Dow Chemical Co. Q3 2008 Earnings Conference Call Transcript

| About: Dow Chemical (DOW)

Dow Chemical Co. (NYSE:DOW)

Q3 FY08 Earnings Call

October 23, 2008, 10:00 AM ET


Howard Ungerleider - VP of IR

Geoffery E. Merszei - EVP and CFO

Andrew N. Liveris - Chairman and CEO


PJ Juvekar - Citigroup

Kevin McCarthy - Banc of America Securities

Jeffrey Zekauskas - JPMorgan

Mark Connelly - Credit Suisse

Frank Mitsch - BB&T Capital Markets

Peter Butler - Glen Hill Investments

Robert Koort - Goldman Sachs

David Begleiter - Deutsche Bank

Michael Judd - Greenwich Consultants


Good day and welcome to the Dow Chemical Company's Third Quarter 2008 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to the Vice President of Investor Relations, Howard Ungerleider. Please go ahead sir.

Howard Ungerleider - Vice President of Investor Relations

Thanks, Derek. Good morning everyone and welcome. 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 rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited.

On the call with me today are Andrew Liveris, Dow's Chairman and CEO; Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer; and Jeff Tate, Director in Investor Relations.

Around 6.30 this morning, October 23rd, our earnings release went out on PR Newswire and was posted on the Internet on Dow's website We have prepared some slides to supplement our comments on this conference call. The slides are posted on our website, available on the presentations page of the Investor Relations section or through the link to our webcast.

As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve risks and uncertainties. We can't guarantee that the accuracy of any of our forecasts or estimates and we do not plan to update any forward-looking statements during the quarter. Now, 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 may 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 on our website. Our earnings release, as well as recent 10-Qs, 10-Ks, 8-Ks and annual reports are available on the Internet at in the financial reports page of the Investor Relations section.

Starting with the agenda on slide 3, Geoffery will begin today's call with a high level review of our third quarter. He will turn the call back to me for some additional detail at the operating segment level. Geoffery will then address several critical issues that are on the minds of many of our investors, such as what we're doing to address the global economic crisis and he'll give you an update on two of the larger transformational actions we have underway, the formation of K-Dow Petrochemicals and our planned acquisition of Rohm and Haas, as well as our outlook.

Finally, after our prepared remarks, we'll move to your questions for both Andrew and Geoffery. Now turning to slide 4, you'll see a summary of the financial highlights for the quarter.

Let me hand it over to Geoffery.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Thank you, Howard, and good morning The third quarter was characterized by three major events-the record high feedstock and energy costs, the weakening global demand, and finally, the two large hurricanes that hit the US Gulf Coast I believe Dow performed well in the quarter, despite these challenges delivering significant price increases tight cost controls and once again strong and consistent equity earnings.

So let's get into the details on slide five. Sales for the third quarter increased 13% from the same period last year to $15.4 billion. Price increased 22% with double digit price gains in all operating segments and all geographic areas. In fact, this was the largest year-over-year percentage increase in price since the first quarter of 2005.

Now volume was down 9% globally reduced 2% by the impact of the hurricanes Gustav and Ike, further weakening of demand and our focus on implementing price increases in the quarter. Now excluding the impact of acquisitions and divestitures and the hurricanes, volume was down 5%.

I am pleased to report that the outstanding performance in Agricultural Sciences continued setting a new third quarter sales and EBIT record. And equity earnings were $266 million for the third quarter, marking the seventh consecutive quarter that earnings from our joint ventures exceeded $250 million.

Now, in spite of the recent significant declines in energy prices, which occurred near the end of the quarter purchased, feedstock and energy costs surged 48% representing an increase of $2.6 billion over the same quarter last year. And actually, we were up more than $350 million, or $0.27 per share sequentially.

This was the largest year-over-year increase in the company's history and the third consecutive quarter in which these costs reached new heights. So as a result, margin expansion in the quarter was not achieved by either our basic or performance segments as the hurricanes idled approximately 80% of our North American capacity in September, just as feedstock costs were declining. All of this led to reported earnings for the quarter of $0.46 per share.

Now, turning to slide six, please keep in mind that this number reflects the unfavorable impact on the hurricanes composed of $0.09 per share in costs and $0.03 per share in margin on lost sales. In addition, there was a $0.03 per share impact for purchased in-process research and development charges, and $0.02 per share for expenses related to our announced acquisition of Rohm and Haas.

Now, if we add this to the reported earnings of $0.46, you get to an adjusted earnings level of $0.63. And this does not take into account that we had an unusually high tax rate of 29% in the quarter, which would add another $0.03 per share.

So as I said earlier, I believe this was a good quarter for Dow, particularly, considering the numerous challenges we faced through the quarter. Another way to look at our earnings is to start with our second quarter earnings of $0.81, then subtract the earnings difference in our AgroSciences division of $0.18, which is due to the normal seasonality of this business.

And next, factoring the substantial increase in our hydrocarbon and energy costs of $0.27 per share on a sequential basis that I referred to earlier. Now, adding these two items together, could have dropped our earnings to as low as $0.36. But due to the success of our pricing increases and our aggressive cost controls, I hope you agree that we delivered significantly better results.

And this does not even take into account that the third quarter is traditionally Dow's weakest quarter or that we incurred various hurricane-related impacts. Now, before I turn the call back to Howard, I would like to briefly highlight the strong contributions from our joint ventures as seen on slide seven.

Let's begin with Dow Corning which reported record third quarter sales and earnings due in part to excellent results at its Hemlock semiconductor unit. Next, our joint venture OPTIMAL in Malaysia had a solid quarter as well with margin expansion driven by higher prices and cost advantaged feedstocks. And our joint venture EQUATE in Kuwait reported strong polyethylene results driven by higher prices and their advantaged feedstock position. However, these strong results were offset by lower ethylene glycol earnings.

