll let Howard talk about the liabilities. I would say the recovery is probably more market-driven globally than it is geographically driven. We've seen similar patterns in all the geographies on what's coming back in the market. So food and specialty packaging, industrial packaging, we've seen a big tick up in construction. We saw durable goods, electronics all up, appliances up, and we saw that across all the markets. We saw automotive make a big comeback. I would say, what you get into region by region would just be differences that you might see in a region. For example, siloxanes was a bit slow in the third quarter in Asia and we have a pretty sizable footprint there. And then polyurethanes, obviously, is a big footprint in Europe. While it ticked up globally, we still have some room there to grow. I wouldn't read much into it from a geographic standpoint; I think the markets are continuing to improve. I think Latin America probably made one of the stronger snapbacks that we saw, especially Brazil, in the third quarter. So we'll keep an eye on that, but it's really more market-driven. And, Howard, do you want to touch liabilities?

Yes, Jeff, great question. I'm impressed with your diligence in the back of our press release. Look, I would say that the $3.4 billion number has definitely increased. The biggest driver is the restructuring, right? So we announced this. We announced the restructuring of 6% of our labor costs. So we accrued in the quarter for all of the charges, and that obviously comes into the accrued and current liabilities. The other item is with the higher performance, there is a slight increase in the performance comp expectation. That's an annual bonus program. We'll see how the fourth quarter turns out, but those are the two big drivers of the increase. So that $3.4 billion number will move around. But as you get through 2022 and 2023, it'll come down by about a $300 million, which was the biggest chunk of the step change because of the accrual.

We will move on to Frank Mitsch with Fermium Research.

Good morning, folks. An impressive quarter. And it came in 18%, 19% higher than the guidance that you offered in the middle of September. So, obviously you ended the quarter on a tear. Can you talk a bit more about how that surprised you? And here we are three weeks into the fourth quarter, how sustainable is that higher level of performance?

Yes. Good morning, Frank. Thanks for the question. A few things changed. We had expected to have turnarounds in the third quarter, and because of the hurricanes turnarounds came in lower by $50 million in the quarter. Now some of that slides into the fourth quarter, because we had to take the plants down. We also had about $200 million of improved polyethylene and isocyanates pricing strength between when we guided and the end of the quarter. So I think those are the two big things. The other thing I would say, and just credit to team Dow, fantastic job of blocking and tackling price volume management and running the assets. We moved quickly in the second quarter to take operating rates down to match demand and manage cash and liquidity and we did that really well. We then brought them up quickly, as we saw in the third quarter that things were improving. I think we capitalized on both ends of that curve. We were also a little bit lucky, we have to say that, that we did not get a direct hit from the hurricane. We were able to navigate through that and get the plants back online relatively quickly. Those would be the big moving parts.

Next, we have Bob Koort with Goldman Sachs.

Thanks very much. Jim, I'm wondering with such volatility in regional margin pads for the polyethylene business over the last year. Do you see ramifications sort of broadly on future expansions? Do you think this is going to chill some ambitions globally, or can you give us some perspective on how you see this next wave of polyethylene that might come into the market over the next couple of years?

Yes, good morning, Bob. Good question. I think it has chilled some substantially, and I think it will continue to chill some more. And on top of what you talked about on demand, you've got to remember there's a lot of pressure on the industry right now to be able to get carbon reductions and get CO2 emissions down. So as you continue to bring on new capacity, people are going to look at that new capacity and they're going to look at your carbon footprint and try to determine what are you doing to your total carbon footprint. That's one of the reasons that we're working on about four technologies in the process technology side, in the ethylene production and propylene production area that are all geared towards being able to build future plants that could potentially be zero-carbon crackers. Also being able to retrofit existing plants where it might be able to get a 20% to 40% reduction in CO2 footprint. We're doing that for ourselves, but we think that could be a revenue licensing stream for us going forward. So I would stay tuned, but I think you're starting to see people pull back a little bit on projects, and that's why we pivoted pretty quickly to manage cash and liquidity through this so that when we get through the pandemic, we come out with a strong balance sheet and we have the capability and the flexibility that we need to not only grow, but to do it in a way that helps bring that carbon footprint down.

