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The Dow Chemical Company (NYSE:DOW)

Q1 2009 Earnings Call

April 30, 2009 10:00 AM ET

Executives

Howard Ungerleider - Vice President of Investor Relations

Andrew N. Liveris - Chairman and Chief Executive Officer

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

Pierre R. Brondeau - President and Chief Executive Officer, Dow Advanced Materials

Analysts

Sergey Vasnetsov - Barclays Capital

Prashant Juvekar - Citi

Kevin McCarthy - Bank of America

David Begleiter - Deutsche Bank

Frank Mitsch - BB&T Capital Markets

Donald Carson - UBS

Peter Butler - Glen Hill Investments

Michael Judd - Greenwich Consultants LLC

John Mcnulty - Credit Suisse

Operator

Good day, everyone, and welcome to The Dow Chemical Company's First Quarter 2009 Earnings Results Conference Call. Today's call is being recorded. At this time, I am pleased to turn the conference over to Mr. Howard Ungerleider, Vice President of Investor Relations. Please go ahead, sir.

Howard Ungerleider

Thanks Jennifer. 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 Chief Executive Officer, Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer, Pierre Brondeau, President and CEO of Dow Advanced Materials, and Jeff Tate, Director, Investor Relations.

Around 6:30 this morning, April 30, our earnings release went out on PR Newswire, and was posted on the Internet on Dow's website, dow.com. We have prepared some slides to supplement our comments on this conference call. The slides are posted on our website, 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 the accuracy of any forecasts or estimates, and we don't plan to update any forward-looking statements during the quarter. If you would like more information on the risks involved in forward-looking statements, please see our SEC filings.

In addition, some of our comments 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 or on our website.

Our earnings release, as well as recent SEC filings, are available on the Internet at dow.com in the Financial Reports page of the Investor Relations section.

On slide three, I would like to run through the agenda for today's call. Andrew will begin the call with a high level overview of our first quarter results and our achievements of the last 90 days. He'll also outline our operating plan and our balance sheet de-leveraging plan, both of which were recently reviewed and approved by our board.

Geoffrey will then review our first quarter results and discuss some of the business trends we observed in the quarter. Geoffrey will also give a brief overview of our first quarter results for Rohm and Haas, before turning the call over to Pierre, who'll provide an update on our integration efforts. Andrew will then end our prepared remarks today with a discussion of our outlook and our 2009 priorities.

Now, I would like to turn the call over to Andrew.

Andrew N. Liveris

Thank you, Howard, and good morning, everybody. I would like to begin with an update on the progress we have made in the first part of this year, against the backdrop of what we can all agree, has been incredibly challenging operating environment.

Let me start with some context around our first quarter results, which actually showed sequential improvement from last quarter. Geoffrey is going to give you a deep dive into the numbers. But, I want to point out what we have done to actually drive these results.

These results reflect the demand destruction that continued into the first quarter, balanced of course by strong results from Dow AgroSciences. Inventory de-stocking appears to be over. So, at least one major component of demand destruction is behind us.

We are encouraged by the operating very improvements that we have seen each month sequentially from December to April.

Cost reduction actions we took also had a positive impact, as we adapted quickly to the environment, and they drove much of our sequential improvement in profitability.

While we expect the recessionary environment to continue through the end of the this year, we actually have seen a few bright spots and some moderation in the pace of decline in the industry. And we're going to provide some color around this.

We know that we have more work to do. But we also know that operational excellence and cost discipline are two of the hallmarks of Dow, and it shows particularly well in these times.

We are taking the necessary actions to manage what is in our control, and we have in place operating plans to maintain and build on our strength, despite the challenges. The path is very clear to us.

Now, turning to our progress in restoring stability to our company. We have made enormous strides by any measure. If you turn to slide four, you will see that since late January, we renegotiated the financing for our acquisition of Rohm and Haas, and settled a litigation to a satisfactory financial outcome.

Two, we restructure the financial terms that allows us to both preserve financial flexibility, and advance our transformational strategy.

Three, we announced the sale of Morton Salt on the same day we closed Rohm and Haas, and at a full price.

Four, these actions have essentially reduced our original bridge loan by nearly 50%.

And five, in addition, we have increased the cost synergies for the acquisition by over 40%; 4, 0.

Six, we have validated the Rohm and Haas growth synergies of $3 billion.

And seven, we announced and implemented cost savings that helped to enable a significant sequential improvement in earnings from fourth quarter of 2008, to first quarter 2009.

Now, although we have made substantial progress, we know that there remains much work to do. And if you turn to slide five, you will in this regard that we have three key areas of focus. Strengthening our balanced sheet to protect our investment grade credit rating. Managing our business through a poor and uncertain operating environment, and successfully integrating Rohm and Haas into the new Dow.

Pierre will talk in more detail about how we are doing to integrate Rohm and Haas, both from a cost and gross synergy point of view. But, let me expand upon what we are doing in these other two focus areas, de-leveraging the balance sheet and running the company in these turbulent economic times.

Turning to slide six. In regards to meeting our financials targets and de-leveraging our balance sheet, we have a very disciplined, yet realistic plan, that we'll retire our Boehlen (ph) facility by the end of this year, even in these challenging times. This plan is also expected to keep our gross debt to EBITDA well within our covenants, and reduce our debt to total capital to a less than 50% by year-end.

