Please standby. We're about to begin. Good day, everyone. Welcome to Dow's Third Quarter 2021 Earnings Call. [Operator Instructions] Also, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Pankaj Gupta. Please go ahead, sir.

Good morning. Thank you for joining Dow's third quarter earnings call. This call is available via webcast and we have prepared slides to supplement our comments today. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. I am Pankaj Gupta, Dow Investor Relations Vice President. 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 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, excluding significant items. We will also refer to non-GAAP measures. A reconciliation of 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 will see our agenda for the call. Jim will begin by reviewing our third quarter highlights and operating segment performance, Howard will share our modeling guidance and outlook, and then Jim will recap our strategy for disciplined value growth that we outlined at our Investor Day earlier this month and why Dow continues to be a compelling investment opportunity. Following that, we will take your questions. Now, let me turn the call to Jim.

Thank you, Pankaj, and thanks, everyone, for joining us today. Starting on Slide 3. In the third quarter, Dow achieved top and bottom line growth, both year-over-year and sequentially. I'm incredibly proud of the Dow team for delivering these results and doing so safely, despite industry supply disruptions from hurricanes on the U.S. Gulf Coast. Our proactive storm preparations enabled us to maintain the safety of our team and community and recover quickly. We delivered a 53% sales increase year-over-year with double digit gains in every segment, business and region. We also recorded a 7% increase in sales over the prior quarter. We captured strong price momentum, driven by tight supply demand balances across our key value chain. And we achieved volume growth of 2%, both year-over-year and sequentially, supported by continued strong end-market demand despite supply and logistics constraints. We increased operating EBITDA by more than $2.1 billion year-over-year, with improvements in all segments and businesses and $58 million higher sequentially. Key contributors included year-over-year margin expansion of 1,170 basis points, driven by price momentum and demand growth, and increased equity earnings up $189 million from margin expansion at our Sadara and Kuwait joint ventures. Our continued focus on cash generation and our balanced disciplined capital allocation enabled us to deliver cash flow from operations of $2.7 billion, up $958 million year-over-year, driven by margin expansion from price momentum in key value chain. We returned a total of $918 million to shareholders through our industry-leading dividend of $518 million, plus $400 million in share repurchases, and we also reduced gross debt by more than $1.1 billion in the quarter. Our proactive liability management actions to tender existing notes have resulted in no long-term debt maturities due until 2026, and we've reduced annual interest expense by more than $60 million.…

Thank you, Jim, and good morning, everyone. Turning to Slide 5. In the fourth quarter, we see a continuation of robust demand growth across our packaging, infrastructure, consumer, and mobility end markets. Brand owner inventory levels remain low, and as a result, we anticipate higher seasonal demand continuing into the holiday season this year. In Packaging & Specialty Plastics, we continue to see resilient demand for packaging applications and for our differentiated functional polymers. Global polyethylene supply remains constrained as the industry completes higher turnaround activity and supply chains recover from weather events on the U.S. Gulf Coast. We exited the third quarter experiencing higher raw material and energy costs, which we anticipate will likely persist through the fourth quarter. We expect these costs to be at approximately $350 million headwind sequentially. Dow will continue to utilize our broad geographic footprint and best-in-class feedstock flexibility to help mitigate these impacts. We also anticipate $175 million tailwind from turnarounds in the quarter as we completed our planned maintenance at our cracker in Canada. In Industrial Intermediates & Infrastructure, continued consumer demand for furniture and bedding, appliances, pharma, and home care, are expected to keep supply tight in our key value chains. Due to the weather related outages in the third quarter, some of our planned turnaround activity was moved to the fourth quarter. Sadara will also start a turnaround at it's isocyanates facility in the fourth quarter as well. Altogether, we anticipate a $100 million in this segment from turnaround impacts. Short-term increased energy costs in the U.S. Gulf Coast and Europe are expected to be an additional $100 million headwind in the quarter. We continue to see sequential recovery in industrial activity, particularly for HOG applications. We anticipate this recovery will continue at least through the fourth quarter as industrial…