John Roberts with UBS will have our next question.

Thank you. Two of the contributors to polyethylene strength I think were low channel inventory going into the recession and a temporary switch away from recycled plastic towards virgin. Have inventories normalized in the channel? And are you seeing any signs of a move back towards recycled?

I would say inventories at the end of the third quarter continued to be low. In fact, they probably went down at the end of the quarter from where we started at the end of the second quarter. So I don't see any change there. And on virgin plastics, John, I think today with recycle rates and we see this as well when people are looking to recycle plastics back into new materials, it's requiring virgin materials to blend with that capability. So I don't think recycling necessarily displaces all the virgin material. I think you still need plenty of virgin materials to make the quality that you need for that end spec. I think that'll change over time, but that isn't going to be an impact over the next couple of years.

And up next we'll hear from P.J. Juvekar with Citi.

Yes, hi, good morning, Jim and Howard.

Good morning, P.J.

I have a quick question about siloxanes. The market seems weak due to excess supply in that area. How quickly can you integrate your merchant siloxanes into downstream silicones, and would that lead to overcapacity in silicones? Additionally, you've mentioned a best owner mindset and made some divestitures. Will Sadara be a long-term asset for you after your bank agreements? Thank you.

Yes, P.J. on the siloxanes question, I think the real issue is just addressing the merchant siloxanes capacity. We've done some things obviously to take some of that capacity idle, and that was part of the third quarter charge that we put in there. So we're going to idle a little bit of capacity in siloxanes. For downstream silicones, a very diverse markets. I think we can continue to invest in downstream silicones, formulated silicones investments and continue to chew up that merchant siloxanes business without getting into an oversupply situation. We see it in automotive. We see it in construction, all very strong. It goes into appliances. It goes into all kinds of food packaging and specialty packaging. So I think you're going to see there are plenty of growth areas for the downstream of siloxanes and silicones without really overpowering that. And as for Sadara, first things first. Our goal here is to get Sadara refinanced and get that $500 million a year off, so a $500 million cash improvement every year for Dow. Then when we get past that, we'll start to have a look at long-term what we think can happen. Sadara is improving. You can see it in the rates of the third quarter, and we're not at cycle averages yet in terms of EBITDA growth. This is what Sadara can do at some pretty low levels. We've probably got another 20% up before we get to cycle averages on EBITDA. We'll take that into account and look through the cycle and what the outlook is before we get into any discussions about that.

Next, we will move to Steve Byrne with Bank of America.

Yes, good morning. I wanted to drill in a little more on this $300 million cost savings initiative. How much of that would you say is actual headcount reduction versus workforce costs, like T&E and another bucket could be the asset rationalization? And what do you think the net benefit could be in 2021 in COGS and SG&A?

Howard, do you want to take that and kind of unpack what the costs are?

Yes, look, I would say from a hard dollar savings standpoint, you should expect about $150 million to drop to the bottom line in 2021. And then the balance of the $300 million, another $150 million in 2022. It includes a 6% reduction in our workforce costs. So that doesn't mean a 6% headcount. I mean, obviously, we're trying hard to trim the high end of the pyramid. Obviously, we're also looking at streamlining. When you think about it from a segment level perspective, it's a little bit more than a third in P&SP, and then the balance split between Industrial Intermediates & Performance Materials and Chemicals.

And we'll move on to Lawrence Alexander with Jefferies.

Good morning. I have a question about the costs or burdens from your ESG initiatives or the direction you're going. I guess, could you touch on your current thinking about the CapEx or return on capital on recycling versus virgin plastic? And for the carbon-neutral targets, how disruptive would it be for Dow to pull forward that target by 10 or 15 years if that's the direction the political winds end up blowing?