Asset sales, coupled with debt and equity issuances that we have already announced, are key elements to our K-Dow plan. And more divestments are on the way, inline with commitments we have made to divest approximately $4 billion in assets by year-end.

And regarding our asset divestment plan, I would like to stress that we are seeking full value for these assets and that we have auctionality. Due to our successful re-negotiation of the bridge loan, and changes we've made to our capital structure, we are once again in control of our destiny.

Now, let's more thoroughly review our divestment plans, and start with the assets we have already communicated to you. As you can see on slide seven, we took a meaningful step forward with our divestment of Morton Salt for $1.7 billion, coming just hours after closing our acquisition of Rohm and Haas. This sale is an attractive valuation. There is no financing contingency, and it will be a significant de-leveraging event.

And as we previously communicated, we're planning on selling our share in TRN, a petroleum refinery partnership in Belgium. Our equity stake in olefins derivatives business in Southeast Asia, and our calcium chloride business. All of these divestments are progressing well, and we will have something to say on these three divestments very shortly.

Now, if you look at slide eight, as we've discussed in the past, these are part of 12 divestment options that we are working on in parallel. All of these are high quality assets, with strong market and technology positions, and divestment ending the whole line part aligns with the company's strategic direction and our past practice of active portfolio management.

I would like to give you more granularity and definition on some more of these 12 assets on today's call.

The first group I'd like to describe are the assets that constitute our olefins envelope and relative derivatives. While outreach and dialogue continues with Kuwaiti partners, there are other parallel negotiations that are ongoing with two other state-owned resource owners, on an equivalent basis for the similar scope of the original K-Dow venture.

These discussions are proceeding on an orderly and timely basis. We are also progressing in parallel, with additional possibilities to strategically position some of these assets in several regional asset like partnerships. The value range for the businesses in this envelop is approximately 4 to $6 billion, depending on the nature of the proposed venture.

And we expect have more to say about some of these regional ventures in the next 90 days.

The second grouping of business is are aromatics envelope. Here too, these are good quality businesses, with significant value potential that are simply not core to our strategic direction.

Businesses such as SP Rubber and SP Latex, will be desirable in other enterprises. And we are pursuing both global and regional options for these units as well. The value range for these two and other business in this envelope is 1 to $2 billion. Options we are examining include strategic, financial and spin-off for this grouping. You'll hearing more about these in the next 90 days.

Our third grouping is several standalone businesses that are non-strategic. In addition, the portfolio management discipline we have demonstrated over the past few years, continues with the acquisition of Rohm and Haas.

After careful review, we have plans to divest the heritage Rohm and Haas powder coatings business. As this business does not have the strategic fit within the new Dow gas materials division.

This business has historically competed with many key coatings customers, and with our acquisition these issues have been magnified. It is clear to us that divestment is the best choice. The full value of this business and several other standalone businesses, not strategic to Dow, are 2 to $3 billion.

Now, another divestment option has been much discussed in the past is Dow AgroSciences. This business is strategic to Dow. But, given the current market for essence in the agricultural space, we have launched a rigorous evaluation process underway here as well, as we continue to assist the right strategic outcome for this business. Options include a full divestment, joint ventures, and possibly an IPO.

So, as you can see we have significant optionality. In fact, the total value of all these divestiture groupings adds up to approximately $25 billion. We are running all these processes in parallel, and are looking for full value for these assets, in order to maximize the return for Dow shareholders, while accomplishing the objectives of our de-leveraging plan. Achieving $4 billion of divestitures out of this complete mix of assets is very doable in our view, within the timeframe of our bridge K-Dow plan.

Other elements of our bridged K-Dow plan, include issuing public debt and equity. With respect to our ongoing financial plans, we are pleased that the capital markets appear to be constructive.

We will continue to monitor debt, equity and M&A markets, as we look to be strategic and opportunistic regarding our capital structure. We tend to file pro forma financial statements for the combined enterprise in the early May. And surely thereafter, we intend to check the pulse in the marketplace for a possible bond issuance.

Regarding equity, we are working closely with the fiduciary of the Rohm and Haas ESOP, and are making good progress towards our goal of issuing common equity from treasury shares of approximately $550 million.

On April 1, we also exercised our option to have the Haas Family Trust to make an additional $500 million investment in Dow Equity. This will convert to common equity assuming we file a self registration statement prior to June 1, which we intend to do.

The equity we are raising by June 1 will be dilutive on a share count basis. The ESOP equity is not expected to be immediately dilutive.

On slide nine, let me review the operating plan. Because this is equally important to de-leveraging the balance sheet plan. This operating plan is comprised of three elements. Firstly, we will deliver on our fourth quarter 2008 restructuring program. And as you can see, we are already making great progress.

Second, we will right size our global manufacturing footprint to adjust to the new realities of the market and reduce demand. The focus here will be on shutdowns and associated work force reductions. This will deliver several hundreds million dollars more in savings.

And third, we will reduce costs and defer or eliminate capital spending, in order to achieve our 2009 pre-acquisition CapEx commitment of $1.1 billion. We are also focused on cash preservation, since cash flow management is critical in these times of economic uncertainly.

Let's start with our fourth quarter '08 restructuring program, and our commitment to achieve $750 million in restructural savings.

On slide 10, you will see since December, we've delivered approximately half of the 5,000 commitment reduce that global work force. And we are 17% ahead of our planned savings. And we expect to be at the $500 million run rate by the end of this year.