Thank you, Howard. Turning to Slide 9. The strategy we outlined at our Investor Day builds on our long history of industry leadership. Our plan enables us to capture demand from sustainability drivers, achieve 0 scope 1 and 2 carbon emissions, and deliver meaningful, underlying earnings, and cash flow growth for years to come. Our path to decarbonize our footprint and grow earnings is a phased, side-by-side approach that both retrofits and replaces end-of-life assets with low carbon emission facility, while also expanding our capacity. This plan will deliver a 30% reduction in our CO2 emissions between 2005 and 2030 through a disciplined approach that manages timing based on affordability, macro and regulatory drivers around the world. Our Texas 9 cracker proves that we can do this, and do it well, Texas 9 is 60% lower carbon intensity than any asset in our fleet. And that's without any specific design for carbon capture or hydrogen. The project was delivered with 20% better capital efficiency and 12 months faster than any other crackers built in that wave. Overall, the project has a 65% lower conversion cost, is running consistently at more than a 110% of nameplate capacity and has delivered greater than 15% return on invested capital since startup. We will leverage key learning from Texas 9 as we plan to build the world's first ever net 0 carbon emissions ethylene cracker and derivatives complex in Fort Saskatchewan, Alberta, delivering approximately $1 billion in EBITDA, as Howard outlined earlier. This project will more than triple our ethylene and downstream derivative capacity at the site while decarbonizing emissions for 20% of our global ethylene capacity. We selected this site due to the availability of carbon capture infrastructure, advantaged feedstocks, and supportive government policies and incentives. On Slide 10, as we capture leads…

Thank you, Jim. Now, let's move on to your questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.

Thank you, sir. [Operator Instructions] And we'll take our first question from Hassan Ahmed with Alembic Global.

Good morning, Jim. Jim, as I take a look at your guidance, sequentially, you seem to be guiding to a $500 million downtick in EBITDA. So $3.6 billion comes down to $3.1 billion. But just reading through the guidance, you don't break out the impact of IDA. So is it fair to assume that you guys are guiding to sort of north of $3.1 billion in EBITDA for Q4?

Thanks, Hassan. That's a great question. The impact -- the total impact of IDA was about $100 million and split third quarter, fourth quarter. So that's how you should look at that. Most of the rest of the guide was just impact on feedstock costs or raw material costs that we expect to see going into the fourth quarter. Having said that, I think demand is going to continue to be strong, and I expect our operating rates will be stronger than they were in the third quarter because of the impact of IDA. And I don't expect that we're going to have a chance to build much inventory, but our intent is to run hard through the end of the year because our customers need the demand and we need to get out in front of this a little bit.

Next, we'll go to Vincent Andrews with Morgan Stanley.

Thanks. Good morning, everyone. Maybe just a little more color within the Packaging & Specialty Plastics sales guidance and in particular, what you're expecting for volume sequentially? And then is there any sort of impact on the top line from feedstocks or hydrocarbons? You can obviously tell I'm trying to back out your polyethylene price assumptions.

Good morning Vince. I expect the volumes will be better. We had St. Charles, obviously, out in the month of September, and it came back here earlier in October. So I expect fourth quarter will have the strong run. And remember, we had the turnaround in the fourth that was happening in the third quarter as well, and we're out of that. So the fourth will be back. We'll see some additional ethylene out of the fourth because the back half of that expansion started up. And I think you'll see higher volumes for the year. We're looking at volume increases for plastics like 8%, 9% for the industry. I think for fourth quarter, we manage 2% in the quarter. In third quarter, I think for fourth quarter, it will be higher than that. I do expect prices will moderate at some point. I don't know exactly when that's going to be because right now, inventories are low, but I don't think it's going to fall as precipitously as some of the forecast estimate.

The next question will come from P.J. Juvekar with Citi.

Yes. Good morning, Jim and Howard. Can you talk about siloxane and downstream silicone demand? What's happening in siloxane merchant market? And how is this change impacted by raw materials? I think, Jim, you said silicone costs came up in China, so you shut down some -- shutdown a plant. Can you expand on that? And finally, what happens to the new siloxane capacity that was announced in China with these recent dual control policies? Thank you.