And now, I'd like to turn the call back to Howard for a review of our performance by operating segment in the quarter

Howard Ungerleider - Vice President of Investor Relations

Thanks, Geoffery. Now, starting with slide eight in Performance Plastics, the majority of the businesses in this segment posted double-digit price gains with price up 14% overall. Volume was down 4% on further declines in the North American automotive and housing industries. Demand also softened in these same industries in Europe, particularly in residential and commercial construction in Spain and the UK.

In Dow Polyurethanes, volumes declined due to softening demand for furniture bedding and appliance applications as well as our aggressive efforts to raise prices and the impact of the hurricanes, which limited supply.

Polyurethane Systems, however, reported strong demand for insulation materials used in oil and gas exploration applications. In fact, the business broke ground on an expansion at its Izolan system house in Russia during the quarter to capitalize on growth in this area.

In Dow Epoxy, there was significant margin squeeze in intermediates because of industry oversupply, which limited our ability to raise prices enough to offset higher costs In Dow Epoxy Systems, growth in wind energy and infrastructure applications, however, remain strong.

Despite robust price gains across the segment, selling prices continue to lag significant increases in raw material costs during the quarter. And with the impact of the hurricanes, EBIT in the Performance Plastics segment was down versus the same period last year.

Now moving to slide nine, for the ninth consecutive quarter Performance Chemicals posted year-over-year price gains up 21%. In North America, Asia-Pacific and Latin America price improved in each of these regions by more than 20%. Designed Polymers reported strong demand in food, pharmaceutical and personal care applications in Dow Wolff Cellulosics, which partially offset weakness in construction polymers.

Dow Water Solutions reported growth for FILMTEC reverse-osmosis membranes and ion-exchange resins as global water industry fundamentals remain strong due to growing demand for clean water. Outstanding results were reported in Biocides driven by growth in oil and gas applications.

In Specialty Chemicals, prices were higher in all geographical areas and strong demand was reported in industrial and household cleaning applications as well as in the agricultural industry. Margins for Dow Latex expanded in the quarter, due to our strong focus on price, which was aided by a limited supply of a key raw material.

Equity earnings were strong in the quarter based on results from OPTIMAL and Dow Corning. Sales and earnings accelerated during the quarter at Dow Corning due to continued strong demand in the Solar industry as well as new capacity at their Hemlock semiconductor unit, which was operational for the full quarter.

For the Performance Chemicals segment overall, EBIT increased as improvement in sales and higher equity earnings offset an increase in raw material costs.

Slide 10 highlights our continued strong performer Dow AgroSciences. Following a stellar performance in the first half of the year and despite this being a seasonally slow quarter, Dow AgroSciences delivered a third quarter sales and EBIT record. Price was up 18% while volume increased 8% reflecting organic growth and growth from recent acquisitions.

Our broad product portfolio of both agricultural, chemicals, and seeds continue to benefit from robust global demand for agricultural output. Sales in seeds and traits increased in the quarter led by a higher demand for sunflower oil and seed in Latin America.

Chlorine sales in Brazil also rose in the quarter, due to an improved farm economy and a solid performance from our Agromen acquisition. Strong demand was reported for cereal and broadleaf crop herbicides in North America and Northern Europe, due to high cereal prices, an increase in planted acres and the very successful launch of Pyroxsulam in Canada which exceeded customer expectations.

Glyphosate sales were up in the quarter, driven by higher prices due to tight industry supply conditions. Strong volume growth continued for new products Penoxsulam rice herbicide and Aminopyralid herbicide for range and pasture.

Spinetoram insecticide sales continued to ramp-up from product launches in the United States The business announced two new bolt-on acquisitions in the quarter; Dairyland Seed and Renze Hybrids. These represent the fifth and sixth acquisitions Dow AgroSciences has completed since May 2007.

Earnings were unfavorably impacted by pretax charges totaling $27 million for purchased in-process research and development related to these acquisitions.

Now shifting to the basic on slide 11, sales in Basic Plastics rose 7% to $3.5 billion, up from $3.3 billion in the same period last year. Price increased a robust 25% and was up in all businesses and in all geographic areas.

Volume, however, decreased 18% due in part to several portfolio management actions Dow has taken over the past year namely the shutdown of capacity in Louisiana and Brazil and the formation of our Americas Styrenics joint venture in May of this year. Volumes were also unfavorably impacted by the hurricanes.

Strong price gains in polyethylene more than offset increases in purchased feedstock and energy costs. Demand for polypropylene was down, again, this quarter, due to lower consumer spending and slowdowns in the housing and automotive sectors.

Equity earnings were up versus the same period last year on improved earnings from EQUATE EBIT for Basic Plastics was down compared with the same period last year, due to price increases not being sufficient to offset significantly higher raw material costs as well as the impact of the hurricanes.

And finally in Basic Chemicals on slide 12, sales of $1.5 billion for the quarter were flat with the same period last year. This segment recorded a 20% gain in price and a 20% decline in volume. Compared with last year volumes were lower due to the sale of the caustic soda business in western Canada in December of 2007.

Pricing for caustic soda continued to be strong benefiting from ongoing favorable industry supply demand fundamentals. Demand for vinyl chloride monomer used in PVC production, however, continued to decline as end use applications for PVC in residential building and construction applications remained extremely weak.

Results for the ChlorVinyls business were also impacted by the hurricanes which extended an earlier unplanned outage at our manufacturing facility in Freeport Texas. Volume was down in the ethylene oxide/ethylene glycol business due to weak industry fundamentals and further declines in polyester fiber demand in Asia-Pacific.