In addition to activities related to the fourth quarter restructuring, we also completed the shut down of eight plants in the quarter. And we are not stopping there. As we right sized our global manufacturing footprint, more shutdowns and associated work force reductions, will occur.

For example, Dow's ethane cracker, which is located on the Saint Charles, Louisiana suffered a mechanical problem on January 3, and was taken down.

As we continue to evaluate the supply-demand dynamics across our portfolio, we decided to leave the cracker off line until economic conditions improved.

In addition, there are several more plants on review, which together with the aforementioned cracker, could add up several hundred million dollars more savings.

In summary, the combination of the $1.3 billion in acquisition related cost synergies, our fourth quarter '08 restructuring program, and future actions on our footprint that are under consideration, will deliver a run rate of approximately $2.5 billion of cost savings by the end of 2010.

If you put that into perspective, this is close to half of our operating income in some of our best years. And we're going to have a lot more to say about this in the coming weeks.

And last, just a few words on CapEx. We're on track to deliver our 2009 pre-acquisition commitment of 1.1 billion. I would like to stress at this point that our operating plan assumes no help from the market we are improved business climate.

The visibility we get from our diverse portfolio and its broad market exposure, shows there are few black spots actually out there. And some trend lines that are moving in our favor. However, we are reaffirming our assumption that 2009 will be a recessionary year, and we will not benefit from any meaningful growth.

We have achieved a lot over the last 90 days. And our 2009 operating de-leveraging plan is realistic. And we have all the levers necessary to implement these actions successfully.

Now, I would like to turn the call over to Geoffery for a review of our first quarter results and trends. Geoffery?

Geoffery E. Merszei

Thank you, Andrew, and good morning, everyone. So, as you know we are all in a midst of the most challenging economic environment we've seen in many decades.

On slides 11 to 14, you can see that despite these significant headwinds we achieved positive earnings on both an operating and a GAAP basis. Well, why so? Well, this is due to the diverse state of our portfolio, including another record performance from Dow AgroSciences, rapid actions we've implemented to reduce spending, and lower raw material costs.

So again, in a challenging economic times that we have all experiencing since the fourth quarter of last year, I believe it's more relevant to compare our business performance on sequential basis. Or perhaps, even on a month-to-month basis, as we discuss our first quarter results in order to help identify and track underlying trends and the potential for a recovery.

For example, we've generated a substantial improvement in earnings from last quarter, earnings of $0.03 per share in this quarter, on a GAAP basis, versus a loss of a $1.68 per share in the fourth quarter of 2008.

Now, on an operating basis, excluding certain items, we also saw improvement. With positive earnings of $0.12 per share, up from a loss of $0.52 per share in the fourth quarter of last year.

So, while the year-over-year volume declines are the worst in more than 20 years, the pace of decline appears to be moderating. As you can see on slide 15, and it shows a steady decline in our sales volume from October to December.

Now since January, even excluding ag, we have seen monthly improvements in demand as the first quarter progressed.

In fact, we saw business conditions begin to stabilize in the first quarter. And while volume is clearly no way near mid-2008 levels, there is evidence that the demand is beginning to pick up.

In fact, March was the strongest month of the first quarter, and healthy rates, most of the declines in volumes we saw in December when demand virtually collapsed.

Now these month-to-month trends, combined with a diversity of our portfolio across markets, geographies and businesses, led to these improved results.

So, you can see on slide 16, we fell in to a wide variety of markets and applications, virtually unmatched in our industry. Now, this means that we are not overly exposed to any one particular market or application, especially those hardest hit, like for example, the automotive side.

Next is the diversity of our business mix, and a powerful combination of our portfolio.

So, let me start with our performance segments. Here, I'd like to point out that all EBIT comparisons I will make here exclude certain items.

Despite the drop in price and volume at the company level, we reported sequential EBIT gain, with the largest percentage improvement coming from our performance portfolio, proving the pricing resilience of many of our specialty businesses.

And these gains were above and beyond the seasonally strong contributions from Dow AgroSciences. Our Dow AgroSciences reported another excellent quarter, with sales up 10% year-over-year. All of this coming from volume gains.

This March, the 11th consecutive quarter that Dow AgroSciences has posted sales growth records, compared with the same quarter of the prior year. And Dow AgroSciences also posted a new EBIT record in the quarter, the third consecutive year in which a new quarterly EBIT record has being achieved.

Looking now the demand trends and the rest of our performance portfolio, you can see on slide 17, our performance plastic and chemicals had a positive trend, most notably from February to March, during which volume increased 13%.

Now, when you compare March volumes to the lows of December, the improvement is even more pronounced. So, let me share with you a few examples.

Dow Epoxy volume increased 47% since December. Polyurethanes and systems (ph) increased 34%. And Specialty Plastics and Elastomers increased 18%. A few bright spots in the combined performance segment are in Epoxy, with the electronics and telecom markets in China are seeing good recovery, driven by government stimulus spending.

And in Specialty Plastics, where demand for packaging appears to be more consistent, and of course in ag, where fundamentals are still good.

Now, these trends however, are likely to be offset by several challenges.

First, the ongoing weak demand in polyurethane used in constructions and durables. Frozen credit markets, which are unfavorably impacting large project spending, in areas such as in Eastern Europe and in Russia, and the continuing uncertainty in the automotive sector, as global manufacturers consolidate, rationalize brands and reduce manufacturing capacity.