PJ, good question. I'm going to walk through several things. I would say in the near-term, the impact on silicon metal has been in China due to the restrictions from dual control. And as you know, that was driven by the higher coal prices, really pushing up the costs for the electricity producers. And the electricity producers are capped on their electricity prices, so some of them didn't run and that forced the industry curtailment. Typically, as you're going into cold weather months, industry takes the hit versus homeowners and consumers. You try to keep your people warm and so that hit silicon metals. For that reason, things became tight. We've moved some silicon metals from Brazil over to China to offset that. And we'll run through the fourth quarter book. We decided to pull a turnaround in Zhangjiagang into the fourth quarter. We had originally planned it for first quarter. We decided to do it now, that takes a little pressure off the dual control situation. That turnaround will cost us, I think on Slide 5, it's in there, $75 million in the fourth quarter. I expect we're going to see about $50 million higher cost. That's both downstream G3 silicones demand and siloxane demand are very strong. And so siloxane’s prices have gone up significantly. And so I think we're going to be in that situation for all of fourth quarter, and I would expect into first quarter as well.

All right. Next question will come from Jeff Zekauskas with JPMorgan.

Hi. Good morning. I have a two-part question. The first part has to do with your expansion in Alberta in the late decade. That seems to be your sole large ethylene polyethylene expansion. And by my calculation, what that means is that over the next 10 years or so, your capacity will expand 1% to 2% per year. And presumably the industry grows faster than that. And so, is this approach an example of your disciplined capital approach where you really only want to have high return projects? And what you'll do is you'll sacrifice volume growth in service of that higher return. Second part is for Howard. The net debt to EBITDA, you say, will go to 2 to 2.5 times. That makes a difference because if your EBITDA is $10 billion, that's a $5 billion difference. So was it 2 or 2.5times? And are you going to get there quickly? Or are you going to dawdle? Because if what you're going to do is lever up by another, I don't know, $9 billion or $10 billion to buy back stock or increase dividends, how quickly are you going to get there? Is it 2022 or '25 or somewhere in between? Thanks.

Good morning, Jeff. The first part of the Alberta expansion comes on in 2007. That brings on most of the new cracker capacity. The cracker will be expandable. And it also brings on the derivatives. And then we retrofit the existing cracker, so we can tie in the back-end into the auto thermal reformer and that will come on in 2009. So that will be the largest mega project that we do. We do have investments in the near-term on the bottleneck and existing assets that will help us between now and 2007. And we have the ethylene capacity to add some downstream capacity as well. So there will be a little bit more than 1% to 2% in growth. But our focus on Alberta is obviously to take advantage of the situation there, to decarbonize and have a good carbon capture location and take that whole site to net 0. Howard, do you want to get the net debt to EBITDA?

Yes. Sure. Good morning Jeff. Your point about disciplined balance on the capital allocation side, it goes to the debt as well. I mean, when you think about what we get in the third quarter, it was very balanced. It was more than $500 million in dividends. It was doing another $400 million of stock buyback, and then we took out $1.1 billion of debt. To your point on the 2 to 2.5 ratio, I would say, some of our peers have a 1% swing between their low and high. So we're already giving you a better than peer view with saying our range is only a half a turn. But if you'd like me to narrow that further, I would say use the midpoint. So our long-term average is 2 to 2.5. I would say through the economic cycle, if what you want to use 2.25, that's a reasonable proxy for where we want to be, but we have the corridor there to recognize that it's a long-term target. Punctually today, using the rating agency methodology through the end of the third quarter, we're probably around 2.4, 2.5. So we have about a quarter of a turn left to go to hit that midpoint of the 2 to 2.5.

Next question will come from the line of Bob Koort with Goldman Sachs.

Good morning. This is Mike actually, sitting in for Bob. Just wanted to give me a couple of comments about inventories still being tight. And I guess from a polyethylene perspective, could you perhaps maybe quantify what you're seeing in terms of days of inventory and how, perhaps, that may compare to what you would consider more normal?