The EO/EG business was also negatively impacted by the two hurricanes in the quarter. Despite selling prices that are higher and higher equity earnings from OPTIMAL EBIT was significantly lower compared with the third quarter of 2007.

One final data point, our operating rates for the quarter was 76%, down from 83% last quarter primarily because of the hurricanes. Excluding the hurricane impact, our operating rate would have been slightly higher sequentially at 84%.

Now, I'd like to turn the call back to Geoffery, who will address several critical issues that are on the minds of many of our investors.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Thank you, Howard. Let's now turn to slide 13, and the topic of risk management, I would like to share with you what we have done to preserve our financial flexibility and further strengthen our financial discipline. As we all know these are clearly challenging times, but I want to assure you that Dow remains financially strong; our balance sheet is in good shape; and the company has sufficient liquidity and financial flexibility to meet all of its business obligations.

When we saw the credit markets were beginning to tighten back in the summer of 2007, we proactively focused our risk management activities in two areas liquidity and counterparty risk. Today, in the area of liquidity, we have committed credit lines of approximately $5 billion, of which half remains unused. In addition, we have other sources of funding available to us throughout the world. And for example, here in the US, we regularly issue medium-term retail bonds.

Now regarding counterparty risk, we diversified our financial exposures. And by this, I'm referring to investments as well as the derivatives. We've also limited the maximum amount of exposure we would have to each counterparty as well as being very selective in the type of investments we make.

In addition to preserving our financial flexibility, our financial discipline also remains intact. We've taken a number of actions to preserve cash, defer or eliminate capital spending and cut costs. First, we're re-examining all capital projects in light of the new economic environment and plan to reduce our capital spending by $100 million by year end.

So this will lower our capital spending goal from $2.2 billion to $2.1 billion Next, we're delaying all discretionary spending. In fact, in the third quarter, we successfully reduced our SG&A expenses by almost $20 million sequentially. And in light of the current economic environment, we have put in place new plans to reduce spending by an additional $100 million to $150 million before year end.

We also have a goal to reduce our working capital by several $100 million. Specifically, here we plan to reduce DSI by three days to 59 days by year end. And we are very actively managing our credit policies. In fact our days sales outstanding tied a yearly low of 38 days in the third quarter.

So we believe that these are prudent measures, given the economic slowdown and the uncertain times ahead. I would also like to mention that Dow has been actively managing its business portfolio and taking action on underperforming underutilized or non-competitive assets for quite sometime now.

For example, in the last two years, we've announced 43 plant shutdowns, we exited 17 sites, and we've divested 18 businesses. And we will continue to trim spending on businesses that cannot hold their ground during tough economic conditions

In fact, year-to-date, we have divested nine businesses with revenues of approximately $1.5 billion and more than $40 million of negative EBIT. So we're also actively realigning existing businesses for growth and profitability. The recent realignment in Dow Emulsion Polymers is a good example. The outcome of this effort will be more focused lean and a more agile business model.

By the end of 2008 Dow Emulsion Polymers will have reduced its production capacity by about 20% here in North America and 10% in Europe. The business will also have reduced its workforce by approximately 22%.

So this strong financial discipline has become part of our culture. This provides Dow with the strength and stability needed to navigate even in these challenging times. And speaking of strength and stability, nothing communicates this more than our cash dividend.

So as you can see on, slide 14 Dow has a long and distinguished dividend history And according to my own research Dow is the only company in the Fortune 200 that has either maintained or increased its regular quarterly dividend since 1912.

Now this includes paying our dividend through two world wars, the Great Depression, the oil shock of the '70s, the savings and loan collapse of the '80s, the Asian financial crisis in the '90s as well as numerous industry cycles. If you add it up, that's 388 consecutive quarters of remunerating our shareholders without reduction or interruption.

I would like to reassure our investors that we have every intention to continue this long standing tradition. And at today's stock price, our dividend yield is over 7% making Dow a very appealing investment choice indeed.

Now in the time that remains, I would like to update you on the two large transformational actions, we have underway. First on slide 15, I would like to discuss the formation of K-Dow Petrochemicals, our joint venture with our Kuwaiti partners.

Now over the past 10 months, we have been hard at work on this extremely exciting new venture and we're still on track to close this transaction by year end, which was the expected timing that we communicated when we announced this new joint venture last December.

Now when this transaction is complete, we will have created a global petrochemical leader with sales of approximately $14 billion. In fact since we're a public company, it would rank in the Fortune 200. As you can imagine, creating a Fortune 200 company from scratch is extremely complex. This carve out includes over 60 plants, 50 manufacturing sites and 11 joint ventures spread out in 11 countries.

Given the size and geographic reach of this joint venture, K-Dow is establishing more than 60 new legal entities. And to facilitate the negotiation, a data room containing more than 12,000 documents and over 150,000 pages was established. More than 1,000 Dow employees have been actively engaged in this project throughout the year.

And because Dow and K-Dow will be both customer and supplier to one another at many sites, we've created approximately 250 supply, service and technology agreements. It's important to remember that these are agreements, which will preserve the value of Dow's integration and our ability to supply our performance businesses with key raw materials.

Recently, we named the K-Dow leadership team and announced that its corporate headquarters will be located in southeast Michigan. The management team at K-Dow will consist of both Dow and Kuwaiti leaders, who have many years of experience with the businesses being contributed to this joint venture and operating successfully through numerous petrochemical industry cycles.

Now this management team has already been working diligently to obtain financing for K-Dow. And as a result of this effort, K-Dow will have the funds necessary to successfully operate independently and grow on day one. This is a clear recognition that these are high quality businesses and are strong cash generators throughout the ethylene cycle.