Yes, good morning, Lawrence. Let me talk a little bit about the carbon side. Clearly, the source of carbon emissions comes from the generation of power, burning natural gas and burning natural gas in the furnaces, in the cracker. On energy, alternative energy, we have a target to create to contract as much as 750 megawatts of alternative energy, wind and solar. Most of that is competitive or less expensive than what we produce today. So that has a net value add to it. Obviously, we can do everything. There becomes a limit on what I can do with wind and solar because I need 24/7 available dispatchable power and I need steam. As we look at the future growth, we're looking at cracking and process technology around FCDH, which is a way to make propylene out of propane and do it with about a 20% lower carbon emissions. That, I think, can be equal to or better than a return on capital than what we typically approve in our projects. We're also working on, and these are all smaller dollar right now, pilot scale activities. We're also working on that same technology for ethane to ethylene. It's obviously a little bit tougher to make that happen. That could be as much as a 40% reduction in CO2 footprint. Obviously, pulling things forward will depend on those technologies proving themselves and then looking at the total capital that we have to spend over time to make that happen. As you know, some of these assets are very profitable, so you want to have a game plan for how you do this over time. I would say the other area that we've got to be sensitive to is that on the recycling side is recycling is going to need public policy as well as recycling targets to make things happen. One of the reasons it doesn't happen today is because it's more expensive to recycle than it is to make virgin material. One of the things we're working on around the world, Europe, United States, as well as what the policy need to look like. In a linear economy, the cheapest thing to do is for your plastic waste to go to a landfill. Obviously, if we stay in a linear economy, we run the risk that there's more plastic waste that ends up in places like the ocean. If we want to close that, we've got to create the right incentives to close that loop and bring it back. That includes technology to do it today. More than 80% of what we make today can be completely recycled, but it isn't. That really has to do with local policies and costs, and we've got to tackle that issue.

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

Good morning. This is Kieran on for Chris.

Good morning, Kieran.

I was just wondering about the demand for polyurethane. Demand for polyurethane has clearly improved substantially this quarter. I know it's a little early, but can you discuss any preliminary demand trends you're seeing in the fourth quarter and maybe how you view the demand levels in 2021 compared to 2019? That would be helpful. Thank you.

We saw double-digit volume growth quarter-over-quarter, and it was primarily driven by consumer durables, appliances, construction, and automotive end markets. They're up, although some of them are still below last year's levels. Automotive, for example, is up, but it's still below 2019 levels. I think it's going to continue. Appliances are still very, very strong, and there's a lot of backlog on appliances. The supply chains after what we went through in the second quarter and into the third quarter, the supply chains are tight in some areas. You're seeing a lot of backlogs and we're catching up with that demand. I think it's going to continue through the fourth quarter for sure. We'll keep an eye on how it goes beyond that. China, I would say already in almost all markets has returned to pre-COVID levels. We may actually start to see overall growth in China, which would be good. Some markets in the rest of the world, like appliances, like packaging are at pre-COVID levels, but not all. In automotive, it's still shallow to pre-COVID levels and probably will be for a couple of years, I expect.

And we will move on to Kevin McCarthy with Vertical Research Partners.

Good morning. Jim, just to continue the dialogue on polyurethanes, I was curious to hear your thoughts on the supply side. We've seen a number of force majeure declarations. Can you speak to where you think inventory levels are in MDI and Polyols as well as operating rates and prospective pricing outlook in the chain?

Yes. Good morning, Kevin. Things are tight as a drum right now on MDI and propylene oxide. I'd say Polyols maybe a little bit better, but propylene oxide is pretty tight right now. I think that's going to continue. When you have an upset in isocyanates operation, you want to get it back as soon as you can, but it sometimes takes a while to get back up and get lined out. I think things are going to be tied to the fourth quarter. Could extend into the first quarter. We are managing. We are working closely with customers to try to keep them running and try to keep enough allocation to everybody so that we can support them through. But it's a lot of heavy lifting by the team right now.