Now, turning to our basic segments, EBIT expanded sequentially as well here.

Slide 18 shows a similar pattern of demand improvement throughout the December to March timeframe. In fact, polyethylene volume increased 10% from the prior quarter, and was down only 4% on a year-over-year comparison.

Basic plastics should show some improvements, as de-stocking appears to have run its course.. In addition, underlying demand for films used to food and industrial packaging, continues to be more consistent, compared to durable applications.

However, significant challenges remain, particularly in the basic chemicals businesses, such as in ethylene glycols, for polyester textile demand will be down, due to reduced consumer discretionary spending.

And in our core vital (ph) chain, unfavorable conditions in pulp and paper, and alumina are leading to demand declines in pretty much all geographic regions.

Now, I would like to talk about another key driver behind our results in the first quarter. And that's our rapid and effective actions to reduce cost. All across the organization, cost control is the top priority as Andrew stressed. We are focused on things that are in our control, and the size and speed of reductions were meaningful in this quarter.

Now, consider these facts. As you can see on slide 19, compared to the same quarter last year, SARD decline 93 million in the quarter. This despite an 8% increase in growth investment in Dow AgroSciences.

And overall spending decreased $270 million year-over-year and sequentially, and we remain on track to achieve our 2009 CapEx commitment of 1.4 billion. That's for the new Dow combined with Rohm and Haas.

We also continue to manage our operations in the quarter, carefully matching productions to demand.

And as business fundamentals improve, operating rates pick up. As you can see on slide 20, coming off the historic levels of 44% in December of last year, operating rates jumped back into the mid-60s in January, declined to 70% at quarter end.

While the quarter average of 68% is no where near the mid 80s were we reported a year ago, the improvement is clearly encouraging.

We're also focused on tightly managing working capital. So, while there was an expected inventory build for business such as Dow AgroSciences and Dow Building Solutions, which are both preparing for seasonal demand, we remain on track to deliver a working capital improvement about $0.5 billion through the year.

And days sales outstanding and receivables remain in good control at a relatively low 42 days, flat with the prior quarter. So, that's the summary of Dow's results in the quarter.

In a moment, Pierre will provide an update on the integration process. But first, I would like to give you a high level summary of the financial results for Rohm and Haas in the first quarter as you can see on slide 21.

Rohm and Haas reported sales decline of 29% year-over-year. But similar to Dow's Performance segment, the businesses showed pricing resiliency against their 26% decline in volume.

Also consistent with trends I mentioned earlier, gradual improvements reported as the first quarter progressed in almost all Rohm and Haas business units. Sales increased 17% from February to March, and that's excluding Salt, with March being the best sales months since October of last year.

Our March volumes at company level and again, excluding Salt, was 46% higher than December. So demand clearly improved from the year-end lows.

Costs improved as well, with SARD declining 21 million year-over-year. In coatings, month-to-month improvements were reported in the quarter. Challenging market conditions were approximately offset by cost reductions, margin management, and new product launches.

And encouraging signs of recovery were noted in the electronic businesses. And there is not better expert on this, than my colleague Pierre Brondeau. And at this time, I'd like to turn the call over to him for an update on our integration efforts. Pierre?

Pierre R. Brondeau

Thank you, Geoffery. It gives me great pleasure to be here today to share with you the news about the new Dow Advanced Materials division. As you can guess, we have had a pretty busy 30 days. Shortly before we closed on April 1, we named the management team for the business unit, which is shown on slide 22.

In the spirit of truly combining the best from both enterprises, you can see we have a premier leadership team that is comprised of both Dow and Rohm and Haas employees.

One of the main objectives of the acquisition is to preserve the customer-centric business model from Rohm and Hass has been known for.

At the same time, we are removing cost and increasing productivity by supporting back office functions in manufacturing operations, a core competency of Dow.

The majority of the functional leaders come from Dow, while the majority of business leaders come from Rohm and Haas, putting in place the necessary expertise of both of these areas to achieve our goals.

Through this combination, we have created a large high-growth global businesses. You can see some examples on slide 23 and 24. These businesses have size, scale, enrich to win in their respective sectors.

On slide 25, you can see that since early April, we have also converted a lock down sessions, where business and functional teams came together and we reviewed confidential materials, gathered by various in teams during the month leading out to the closing.

We used Dow efficient process, and I can tell you, it is a very impressive practice with more than 1,000 employees engaged covering businesses, functions and geographies.

This Clean Team collected and this deal thousands of documents in better point, into actually more recommendation that we'll accelerate the integration and the capture of both costs and growth synergies.

On the cost side, which is most important in the near term, we remain committed to delivering $1.3 billion in acquisition related cost synergies by the end of 2010.

Having new integral for all your process, I can also tell you that the team is completely engaged and fully committed to the $1.3 billion target, which as you'll recall is earned from a original estimate of $910 million as shown on slide 26.

In fact, we will begin tracking progress against these projects quarterly, starting with our second quarter earnings call.

If you turn to slide 27, you will see the Clean Team I just mentioned. I have already identified more than 100 major cost synergy projects, and 100 more sub project. With a top 12 project representing approximately $650 million of cost synergies.

As we have said previously, we intend to be at 60% run rate, 12 months after the closing date, or by March 31, 2010.

We have a detail on that, and I am very confident we'll achieve these goals.