And needless to say. this also speaks to the reputation and financial strength of both companies. Remember Kuwaiti Petroleum Corporation is one of the world's top 10 energy companies. So where are we in the closing process?

Well, regarding regulatory approvals, the transaction has received clearance from the FTC here in the United States and the European Commission, and the project has been cleared by the Committee on Foreign Investment in the US also known as CFIUS, due to it being deemed outside of their scope.

This transaction has also been approved in Kuwait by the Board of Directors of both PIC and its parent the Kuwait Petroleum Corporation. And we are currently awaiting final approval from the Kuwaiti government via their Supreme Petroleum Council. So as I said earlier we remain on track to close this transaction by the end of the year.

Now moving on to slide 16, I'd like to talk about our announced acquisition of Rohm and Haas. We remain on track to close this transaction in the early part of 2009 pending, of course, regulatory approvals. In order to complete the transaction, we have secured a $13 billion bridge loan. This facility has been fully committed and successfully syndicated amongst 19 banks with very favorable terms and conditions.

We have also secured $4 billion in convertible preferred securities for this acquisition: $1 billion from the Kuwaiti Investment Authority and $3 billion from Berkshire Hathaway. These two facilities are contingent upon the close of the Rohm and Haas acquisition, and they're also committed. And as you recall, these securities carry a coupon of 8.5%.

Now I believe, Warren Buffett chose to invest in Dow because one, we have a good brand; two, an excellent management team; and three, a sound strategy and business position in our industry. And I also believe, his involvement in this transaction is a sound endorsement of our transformational strategy and most importantly the long-term value it will create.

And after utilizing these funding sources and the proceeds from the formation of K-Dow, we expect to draw approximately $4 billion to $6 billion from a $13 billion bridge facility in order to complete this acquisition. And as we said, back in July, Rohm and Haas is a strong operational fit for Dow.

And this combination brings together best-in-class products and technologies broad geographic reach and leading industry positions in coatings, electronics and adhesives to create an outstanding business portfolio with significant growth opportunities. And we're also making great progress on identifying synergies between the two companies, and we remain confident, we will achieve the $800 million in cost synergies that we announced back in July.

Now I'd like to remind you that this $800 million we committed is in addition to the $110 million announced restructuring program that Rohm and Haas already has underway. And given the current economic climate, we are already identifying new ways to accelerate the implementation of the $800 million synergy commitment.

As part of our acceleration effort, we have set a goal to be at a $100 million annual run rate by day one of the new Dow, an achievement rare in acquisitions. So here are just a few examples of the work that has begun to get us to this run rate commitment.

First is an example in the IT space, where we will be able to immediately rationalize similar capabilities and stop redundant project work. In fact just looking at Dow's current IT activity, we have already identified a 100,000 hours of active project work that could possibly be eliminated.

Now, this is especially true in SAP development and implementation, AND another example is in the purchase services area, where we expect to have reductions in spending on IT from critical vendors based on the increased scale of our new company.

And we've set an aggressive timeline to implement these cost reductions, where we fully expect to achieve our run rate in the range of $40 million to $50 million in savings immediately following the close of the transaction. I'll share with you another example in marketing and sales We believe Rohm and Haas has the best-in-class marketing organization in our sector and knows how to drive profitable growth from customer-driven technologies and products.

Now it's our intention to integrate this capability throughout the Dow organization. In doing so, we'll achieve marketing and sales cost synergies with an estimated run rate of $30 million on day one as well. So as you can see the majority of the $100 million day one run rate has already been identified.

And finally, in order to accelerate the capture of synergies post-closing and be ready to implement on day one we have launched a number of clean teams to focus on cost and growth synergies. Now, this is no different from what we have done in the past with some of our past acquisitions.

Clean teams are typically comprised of third parties such as Dow retirees or independent consultants, who do much of the pre-work in advance of closings. And these teams gather and analyze the data as well as formulate recommendations, which will be shared with the implementation teams immediately after closing.

So, clean teams have been established in the functional areas of purchasing, supply chain, tax controllers and manufacturing. And all of these efforts are aimed at jump-starting synergy capture on day one.

So as you can see on slide 17, here is a summary of the major categories of savings we've identified in our $800 million commitment.

In summary, we remain very confident in our ability to deliver total savings of at least $910 million and do it quickly after close.

Now I'd like to share with you a few more updates on important milestones regarding this transaction. We're currently responding to a second request for information, which we received from the FTC here in the United States and we are cooperating.

Now in an effort to mitigate potential antitrust issues, we proactively announced that we are exploring divestiture options for our Clear Lake, Texas Acrylic Acid and Esters business as well as our UCAR Emulsions Systems Specialty Latex business here in North America. And we're also cooperating in the European Commission's review of this transaction and they are on track to file regulatory documents in that process.

And finally, there is a Rohm and Haas shareholder vote on the proposed acquisition, which is scheduled for October 29. So at this point we're not aware of issues that would prevent us from achieving any of the milestones, I just outlined with you and we reconfirm our intent to close this transaction in the early part of 2009.

Our acquisition of Rohm and Haas is very consistent with our strategy… increase the percentage of specialty businesses in our portfolio, so we are better able to withstand the ups and downs of the economic and industry cycle, and most importantly, create shareholder value in the long-term.

So turning now to slide 18, I'd like to make a few comments about our outlook and what to expect from Dow in the fourth quarter. The global economy is now clearly feeling the effects of the same economic issues that have plagued the US for the past several quarters. These issues have been magnified by a lack of consumer confidence resulting in a drop in demand not only in the US but, in fact, around the world.