Industry -- Mike, good morning. Industry inventory and DDI fell. Industry inventories September fell about 120 million pounds. And so days and inventory had dropped, demand is obviously strong. And export demand exceeded -- domestic and export exceeded the production. Obviously, storms had an impact on that as well. We saw inventory declines in high density and linear low. And a little bit of inventory build in low density, but it isn't a significant number. So when you look at the 5 year trends and I think what we put in the slide deck to show your earlier is that the order backlog is up about 30% above normal and the inventory to sales ratio is down about 10%. I think that's going to stay in that band for the most of the fourth quarter. And as the capacity comes back from the hurricanes, we have still supply and logistics issues, so they're bottlenecks everywhere, especially when it relates to marine pack cargo or export and as it relates to product being shipped by truck. It's a little hand-to-hand combat right now on the truck driver doesn't show up, shipment gets delayed. So I think we're going to be in that situation for the rest of the year and into the first quarter.

I'm just giving you some Dow numbers. Our DSI was down 7 days in the third quarter versus a year ago, and our overall cash conversion cycle was better by a day sequentially. So we're tightly managing our working capital.

Next, we'll go to David Begleiter with Deutsche Bank.

Thank you. Good morning. Jim, the consultants have a pretty sharp decline in ethylene chain margins through February. Do you agree with that or are they being a little too bearish given the tightness right now in the marketplace?

Good morning, David. I think, a little bit bearish, the way I would categorize it, I think they are underestimating the demand that's going to be there because there still is a significant inventory restock and continued strong demand that we see coming. And I think they are overestimating how much supply. I is coming in. And if I go back to the China situation, remember that about half of those CTO/MTO capacity is out of the money right now. 60% of all the new capacity coming on in the world is in Northeast Asia, which will still be a net importer for a long time, and it's all napma or higher cost base. And so I think those things are going to soften this. I do expect prices to moderate a bit, but I think we could see a pretty strong 2022 with higher volumes, yet slightly lower prices. Operating rates were always going to be in the high 80s to low 90s for the full year. So I don't see a change there. And remember that the U.S. structural advantage, the Canadian structural advantage, our position in Argentina, our position in the Middle East are still going to remain strong.

Thank you.

And next, we'll go to Frank Mitsch with Fermium Research.

Hey, good morning and nice results. You r data sequentially tick up your buybacks here to that 400 million level in the third quarter. How should investors think about the pace of buybacks in 4Q and 2022?

Howard, do you want to take them?

Yes. Thanks. Frank, good morning. So the guidance we gave for the fourth quarter is 745 million shares outstanding. So if you look at where we ended the third quarter or the average for the third quarter, that's about a 5 million share reduction, which would equate to another 400 million plus or minus on stock buybacks, so essentially keeping pace with the third quarter. With that said, look, we continue to be disciplined and balanced on the capital allocation and we will continue to be opportunistic. We're staying true to our 65% of our net income going back to shareholders. Long-term 45% of the earnings growth will and the net income will go in the form of dividends. And then we'll use stock buyback to top that up to 65%

All right. Next question, we'll go to John Roberts with UBS.

Thank you. We see all the container ships out in the harbors and all the containers stacked up on the docks and the warehouses are full with drivers waiting to take product to the final customers. Your earlier comment was about polyethylene producer inventories. Do you worry about contained product down stream where it would seem like there's a lot of inventory in the channel downstream of the converters.

Hey. Good morning John. Yeah it's -- the visibility is hard to track right now. I do think that some of the moves that the government made recently to get the big ports 24/7 operation is going to help the backlog. What happens is typically when those ports get backlog, it spills over into other ports. We don't use Long Beach as much, but when traffic spills over into other ports it hits us. I would say that almost every value chain has some impact from that, and where we see the biggest impact is being able -- it's kind of blocking material getting out. And so we're starting to see some congestion and some competing demand, product coming in. Sometimes it's faster to reload and empty containers to get it back to China, and so that competes with other materials going out. We don't see that in every quarter. But certainly on the west coast, we're seeing that right now. I would say almost every value chain we have, every application we have is short product. And I don't think there's enough material tied up in all of that floating inventory or in the warehouses that that is going to alleviate the demand, or fill the demand that's out there right now. I still think the consumer is strong and we've still got other economies that are coming back from COVID that are going to add to that demand.

Next, we'll go to Michael Sison with Wells Fargo.

Hey, guys, good morning. Nice quarter. Just curious, when you think about '22 and you tend to have that nice little market fundamentals for your three base segments. And just curious, any -- I know you think demand's strong, what -- any thoughts on natural gas pricing, feedstock costs, oil's going up. Just curious how you 're baking in those type of inflation numbers in that outlook?