Turning now to growth opportunities on slide 28. We believe there is tremendous potential here as well. We have in hand numerous growth playbooks that when put together by the integration teams for each of our global businesses.

On the day of closing, I finally had a chance to review these. And all I can say is in spite I was there, I was still reading with excitement, tremendous opportunities clearly lied ahead of us.

Sources of near term growth synergies for the combined companies include a broader product offering, opportunities for cross selling at the accounts, utilizing channel to market expertise, accelerating new product and productions and stronger technical service, and leveraging a complementary geographic position.

Near term growth synergies spread across all business groups, geographic and market segments. The top 50 short-term growth opportunities represent over $2 billion in potential on new sales.

Let me expand on the couple of this. The new portfolio of our coating business, clearly allows a much stronger penetration of key accounts, and broader participation in the architectural industry and industrial markets.

On the building and construction side, Rohm and Haas had developed new technologies, but did not have the critical mass in channel to market, nor did efficiently participate in these markets.

The new company brings together normal technology and a very strong route to market.

We also have significant long-term growth potential as well. The top 30 opportunities, our combined annual sales potential of $8 billion, in addition to the previous one.

The combined marketing and R&D organization are already harder to work to make these a reality.

If you could turn to slide 29. I would like to discuss now the outlook for Dow Advanced Materials for the remainder of 2009.

We expect full year sale to be down versus 2008, inline with the rest of the specialty chemicals sector.

However, and consistent with Geoffery's comment, we have seen four months of sequential growth for the heritage Rohm and Haas businesses, excluding Salt.

In fact, as our specialty chemical demand actually grew year-on-year in March for some critical segment such as coatings. Electronics was significantly impacted due to the severe inventory correction and reduced customer spending, and the high gross margin of the business magnified the negative impact on the results.

The good news, is it appears the inventory correction is essentially over, and demand is now improving.

The semiconductor industry is seeing better operating rates, and higher capacity utilization at foundries. The demand for flat panel displays led by China, is also improving.

Both our coating and performance based materials, almost still affected by the global economic slowdown of have been posting modest sequential growth monthly.

Unan (ph) and Asia and Latin America are stabilized, or even started to show some growth signs for the area.

North America is flat for now, while demand in Europe is still lagging.

Over the next several months, we will be focused on a few key priorities as you see on slide 30. I have no doubt that we are building the strongest specialty chemical unit in the industry. And I am proud to lead an organization with such a growth potential.

Andrew N. Liveris

Thank you Pierre, and welcome aboard. It's really great to have you.

Well, let's conclude the presentation part of the presentation by talking about the outlook. And clearly, as you see on slide 31, we are beginning to see signs of the pace of global economic decline is moderating. Although, the signals are still yet not overly clear, albeit, they are much better than they were in January.

We believe the rate of decline of the key economic indicators such as industrial production and consumer spending, has in fact slowed.

However, lower business spending, weak manufacturing activity and growing unemployment warrants a cautious approach in the near turn. Techno-geographic view in the United States, we are hopeful that we will return to positive growth in the second half of 2009, as economic stimulus spending ramps up.

In Europe, the view we have based on our diverse portfolio, and vast end market reach, suggests that stimulus packages might not have been having the same impact, and therefore recovery may be further out.

China, however, has emerged as the potential bright spot. The declining growth rates there appears to be at bottomed, and the story now seems to be a domestic one, with local demand improving in response to aggressive government stimulus programs.

If we look at business trends through the eyes of our customers, we see a continuation of low inventory levels, following recent periods of heavily de-stocking. But clearly, the world is in a far better place than it was in December. And it now appears that the inventory de-stocking was an overcorrection, and that that part is behind us.

The operating rate improvement from December to April is a good signal in my opinion. And Dow's reach into nearly every part of the industrial and manufacturing economy, reduces our vulnerability to those segments that are most hard hit.

Despite these bright spots on the horizon, we nonetheless continue to assume that 2009 will be a recessionary year globally. And we're not counting on any material improvements in economic conditions in the near term, as we implement our plans.

But, we are ready to take advantage of any upturns due to our cost and interventions.

On slide 32, you can see our priorities for 2009, which are, successfully integrate Rohm and Haas, to capture growth, and preserve their business model. To realize Rohm and Haas cost synergy targets and accelerate Dow's own re-structuring plans. To execute our de-leveraging plans for the bridge loan pay down, and protect our investment grade ratings, and actively manage our cost and operations through the economic downturn.

Operational excellence and cost discipline are two of Dow's traditional strengths. And as promised, we are focused on managing what is in our control. We view the results and actions taken this quarter as important steps towards our goal to realize the transformation of Dow into an earnings growth company. And we're firmly committed to deliver on the plans we have described on this call. The future holds a more rapidly growing, more profitable, leaner, less leathered, and are a far more valuable Dow.

I would like to turn the call back to Howard for the Q&A. Thank you, everybody.

Howard Ungerleider

Thanks Andrew. 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 will move on to your questions.

Before we do though, I would 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 make them up during the Q&A.

Jennifer, would you please explain the Q&A procedure.

Question-and-Answer Session

Operator

Yes. Thank you, sir. (Operator Instructions). Our first question will come from Sergey Vasnetsov with Barclays.

Sergey Vasnetsov - Barclays Capital

Good morning.

Andrew Liveris

Good morning, Sergey.

Sergey Vasnetsov - Barclays Capital

Page eight is very impressive, if it's a much longer lease than probably most of us here imagined. And there seems to be a little larger than you would really need.