So while feedstock and energy costs have significantly declined from the all-time highs that we experienced only recently, we believe margin expansion of fourth quarter will likely be muted by weakening demand. So as I mentioned earlier, Dow is well-positioned to weather this increasingly difficult economic downturn.

We have a strong balance sheet. We have a track record of strong financial discipline. And we are accelerating our focus on what we can control namely price, volume, management as well as cutting costs, deferring or canceling capital spending and continued business portfolio management.

And in addition, we will continue to implement actions that are aligned with our transformational strategy, such as completing our petrochemical joint venture with our Kuwaiti partners and closing our announced acquisition of Rohm and Haas.

So thank you very much. And at this time, I will hand the call back to Howard for the Q&A portion.

Howard Ungerleider - Vice President of Investor Relations

Thanks, Geoffery. That wraps up our prepared remarks. For your reference, a copy of these comments will be posted on Dow's website later today. Now, we'll move onto your questions.

Before we do though, I'd like to remind you that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and to anything that may come up during the Q&A Derek would you please explain the Q&A procedure?

Question and Answer


Yes, sir. [Operator Instructions]. And our first question that will come from PJ Juvekar. Sir, your line is no open, please go ahead.

PJ Juvekar - Citigroup

Yes. Hi. Good morning.

Howard Ungerleider - Vice President of Investor Relations

Good morning.

PJ Juvekar - Citigroup

You mentioned that your glyphosate profitability was up due to tight supply demand. How do you see that supply/demand playing out in '09? And then what is your glyphosate strategy, let's say, for next few years?

Andrew N. Liveris - Chairman and Chief Executive Officer

Well, hi, PJ. We actually do see China capacity coming on in '09, which will cause some moderation of margins. And therefore, if you like not the stuff we've been seeing so far this year I think that's on the supply side.

On the demand side, I do think we've kind of had a little bit of a farm bubble here these last couple years and I think that's going to moderate in a very slowing economy, although, people will still eat clearly. So I think that Ag sector still remains very strong in general not just the glyphosate side in '09 I would say.

Our own strategy, we remain very committed to being a supplier. Obviously, we have outsourcing agreements and our agreements with Monsanto and it's very much a part of our repertoire, although I would tell you we could always do with more It's continually… what we're seeking for is more and more channels inclusive of more and more ways to get glyphosate as part of our overall mix.

PJ Juvekar - Citigroup

Thank you. And quickly, Geoff, you didn't talk about stock buyback when you talked about your financial strategy. If you look around… many industrial companies are suspending stock buybacks to conserve cash. Can you just tell us how you're thinking about buybacks?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Well, sure. As you know… thanks for the question, PJ. As you know, during the course of the third quarter, we'll be completed our $2 billion program and we spent about $50 million on that The only reason why we haven't announced yet another programs is because we have two very large transactions that are about to close plus, of course, your last point, which is on cash preservation.

But let me reiterate what our financial policy has been over the last two years and will continue to be is that at a minimum we're going to cover dilution. This is on an annual basis. And you can count on a new program following the two transactions that we are about to complete. PJ?


[Operator Instructions]. We'll take our next question from Mr. Kevin McCarthy. Please go ahead.

Kevin McCarthy - Banc of America Securities

Yes. Good morning.

Andrew N. Liveris - Chairman and Chief Executive Officer

Hi, Kevin.

Kevin McCarthy - Banc of America Securities

Andrew, Dow sales are roughly six times that of Rohm and Haas yet based on the deal price of 78 you'd be paying a price for the equity that's roughly 70% of your own stock market value here. So my question is given the unprecedented volatility in the capital markets do you still feel as though the Rohm and Haas transaction is tenable based on the original terms or must it be re-negotiated?

Andrew N. Liveris - Chairman and Chief Executive Officer

Well, it's clearly you're using numbers based on current equity markets and I think if you saw me on CNBC this morning. There's many of us. I think Mr. Welch was on TV saying the same thing as I was that fewer equity markets have disconnected from true valuations of companies and enterprises like ours.

I mean just look at our dividend yield give you an indicator of how ludicrous as I used the word this morning, valuations are So I don't think your math works that way. And if you're going to tell me that we should have waited, then, I could have told you that it wouldn't have been available at these equity valuations. And I would also tell you the family wouldn't have sold.

And so the strategic rationale for the Rohm and Haas deal remains hugely intact equity markets will eventually re-catch up with what should be the right valuations based on the strength of companies. Companies like ours have been unfairly marked down, but I've been… I am not going to moan about that.

We're just going to deliver the value that we talked about when we announced the deal. And as Geoffery said in his talk, the value is very strongly positive. Everything we've seen on the cost synergies are there. We don't talk about the growth synergies because we didn't count them.

And so, we still believe that our numbers are intact based on our ability to deliver the cost synergies and tilt the company's portfolio to be two-thirds specialty to one-third commodity, which is what these two transactions are doing. A lot of Monday morning quarterbacks out there, I'm not listening to any of them.

Kevin McCarthy - Banc of America Securities

Understood. Not trying to do that. I certainly understand valuations are very well dislocated and this strategy makes a lot of sense for you. Separate topic on the subject of foreign exchange, I was wondering if you could address the subject of any changes you may foresee in international trade flows as well as translation. I know you don't normally get into a lot of detail on FX, but obviously we've seen a lot of volatility in the US dollar movement recently as well.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Sure, Kevin. On a year-over-year basis, the currency impact on price which was favorable was about one-fifth of that 22%. But keep in mind, we have a very large manufacturing base throughout the world. And so any gains on a year-over-year basis, a large portion of that is offset through higher costs.

And in fact, I did not highlight in my comments that on a sequential basis, we actually had a negative impact from currency. But as you know, we don't highlight the currency part, but it was negative in the short-term. If you compare year-over-year currency impact, you've got to take into account the profile of the business. And there is clearly a correlation between commodities and currencies.