So we're starting to see some improvement in production, drilling, and completion of wells. We're going to bring more NGOs as we move out of the winter season. I believe what we're seeing short-term here is a knock-on effect as coal really ratcheted much higher in China. The first fuel that you go to that could replace coal in the fuel grid is natural gas. And then LNG obviously went right up after coal. And then the next fuel is oil. And oil came right up. And so that could cost up to $80 a barrel. I think we're going to see things will stabilize a little bit as we go into winter. Inventories are a little light of the five-year average going into winter. But you've seen prices unwind a little bit in the forward market by about $1, a million BTU, because weather plays a significant factor. So if we have a warmer fall, that's going to take a little bit of sting out of natural gas prices. Even with them the oil to gas ratio, but more importantly, the oil to gas spreads are good. And so I think that's going to continue. And if we get through winter without a really, really cold snap then I think you're going to see prices to moderate. Long term or medium term, I would say 250 to 450, for U.S. production. And long term, about 275 a million BTU for natural gas.

And your next question will come from Duffy Fischer with Barclays.

Great. Thanks. Good morning. This is Mike Delay on for Duffy. Maybe two-part question for Howard. I guess one -- just a clarification in Jeff 's earlier question. Is that 2 to 2 and 1/2 debt target of gross debt to EBITDA metric net debt? Because if I heard your response correctly, it sounds like you still want to pay down slightly more debt from here. And second, if we say in this call 6 billion or so annualized operating cash flow range from the past, say 24 months or so, we roughly know what CapEx would be next year. And it seems like there should still be a decent amount of excess cash. I know you stress ed the balanced approach, but just how should we think about the priority of that excess cash, gets us the gold bar and your chart. But are buybacks supply real here? Thanks.

Yeah. On a 2 to 2.5 debt to EBITDA ratio, that's a rating agency adjusted net debt to EBITDA target. So that's over a long term. Typically the rating agencies will look at a few years back, current year, and then come up with a forward two-year forecast. So when we think about that 2 to 2.5 range or as I targeted the midpoint, in answering to Jeff's questions of 2.25, that's over a 5 to a 10 year period. So as I mentioned to Jeff, we're slightly -- we're at the higher end of that range today, so you will -- you should expect over the next several years, we'll continue to titrate that number down to the midpoint of 2.25. And depending on how things go, we might go to the lower end of that range, we'll see. In terms of the capital allocation priorities, we intend to continue what you've seen from us, which is disciplined and balanced approach. The number one priority for us is to safely reliably operate our plants. And then, the next is organic investments. So where we have low risk, high return, fast pay-back projects that helps us continue to get the through the cycle, average return on capital of the enterprise to 13% or more. We will do that. Dividends would be next. So as the net income increases, that dividend should increase in line with the 45% of net income over the cycle. And then share repurchases and we'll -- like I said earlier, we'll use share purchases to at least cover dilution, but then we will also be opportunistic and compare opportunistic share buyback to any other use of cash. And over the long run, our goal is to do the value maximizing thing.

Next, we'll go to John McNulty with BMO Capital Markets.

Hi, good morning, Jim. This is John. Question on your equity earnings from the GDs? It looks like each of your II&I and TNXP segments is on track to deliver around $0.5 billion of earnings. Now, quite a few unique regional dynamics and feedstock arrangements that play here but broadly, could you discuss where these businesses are in the cycle and perhaps any color on where you see the earnings of these businesses for the next year? Thanks

Yeah. Good question on II&I and Polyurethane, I do believe that the demand and the operating rates for isocyanates will continue to stay strong into next year. Maybe a little bit lower operating rates on polyols, but the key demand drivers and value drivers are going to be those systems and solutions that are going into things like mobility, like construction, like appliances, and some extent furniture and bedding and things that are driven by consumer growth. And that'll continue to remain strong. The only thing that we've got coming that would be a detractor from those earnings would be, we've got a turnaround in this quarter on isocyanates and Sadara. But that's been planned and they'll manage that. They've been running very well. I expect to see them in good shape next year. And as you know, their fixed costs are quite low. And so I think they will be a very good source for us to fulfill that demand.