So, I just wanted to ask you, when you are trying to divest some business, what's the value trying to realize, or is it just to cover the bridge loan, or you try to sell larger amounts if the market allows you to?

Andrew Liveris

Yes, I think Sergey, it is an impressive list. It's one that's been drooled over the last several months. And in respond to the two points you're making. One is, of course, the bridge pay down is priority one, and returning investment grade rating, and that shows optionality.

But, two, given that we have a very strong and aggressive portfolio, management process at Dow, that is meant to liberate resources for growth businesses. That process is what we put in place these last two months to yield slide eight.

And of course, we just started applying it to Rohm and Haas. And that's why the powder coatings announcement was part of my prepared remarks. What it basically says is that we have the portfolio that we want. We know what we're not going to grow. We know what we are going to divest. We will do it to pay down the bridge. But, we can over achieve beyond the 4 billion that we have articulated in the bridge pay down metrics.

So, priority one, bridge pay down. Priority two, liberate resources, so we can grow key growth businesses in Dow, so that we can actually transform the companies earnings profile. This has been board approved, board committed. And we felt very strongly compelled to articulate to the market that slide eight exists.

Sergey Vasnetsov - Barclays Capital

Okay. Thank you and good luck.

Andrew Liveris

Thank you, Sergey.

Operator

Okay. We'll go ahead and move to our next question which comes from P. J. Juvekar with Citi.

Prashant Juvekar - Citi

Good morning.

Andrew Liveris

Good morning, P. J.

Geoffery Merszei

Good morning.

Prashant Juvekar - Citi

Andrew, you said that non-durable inventories are low. And they have been de-stocked. When you look at durables, how much inventories are there in the supply chain, and when do you see a bottom for those?

Andrew Liveris

Depends on the region of the world, P. J. I would say to you that the bottom has been reached in China on the durables side. We are starting to see products that served the durable market, start to have an uptick in China, which suggests that government consumer oriented stimuli is working. Remember, the Chinese stimuli is not just infrastructure, it's also rebates that help the Chinese consumer do something that Chinese consumers love use to doing, which is spend.

That's happening in transportation. It's happening in durable goods. And you can see that in shipments from factories to the wholesale, and wholesale to retail. And so that is occurring. And frankly, it is the bright spot in the durables world.

The rest of the world is still very cautious on the durable side. And I would say to you that we don't see the order patterns yet to suggest what you are hunting for, which is durable pick, certainly in the U.S. economy. Europe is a worry to the negative, and the rest of the world it doesn't matter materially.

Prashant Juvekar - Citi

And similar question for Pierre in electronics. Pierre you mentioned that you saw bottom in electronics. And given that these end markets are higher growth, do you expect a faster recovery in electronics, as compared to like hoardings or other industrial markets?

Pierre Brondeau

I think if you look at the electronic market, the electronic industry as a whole, the slowdown was much more severe in the electronic industry than it was in other building and construction market. For example, we have been talking of numbers for the last quarter of about 40 to 50%, slowdown in those markets.

When you look at those markets, we believe about half of that comes from de-stocking, half of that comes from slowing demand, which brings us really in demand in the same range as other markets. We believe that de-stocking is essentially over at this stage. So, the electronic industry now should see some rapid improvements, actually there have been and we can see that already in April.

We believe the quarters to come will fill (ph) especially, from the second third quarter. We'll still be down versus a year ago. But, you could see significant sequential growth, and you could see sequential growth in the range of 25 to 30% in the second quarter.

So, limiting the slowdown to the lack of argument.

Operator

Okay. We'll go ahead and move to our next caller. Our question will come from Kevin McCarthy with Bank of America.

Kevin McCarthy - Bank of America

Yes, good morning. How are you?

Andrew Liveris

Good morning, Kevin.

Geoffery Merszei

Hi Kevin.

Kevin McCarthy - Bank of America

Andrew, a long term question for you. The Wall Street Journal described this morning the U.S. swimming in natural gas. And obviously, cheap gas drove a lot of investment in the 70s through to 90s. That changed this decade as capital migrated to the Middle East and Asia.

As you look longer term assuming that you right sized the balance sheet, as you think about where Dow should be investing, let's say, over the next five to 10 years?

Have you changed your thinking at all, given how cheap gas has gotten relative crude oil? Or are there other issues, such as carbon legislation et cetera that would keep you on course?

Andrew Liveris

Yeah. I think, you gave part of the answer of your question Kevin. And clearly, climate change legislation, which Dow is very proactive on, and very supportive on to give the market a signal that it definitely needs, industrial manufacturers in particular, in terms of investment economics. We need to have that carbon signal out there.

But, having said that, the dash to gas will be pretty strong, if we don't develop alternatives for utilities and transportation. So, natural gas is a clean fuel and power stations in particular, will move to natural gas on the carbon change legislation. So, that will cause the long-term demand to reop. And really, the next point that I will make that which is fundamental, which is demand destruction, related to this carving out official glut in natural gas in essence with 30% volume disruption in key markets. All of us are running at lighter weights. And its instructed to us that natural gas albeit at swimming, still has not returned to what we had in the 90s.

I mean, remember we built our whole industry based on $2 natural gas. Now, can we see some better opportunity today than it was? There clearly is. And Geoffery talked about feed stock flexibility. That gives us an opportunity to make more money. Because of our feedstock flexibility give us a committed advantage on our ethylene margin.