All you need to do is look at the Canadian dollar and the Australian dollar, and see how they have deteriorated, of course, because of the… call it a disease… depreciation of the various commodities.

Over the long-term, we believe that the US dollar will probably be on the weakening side. I don't normally look at my crystal ball and it's only a crystal ball, but I think short term we've probably reached a PPV a value… PPP value; person and price parity value of… I think today the Euro was at $1.28 and the last thing that I read was at around $1.25.

So I think we have pretty much seen the strength of the US dollar. And I would venture that over the course of the next couple years, in fact, you're going to get another weakening tendency in the US dollar

Kevin McCarthy - Banc of America Securities

Thank you very much


Thank you. We'll take our next question from Jeff Zekauskas, please go ahead.

Jeffrey Zekauskas - JPMorgan

Hi. Good morning.

Andrew N. Liveris - Chairman and Chief Executive Officer

Good morning, Jeff.

Jeffrey Zekauskas - JPMorgan

When you originally negotiated your memorandum of understanding with PIC, I'm sure there was all kinds of negotiating room and over time has the net present value of that arrangement with PIC changed in any way?

That is the net present value at your closing different from the net present value of the original memorandum of understanding?

Andrew N. Liveris - Chairman and Chief Executive Officer

Geoffery mentioned on the talk how much work is being done, the thousands and thousands of documents and moving parts And when you take all that and you net out and you do this that and the other we come out on the other side of it, well, the answering your question is no.

The net present value stayed very intact and very firm. And the Kuwaitis, if I can take a second here when they did the deal, what happens when you work with a country is they think long-term, and really buying in half of one of the world's leading plastics franchises to them was a growth opportunity versus if you like a valuation opportunity at that moment in time. That was their whole way of thinking.

They did their economic rationale based on what this franchise would do to grow from here with access to their feedstocks. And so as they went through their approval process at Kuwait Petroleum's board, they reaffirmed the MPV value and IRR to them and ditto to us despite these thousands of moving parts that you might have alluded to or your question might have alluded to a change of some sort, Jeff. We were quite… both of us pleasantly surprised that way.

Jeffrey Zekauskas - JPMorgan

I guess this is my second question. In terms of the Clear Lake and UCAR Emulsions Divestiture calculated in 2007 sales, how large is that divestiture relative to the 1.3 billion limit you have with the arrangement with Rohm and Haas?

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes, clearly, those two, one business and one facility, $500 or so million just a little north of that and not very material to the size of the company obviously. And those were good businesses for Dow. They in both cases came through acquisition as you probably know [inaudible] from Carbide and Clear Lake from Celanese. And we understood as we did the Rohm and Haas deal that we would have to divest, but they're not substantial in size

Jeffrey Zekauskas - JPMorgan

Okay. Thank you very much


[Operator Instructions]. We will take our next question from Mr. Mark Connelly. Please go ahead, sir.

Mark Connelly - Credit Suisse

Thanks. I am asking both again in another way, if you want. The first question, the strong pricing that you're seeing in the performance businesses suggested it might be on the more commoditized side of your portfolio, and if that's true, then you might start to see a decline in that pricing as energy prices back off? I was wondering if you could… could you comment on that?

And the second question is about your spending reductions. I'm curious what the giveback on that is, I mean presumably those were high return projects to begin with, so can you give us a sense of what it means to pull those back?

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes, Mark. Thank you. We'll get both questions answered. Thanks for asking them simultaneously. Look on the pricing power, clearly, with the severe drop you know, we started the third quarter with oil hovering in the 140, 150 mark naphtha north of 1,000 EC [ph], where half those rates outbound in the quarter. So the commodities have come down commensurate with that decline.

The specialties have… to your point… have… which is roughly half of the portfolio have lagged down although there are pressures on some of the more differentiated commodity part of the specialty portfolio, which is roughly half again of that half. So, frankly, the quarter of the company that seems to have hung in there quite well on price power because their markets are good still despite recessionary environments and they're not as… their pricing is value pricing versus commodity input pricing.

Our businesses in the specialty area like Dow Water and Wolff Cellulosics. These are doing well because of the markets they serve plus not really hydrocarbon-driven. But we have been bringing down prices on the commodity side to commensurate with the drop in oil and gas, now the… mostly oil actually mostly naphtha.

But just a little footnote, notice OPEC's move this morning, I mean, so we really are still living in volatile times of hydrocarbons and albeit we're down half from where we were three months ago. We still believe that the… let's call it the 70 to 90 ranges are still out there and naphtha in the… north of 500 to 600s are out there still even in declining demand environments because of the supply side.

So we're very watchful of how we set prices but we're very fast and our Basic Plastics business did a great job in the quarter, Remind me, of your second question?

Mark Connelly - Credit Suisse

On the spending reductions.

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes the spending reductions. Look because of the declines in demand the ongoing portfolio work we do here which of course is multi-year, but in these days and ages multi-quarter and multi-week. We see businesses that were performing well that in declining demand environments don't perform well.

So a lot of these interventions are because there is now value destruction or less value in something that was creating value before. So we can idle facilities, take out costs and wait. And in some cases, look at it in a more permanent way, and that's the nature of the interventions not… we're keeping all of our growth programs intact, our R&D spending is actually up, so, frankly, with portfolio managing, a way through your question.

Mark Connelly - Credit Suisse

Got it. That makes sense. Thank you.

Howard Ungerleider - Vice President of Investor Relations

Derek, for the sake of the limited amount of time remaining, can we limit each caller to one question please, so we can get more callers in?


[Operator Instructions]. And our next question will go to Mr. Frank Mitsch with BB&T Capital. Please go ahead.