Just one point on maybe on the cash flow side, on the equity earnings. If you recall that our dividends usually come from the prior year earnings. So with this year's equity earnings up, as you pointed out, then that will drive a cash flow tailwind for us next year, probably in the range of at least $200 to $300 million as we sit here today, possibly more.

And next we'll go to Laurence Alexander with Jefferies.

Good morning. Two questions. In the period with the tighter supply constraints, have you seen a mix, be it net positive or negative across the portfolio? Or in other words, how do you see things playing out when the supply constraints ease? And secondly, with respect to the decarbonization, so long as you could see a path to hitting your return on capital hurdles, how broadly would you consider vertically integrating in decarbonization platforms?

On the mix, I think any time you get a tight situation like this, there's a natural gravitation for the mix to move up. I would also say though that we've been trying, customers are in close communication and we're trying to obviously to keep everybody running. There's a lot of juggling going on.. There are some specialty grades where it's hard to shift the mix up because things are so tight right now, especially in some of our elastomeric products. On decarbonization, I think it's just going to depend on the situation in the geographies that we're looking at, the investments. In Canada we don't need to do the bank investment into CO2 capture and sequestration. And I think there are a lot of players that are out there that have capabilities to do that. So if we can keep our investments focused on assets that generate revenue for us and generate growth for us and our zero carbon emitting, I think there's plenty of room for third parties and others to play to help us to handle the CO2.

Thank you.

Next, we move to Alex Yefremov with KeyBanc.

Thank you. Good morning, everyone. I have a question about Slide 8 where you detail in-flight investments for 1.7 and 2.1 billion EBITDA contribution. In my math, this implies fairly high single-digit growth versus your base EBITDA. So can you give it a high level explaining why investors can have confidence in this target? What are you doing differently from traditional Dow's growth rate here? So anything that can at a high level explain why this growth is achievable.

Yeah. I'll start and I'll ask Howard to fill out a little bit. But I'm going to start with silicones because that's an area that's grows at 2 GDP. And if you look in mobility and if you look at electronics and if you look at consumer application, they are going to continue to grow as well as, we've had expansions coming for silicons products into construction and sealants, or glass glazing for big skyscraper buildings. So that is a high GDP growth, and that's going to continue in Industrial Solutions, not only highest value return to ethylene, but also high-value downstream growth driven primarily by consumer applications. To some extent, oil and gas, which we see recovering. I know we have many, many cases where our oil and gas products help people reduce CO2 emissions in the midstream production. And then things like ECOFAST Pure, which is the partnership with Ralph Lauren where we just open sourced that technology to use that product, which would get textile mills that use cotton to switch over to a product that is -- uses 90% less chemicals, 50% less water, 50% less energy, I think that's a huge driving force towards more sustainability in an area that's a tough environmental aspect. And then if you go to PM and see, we've got continued growth in our downstream systems, which have been growing at greater than 11% per year for a long time. We'll continue those investments. We've got high-gross targets for our downstream coating business, as I continue to keep up with demand specifically traffic demand. Howard mentioned paper demand for paper cups, replacing others with our raw barges versions, and also architectural demand, which is our growth leader in that space. And then you get back to Packaging and Specialty Plastics, which is continuing to grow above GDP, about 1.4 times GDP in our forward forecast. It's very dispersed, so when we talk about $3 billion of EBITDA growth over that time period,

is pretty evenly split between all three segments. And you're going to see about 200 to 300 million of it come on next year. And that is the projects that are already completed and will be finished by the end of the year.

All right. Your next question comes from Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question and congrats on a strong quarter. So I just wanted to get back to the polyethylene discussion. I guess we're hearing some conflicting things because we saw an ACC member on inventories of mid 40s on days of supply, maybe 47, and then it appears that the September, October increase on polyethelene has stalled as well. So is that -- are those correct characterizations or would you say that the market's really tight and you do expect further increases as we go through the year. Thanks.

Having a mid-40s number on days of inventory is kind of an average number. But remember sometimes the inventory numbers on things that are locked up and can't get shipped out. And so I think that's the main delta and some of the data that I shared with you. I would say demand and production, I think are both going to be strong in the fourth quarter. I also think some of the shipment delays are going to moderate as we get through the quarter and I think that will help. But a 40 to 45 days of inventory is not much inventory for the polyethylene business.