We can crack lights selectively. And of course, that's a key parameter in this current oversupply. But frankly, we don't consider that the oversupply will continue once demand returns.

Kevin McCarthy - Bank of America

And two brief follow-ups, if I may. Do you have a Rohm and Haas EBITDA number for the first quarter?

And second, I was wondering if you could comment on your operating rate in the month of April as a company?

Andrew Liveris

On the operating rate, I'll let Geoffery or Pierre respond to this. On the operating rate, we are continuing the trend to the positive.

So, in other words its up for March. And again, this is an indicator of what I think I said in my remarks. Geoffery?

Geoffery Merszei

Yeah. And let me just comment here about. The pro formas are going to be filed May the 5th. The Q is going to be filed on the 4th, which I think is Monday. So, at that point in time, we will have all the details.

Kevin McCarthy - Bank of America

Thank you very much.

Andrew Liveris

Thank you.

Geoffery Merszei

Thanks Kevin.

Operator

Okay. And our next question comes from David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Andrew Liveris

Good morning, David.

David Begleiter - Deutsche Bank

Andrew, another long-term question. When you look out to perhaps 2011, perhaps the first normalized year for both Dow and on the globe, what is Dow's earnings power. I know there are lot moving parts with the assets. But, what is Dow power, maybe just a range?

Andrew Liveris

It would be very fair to all of us David. I mean, we are putting a lot of work in the next several months. I'll answer your question more fully, and I don't like ducking answers. You know, we will not.

But, I certainly don't want to give you a sense of that yet. We have a lot to assimilate into views go forward. One of them is the portfolio question I've already addressed.

Second is the earnings upside and some of the things Pierre talked about, which we're pretty exciting to us if you heard a couple of his numbers, the $8 billion revenue growth opportunity by 20, whatever it was, I think 10 years from now.

Maybe -- there is a lot that we want to fund. Having said that, we have some drag because of our new capital structure. We have to get that remedy. So, there is a lot that goes into that number right now. But, our long-term goal okay, is the 10% per year earnings per share growth, a 20% return on equity, and achieving a 10% return on capital through the cycle at average of getting 2 to 3% above that number, as we got through the cycle average.

We should be a less volatile company with the acquisition of Rohm and Haas. We need to demonstrate that by a portfolio clean up. And that's why slide eight is so important. And we are encouraged by some of the regional possibilities we now have in the olefins envelope that we articulated on slide eight.

The new Dow will be a much more focused Dow, one that is focused on end use market s like electronics, like AgroSciences, if we choose to retain that business in its current form. And like coatings and like some of the other things that Pierre talked about, which should make us more predictable and achieve these earnings targets.

David Begleiter - Deutsche Bank

And there was a timeframe for Dow Ag decision, is it the next months, by year-end?

Andrew Liveris

Well I think the Dow Ag decision has been a five year timeframe, of which the last three months have yielded quite a lot of interesting opportunity.

I mean, I would tell you that it went from people feeling we were a distressed seller, to what I now call a more orderly process to position Dow AgroScience, better for its future, and returning the highest value for Dow shareholders.

So, we've begun very full process. It's quite wide ranging. There are various serious bidders on the business. And we're seriously engaged with many of them, to figure out can we look at for example, liberating evaluation, liberating cash and re-deploying that into better opportunities in Dow.

So, I would tell you that you will have a lot more to say in the next 30 days, 60 days, 90 days. But, it wouldn't be end of year. We will not leave the property in its current form, where we're looking at options till the end of the year. We'll do it in the next 30, 60, 90 days.

David Begleiter - Deutsche Bank

Thank you.

Operator

We'll take a question from Frank Mitsch with BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Good morning, gentlemen.

Andrew Liveris

Good morning.

Frank Mitsch - BB&T Capital Markets

There was a former Dow executive, who used to talk about how the old Dow models didn't work anymore. And I am reminded of that given how far the streets been off in the fourth quarter. And again off here dramatically in the first quarter. And I'm wondering if you could share some light as to why do you think that is? And can you talk about the positive benefits that you saw, with raw materials size for us in the first quarter. And then perhaps, what the expectation is going forward?

Andrew Liveris

I think Frank, we are all veterans of trying to predict cyclicality and cycles. And I think one big learning is modeling doesn't tend to work very well, when the moving parts are so huge. And I think we've been in a new era where inflationary hydrocarbon commodity prices took the Dow model to as different place in its portfolio. And the massive destruction that occurred in demand in December took the model to a completely off center data point.

So, there is no bold that could have put those two data points in place. One, the run up to $150 oil, and two, the demand destruction that led to a 44% operating rate in December.

In our view, you almost have to throw those two points out, and then go forward, have a view to the future hereon. What are we looking at in terms of A, our portfolio, with 60% specialties in his current manifestation, B, the equation on natural gas, and what does the margin look like, in terms of an ethylene margin, which is still a big impact to the company.

Those two things are being worked on right now to answer the question that was asked I think by, it might have been Dave Begleiter or Kevin. I can't remember the last. But, about what's that go forward earnings profile. But, one thing for sure, the volatility we all saw in '08, if you begin to think that that's recurring thing, on destruction on the target on December. And/or a run up to a $155 oil, then you almost have to reset all the models.

And we're going to work on that. Our whole objective here is to get predictability in our earnings by going to feedstock advantage as of life ventures like I've already articulated. So, we reduced that volatility.