Frank Mitsch - BB&T Capital Markets

Yes. Hi. Good morning. I have five parts to my one question.

Andrew N. Liveris - Chairman and Chief Executive Officer

Thank, Frank.

Frank Mitsch - BB&T Capital Markets

Andrew, earlier this year, I think back in April as you were looking out at the year you said, hey, we look at strong international markets in Ag are offsetting the US weaknesses. Obviously, in today's release you talked about a looming global recession. Can you talk about the various geographies around the world? What your expectations are for growth and your ability to perform as you look out into 2009?

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes. Firstly, the calibration to international, as we all did through the most part of this year, we all said our rest of world or in our case 70% of our business being outside the US was a geographic hedge to a very poor US market.

And clearly, Frank, that's changed dramatically with our ability as a country to shoot ourselves in the foot and get Main Street to catch the flu and the rest of the world catching the flu due to the credit crunch.

And as a consequence of that we're seeing quite a lot of declines. Notably in Europe, I think Europe is as bad as the United States in several markets auto housing, but also appliances, durables, furniture furnishings. So that's the developed world and I would say Japan is not much better, although slightly better.

The emerging world is where we are starting to see the slowdowns that are troublesome And that's the credit crunch and consumer confidence in those economies, as well as in the case of the export economies like China, Southeast Asia that export to the US, seeing the loss of the US export market. And for that matter, the dollar moving in the direction it did could actually help that a little bit.

But China, I mean, their GDPs are coming down to the 8% mark in terms of forward forecast. For them off of a double-digit GDP, that's a bit of a worrying signal. I don't believe the Chinese will let their GDP go below 8%. They can't afford it. So I think, Frank, there's going to be sort of a kind of a stimulus here sometime in the next few months certainly from China and hopefully, here in the United States that helps correct what I consider maybe the recession environment be all of '09.

But we think that will take several quarters to see through. So China are at 8% and then India, Middle East and in Eastern Europe also coming down a few percentage points of their GDP growth to what I would call off the hot pace they were at and more in the 5% ranges and the 4% ranges. I think we're going to see two or three quarters, where the slowdown will continue and the emerging world being affected. And I would tell you that that's at least two quarters maybe three quarters in our mind

Frank Mitsch - BB&T Capital Markets

All right. Terrific. And you're fond of saying, Andrew, that the coming year should be a good year for Dow. You've said that in the past With this sort of outlook and excluding obviously the Kuwaiti and the Rohm and Haas deal, would you envision 2009 being "a good year" for Dow?

Andrew N. Liveris - Chairman and Chief Executive Officer

The reason it will be a good year for Dow will be nothing to do with the economy nothing to do with the market. Frank, I… in my mind, our psychology here is 2003 where we had to intervene to portfolio manage our way through incredibly rough waters in the economy and in the marketplace.

Now, 2003 wasn't 2002, thank goodness We are a much stronger company with a better balance sheet. We have the synergies that Geoffery talked about. We have our interventions. We have, frankly, a portfolio move that will help us as we go through the year. And as a consequence of that, I think we will be in good shape in the back half of the year.

And so maybe I will declare a good year at that point, but I don't want to fool anyone. I think these troubled waters out there are going to mean that it's going to be tough to navigate. But you're talking to a company that has huge operational excellence on its side And frankly, our mindset here is execution, execution, execution.


We will take our next question from Mr. Peter Butler. Please go ahead.

Peter Butler - Glen Hill Investments

Good morning.

Andrew N. Liveris - Chairman and Chief Executive Officer

Hi, Peter.

Peter Butler - Glen Hill Investments

Andrew, wouldn't Carl Gerstacker be backing up the proverbial truck right here to buy shares cheap? Gerstacker would say, "My God, if you can buy at a 7% yield, then you're looking at good news from Kuwait and Rohm and Haas. Why wait for the stock to go higher?"

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes. Look, Peter, as Geoffery answered because we have these two or three moving parts that are close in two or three months. But I think Geoffery indicated, I don't know backing up the truck is a colorful way of explaining it. But I said this morning, the dividend is safe. This CEO is never going to cut it. I'm not going to be the first. The yield is unbelievable. The stock is undervalued by a long mile. I mean, so clearly, your analysis is our analysis.

We're just going to get through the two transactions. Let us go on the other side of it. And then obviously, stock buyback is going to be top of mind. And these values hang in there in equity markets for the next several months. I think Mr. Buffett said it, well, Buy American. Well, we're American.

Peter Butler - Glen Hill Investments

Thanks for the help


We will take our next question from Mr. Bob Koort with Goldman Sachs. Please go ahead.

Robert Koort - Goldman Sachs

Thank you. Good morning.

Andrew N. Liveris - Chairman and Chief Executive Officer

Good morning, Bob.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Good morning.

Robert Koort - Goldman Sachs

Andrew, I think you said on one of the shows this morning that you don't think a $3 trough number is reasonable anymore. I was wondering if you could tell me what the path to the trough looks like? Is it a demand erosion trough in '09? Or do still think '10 or '11 is the trough?

And then, secondly, in your performance business particularly Performance Plastics obviously a pretty horrific margin partly influenced by the hurricanes, but what do you see in terms of the progression of your performance business margins as you go through the next couple of years? Thanks.

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes, I think, Bob, firstly on the trough. We're going to spend a lot of November analyzing our view of '09, '10 and '11 given these new market conditions. Clearly, '09 now is going to be a tough demand year, everything we've just talked about. So we see an economic trough in '09. The industry trough that we were forecasting for '10 and '11 is going to be impacted by both sides of that discussion.