The next question will be from Christopher Parkinson with Mizuho.

Hi, this is for Chris. I was just wondering if you can touch a little bit between II&I and you mentioned third-party supply constraints. Can you just talk about what you're seeing in terms of those third-party supply constraints and whether you see them easing into the fourth quarter and into the first half of next year, if it's something that you continue to expect to persist throughout 2022? Thank you.

They are primarily -- the third party supply constraints are primarily industrial gas suppliers. They were racked pretty hard earlier in the year from the Texas freeze. And then they got hit again from the hurricanes in Louisiana. it is improving. I expect it will continue to improve through the quarter. And I think they're working hard. I know they're working hard to work on reliability and get the assets back up. And we're working hard as well to make sure that we've got redundancy in those supplies. So we'll take actions, like we do after events like those and make sure that we've got redundancy in supply as well. But that was the primary impact.

All right. Next, we'll move on to Steve Byrne with Bank of America.

Thanks, everyone. It's Matt Dion for Steve. Just a question on polyolefin I think you touched a little bit on this, but where do you think we are in the cycle? Because even earlier this year we had some of your peers talking about over earning. I know we've had a lot of outages, but demand is still really strong. Inventories are like, how does the shake out into 2022? And then, as you pushed downstream into systems, what do you expect the margin uplift to be, and how has the business, maybe, different from SG&A intensity perspective?

I think the supply demand balances are pretty favorable through 2026 because durables demand has been outpacing the supply growth and durables pull a lot on [Indiscernible] and [Indiscernible] operating rates. And so I think you're going to see an earnings ridge in the business that we haven't seen. There have also been a fair number of delays or rationalizations of capacity. And we've also seen obviously margin up within that segment for polyurethane systems.

All right. And we'll take our final question from the line of Matthew Blair with Tudor, Pickering, Holt.

Hey, good morning. Thanks for squeezing me in here. Howard, I think you highlighted the feedstock flexibility in your crackers. Given the volatile energy markets, do you have any specific examples of the kind of changes you've been making. For example, are you switching away from propane either in the U.S. or in Europe, and then also if you have any thoughts on the recent widening of the ethane to natural gas spread? I think it's out to about $0.08 a gallon. Do you see that, as kind of a short-term blip or perhaps something, maybe a little bit more medium term. Thanks.

No, go ahead, Howard

Jim, look at me. So I will take that. Look, I would just say this, our feedstock selection ability is really a key enabler of our consistent outperformance versus our peers as you've seen in the last several years of our annual benchmarking. It includes what I would say is unmatched feedstock flexibility for most of our feet. We've got the ability to max ethane on the U.S. Gulf Coast. We also have propane. We can do minimum naphtha if we need to. In Europe, we also have the ability to do max LPG to your point made propane is not necessarily in the slate right now. So you're not doing that in Europe. But then you also look at the point that Jim made earlier, which is we've got our Canadian advantage. We've got the feedstock flexibility in U.S. Gulf Coast. We've got the Argentinean advantage and we also have the Middle East. And I also think a lot of people talked about feedstock flexibility. But most of the time what that means is that they have three furnaces that can crack this feed, two furnaces that can crack this feed. When we talk feedstock flexibility it's in-furnace flexibility. So we have the ability to switch within the furnace and we can do it -- frankly, we can do it day by day. Typically, we do it every week. Do you have anything to add?

I'm only going to add two things. It isn't always the linear equation when you switch from cracking ethane to propane at these propane prices. Some might expect that propane was out of the crack slate. And actually, we've been cracking a fair amount of propane because we're generating a lot more byproducts out of that and we need them all. And so it has been in the slate more than you might expect. And I think as the natural gas prices moderate going into the year, we're going to see that ethane and propane advantage in the U.S. Gulf Coast is going to be there.

Very good. I think that's all the time we have for Q&A. Thank you, everyone, for joining our call. We appreciate your interest in Dow. For your reference, a copy of our transcript will be posted in Dow's website within the next 24 hours. This concludes our call. Thank you.

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