And we will move on to Arun Viswanathan with RBC Capital Markets.

Good morning. Thanks for taking my question. I guess, I just wanted to get your thoughts similar type of question, but there's been some chatter of potential restocking in certain end markets, maybe the first half of '21. I guess, would you agree with that? I'm just curious, just because it seems like some of your markets you're back to normal levels, maybe in construction and so on. You mentioned China is kind of back there, but maybe if you can touch on automotive and construction in some of these areas, do you expect more restocking in the first half of next year, or are we kind of back at normal levels?

Arun, I'm not sure I would characterize it as restocking or just getting back to target levels of supply. I think we've dipped in some of the supply chains below target inventory levels, and that's made them the supply chains less robust. On top of that, you've got global trade issues, which complicate some of the supply chains as well. I think people would like to get back to normal inventory levels. I'm not sure I would call that restocking or stocking up. I think just get back to a more resilient supply chain, because we're doing this today, and it's taking a toll on people. The second thing I would say is that coming out of COVID we're pivoting to more digital capabilities. One of the things that we're able to do with digital channels is have better line of sight to market demand and we're able to match operating rates to demand. You'll see a change in behavior in terms of how people operate; they're going to have much better visibility on the demand side and be able to titrate that. You won't see big swings up and down in inventories; you'll see things be more tightly managed, especially in a period of time like this where cash is king and you need to focus on cash and liquidity.

And we will move on to John McNulty with BMO Capital Markets.

Yes, thanks for taking my questions. So maybe a bit of a follow-up to what you were speaking to earlier. On the Packaging & Specialty Plastics area, when I look at the outlook that you guys have for 4Q versus 3Q, the flat to up 3% or so. I guess, to me, it seems like something is missing here, because the pricing looks like it should be solidly better than that. The demand environment, given low inventories, also sounds like it should be at least a modest improvement. So are there other puts and takes that we should be considering, or is it just a conservative outlook? I guess, how should we be thinking about that?

Yes, remember, I talked about the turnaround. So the turnarounds that were in the third quarter that got moved to the fourth quarter are going to hit packaging, especially plastics segment. They get most of that $100 million cost. You can add back, we had about a $50 million impact in the third quarter from hurricane Laura; you can add that back. So $100 million of turnaround costs, take $50 million off of that. So you’ve got that, which is weighing on it. We are also expecting ethane price to go up a couple of cents during the quarter. Those are the biggest moving parts.

And next we will move on to Jim Sheehan with Truist Securities.

Good morning. Just on your sustainability initiatives, what are the incremental costs of reducing the carbon emissions and collecting the 1 million tons of plastics for recycling by 2030? And on closing the loop, would that increase or decrease your mid-cycle EBITDA, and then roughly by how much?

Jim, I don’t know that I would characterize the carbon reductions as incremental costs. I think as you look forward, it will be reflected in where we decide to spend our capital spending and how we decide to improve those assets. We want to do this in a way that’s neutral or positive to the company's results. That’s why we’re focusing on process technology and catalysis as a way to do it. Those are the near-term improvements we're looking to make. Also, remember that we’ve older assets in the fleet. Some of those that are at the end of life, have some of the higher carbon intensity and carbon footprint. So what we decide to do with older assets can have a big impact as well. On closing the loop, it isn't like we are going to pay to close the loop in the marketplace. There's market demand for recycle materials, and so we’re working with partners to create innovative solutions to make that happen and we're working with the marketplace to get the capital markets involved. We're working with people like the recycling partnership, close loop partners, and we’re trying to come up with business models that, in and of themselves, are sustainable, and that will allow that plastic to come back in. In some cases, getting blended with virgin plastics to make the final end product.

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Colleen Kay for any additional or closing remarks.

Thank you, everyone, for joining our call today. We appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow’s website within 24 hours. This concludes our call. Have a great day.

So that will be the end of today's call. We thank you for your participation.