One is the new demand forecasts are going to speak… stop projects happening. So people who are early in their project calibrations are going to delay projects compared to… this is on the commodity stuff in particular and the petrochemical stuff. In addition, there is going to be a lot of competitors out there who don't have our leverage ratios, who are not going to make it. I mean people who are… with their debt ratios in the 90s who leveraged up in the good days are going to suffer. You pick your favorite companies, I'm sure you can find them in the commodity chain in particular.

And then, on top of that you've got frankly the other side of the coin, which is the people who have got low-cost feedstocks and now can negotiate better EPC contracts because everything is coming off… the price of steel, the price of copper, the price of engineering. You can start to bring these projects more in line with the better returns in the low feedstock cost regimen.

And so actually companies like Dow, who have put these joint ventures in place should benefit from the '010, '011 scenario compared to what we were before. And last point I'll make, in a declining oil and gas environment, we have feedstock flexibility that we can bring to bear in our developed economies now, which we didn't have up until a month or two ago.

In other words, naphtha, LPG, ethane… we've got flexi-crackers that we can bring to help us out in the '10-'11 industry trough. So these are the sorts of things we'll be discussing deeply in November and we'll come out on the other side of that and give you guys a better view. Second question, Bob?

Robert Koort - Goldman Sachs

On the performance side, the margins have been pretty lackluster,

Andrew N. Liveris - Chairman and Chief Executive Officer

Of course that is clearly hurricane affected. Although, I would tell you the urethanes business also suffered from this decline in furniture bedding, as you know, slab stock polyol et cetera. So there is a demand correction in the epoxy business had the electronics demand correction that was going on as consumers cut back on consumer electronics markets.

So I would tell you there is… the more commodity side of the Performance Plastics portfolio saw those declines. However, the systems part, the PU Systems and Epoxy Systems did very well. And that's part of their strategy to go more down market into more, what I would call, value-added businesses.

Frankly, Dow Automotive and Dow Building Solutions are having a lot of difficulty. And we are changing their cost curves to suit those new equations in their customer side. So Performance Plastics when you look at the makeup of the businesses, some of those businesses have been underperforming because of the markets and what's going on. And we will be watching that very carefully in terms of their spend rates and investment rates.


And we will take our next question from Mr. David Begleiter. Please go ahead.

David Begleiter - Deutsche Bank

Thank you. Andrew, Dow Corning has become an important part of the company's earnings. Can you discuss how sustainable these are? Obviously, Solar might be impacted by some of the declines in crude prices. Thank you

Andrew N. Liveris - Chairman and Chief Executive Officer

Well, the Hemlock business model is a terrific business model and frankly Solar is… we don't see any declines on the Solar side even at these oil prices. And as I said on an earlier question, where is oil going to bottom out? Is oil going to bottom out because of the demand destruction? Or is it going to bottom out because of the supply side and OPEC intervening?

I think we had a big signal this morning that oil is not going to go much south of the numbers it's been at, which makes Solar very attractive and then throw on top of that, you know, look in a few weeks, one of these two president-elects are going to put in place alternative energy programs.

Every country in the world has seen the effect of high oil price. We believe Solar is going to be here to stay because government is going to make it an alternative just like wind and other things renewables as well. So, we think the business model is very intact at Dow Corning on the Solar side and therefore sustainable

David Begleiter - Deutsche Bank

And just could you just comment on China in October, how slow is activity in that country?

Andrew N. Liveris - Chairman and Chief Executive Officer

Yes. Look it's slow. I mean we're seeing double-digit volume declines. I think the Chinese are quite alarmed. And I'm going to be there next week as Chair of the US-China Business Council meeting with some very high-level people. And I think they are looking at stimuli as we speak.

The post-Olympic thing was worse than they expected, but the global credit crisis I think has absolutely alarmed them. And as I said earlier, I don't think they're going to let it go below 8%.

David Begleiter - Deutsche Bank

Thank you.

Howard Ungerleider - Vice President of Investor Relations

Let's make this the last question please.


Yes, of course. And our last question today will come from Mike Judd with Greenwich Consulting. Please go ahead.

Michael Judd - Greenwich Consultants

Yes. Just a pension question. I noticed that on your balance sheet the pension liability was down around $100 million or so. Could you talk a little bit about that move directionally? Also, I guess Rohm and Haas hasn't filed a Q yet, could you talk about where they are in regards to their pension? And lastly, just with the two transactions that are coming up here how pensions could change?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Well, I think you asked three questions. I can't comment on the Rohm and Haas pension situation. They're being managed totally separately. And so, I'm sorry I can't comment on that.

With regards to pension for Dow, if you take the statistic based at end of September 30, we, in fact, had a funding ratio… overfunding ratio in the low teens, okay. Now, of course, we all know that the equity markets have suffered since the end of September. I don't know where we are right now and I don't have the crystal ball to tell you what going to happen by the end of this year.

So I think it's a little too early to start coming to conclusions about pensions. Our pensions around the world are well-funded. They were way overfunded at the end of last year. I shared with you what they were at the end of September. And so, let's see what happens over the next two months. But at this point in time, I frankly think it's too early to make a comment

Michael Judd - Greenwich Consultants

And with the close of the Kuwait deal how will that impact the pension situation?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Well, on a proportionate basis, they will be aligned and it should have no material impact on Dow

Michael Judd - Greenwich Consultants


Howard Ungerleider - Vice President of Investor Relations

Okay, great. Thanks, Mike. We're going to have to end it there since we're over our allotted time. But we'd like to thank you for joining us on the call today. Our team looks forward to talking with you on Dow's next earnings conference call in early 2009. Thanks very much


And once again, that will conclude today's Dow Chemical Company conference call. Thank you for your participation and have a great rest of the day. .

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