In the more near term, I think what you are going to start to see is what you did see in the your part of your question, which is we had good margin expansion, because of cost management. And we lost less price compared to losing hydrocarbon.

And as markets tighten around new asset of footprints, we're reducing -- we're all reducing supply, this 2 million tons of announced permanent shutdown in ethylene capacity that's out there already, and the crack that we just talk about adds to that.

You will see that supplied amount, the ethylene margin will go into the high 80s, in terms of operating rate. You'll start to see the opportunity for margin expansion in the ethylene envelope in this more near term.

All of that to tell you that it's a very complicated question. We're going to do our very best in the next 30, 60, 90 days, it's including our only analysis to give you as better guidance on that answer.

Frank Mitsch - BB&T Capital Markets

All right, terrific. Thank you. And then speaking of models, the old models aren't not working on Rohm and Haas, the result in the first quarter was I guess surprisingly bleak. But, Pierre if I am to understand you correctly, you are seeing a material pick up in your high margin electronics business, such that we can basically take the first quarter, throw it out, and get back to more normalized sort of electronic earnings for Rohm and Haas, for the former Rohm and Haas business.

Pierre Brondeau

Yes, Frank. We are going to see some normalized earnings coming from a very unique dealer (ph).

If you look at the first quarter you have the specialty materials business with positive earnings, and coatings actually not doing too badly. Some of the performance materials being close to breakeven. And with the electronic materials because of the slowdown in sales, any high margin which was really the a business, which has been penalizing us from an earnings standpoint.

This business is recovering very fast. I mean, it's been sequentially improving since December. The month of April is looking much more robust than the month of March. Also, the display business is growing led by China. So, it's a business when the top-line goes up, the bottom-line goes up very fast too. So, we should see some improvement very rapidly.

Operator

Okay. We'll move to a question from Don Carson with UBS.

Donald Carson - UBS

Thank you.

Andrew Liveris

Hi don.

Donald Carson - UBS

Hi Andrew. Getting back to Ag, you talked about obviously, in your comment about liberating valuation. So is this pretty much a signal that you just think Ag wont get the proper value within the Dow portfolio, and that you either sell it or IPO it entirely, or is it sort of a partial IPO to liberate value?

Andrew Liveris

Yes, all of the above in the sense of optionality. The key point is the one that you asked about or started with, which is, it's a property that sit inside our commodity chemical multiples.

Now, of course, the entire strategy of the company is to our multiple towards the Ag side, to the extent that others notably, our friends at DuPont are doing the same. They have become more and more of a Ag company. And of course, they have other businesses. That model is not too dissimilar to what we would like to get to, which is less commodity, more downstream. Rohm and Haas is a similar event in that regard for us, because now we have Ag, and Advanced Materials, and some of our performance products.

And so, if were to meaning for long-term, there could be value liberation by the entire Dow enterprise moving its multiple.

Having said that, this process we are going through may give us a short-term return to our shareholders by liberating the value in part or in full now. And that's why we are just sidely (ph) interested in looking at how we can return maximum value to our shareholders.

Full retention or full divestment of the two extremes.

Donald Carson - UBS

Andrew, a follow-on portfolio question. On the basic side, you've talked about your various options on the ethylene envelope. What about the chorine envelope? And obviously, near term with the way the cycle is going, does that give you more sense of urgency to do something to get that out from the portfolio.

Andrew Liveris

Our decision recently to delay the new (ph) build of chlorine on the Texas Gulf is instructive that we really do believe that, chlor-alkali still needs some degree of rationalization.

We do believe that asset life is more probably in that future than not. We clearly also see that there Syntec (ph) relationship needs to re-classed. And that is being done as we speak. And I would say to you that the most important part of chlorine for us is that feeds our downstream derivatives that are value-add. And as we build new footprints, whether they be in Saudi Arabia or China, they will be asset-liked on the powder coating we don't want to be in which is EDC/VCM. And try to get low cost feedstock's to feed the chlorine value to feed the downstream value. That's indeed our strategy here in the United States, and for that matter in Europe.

And asset life with feedstock advantage. The natural gas point by the way, helps right now. Of course, because of low cost power.

Operator

Okay. We'll go ahead and move to our next question which comes from Peter Butler with Glen Hill.

Peter Butler - Glen Hill Investments

Good morning, good morning.

Andrew Liveris

Good morning.

Geoffery Merszei

Good morning, Peter.

Peter Butler - Glen Hill Investments

Yeah I have an observation. It's unfair to Sergey, who conformed with your request the hold of your questions to one each. You're letting the subsequent people ask multiple questions. It's an observation.

Okay, my question is Dow has had a very difficult time of late, making things happen in the Middle East. I think you are finding that contracts in the Middle East are written in the sand.

Did you derive any lessons from striking out in Kuwait, probably Saudi Arabia, Oman et cetera. Do you, I mean, do you guys need to establish better relationships with the ruling families before you start negotiating with the petrochemical bureaucrats?

Andrew Liveris

Yeah Peter, thanks for the observations. Sergey, if you want to come back in on another question, please do because I do think Peter is correct. We'd be a little relaxed. So, we will answer everyone's questions either in the call or follow-ups. So certainly, Peter you ask a very huge question and one that Dow's legacy has -- we've been exceptionally good at, which is government relationships around the world, down in the context of high ethics, high integrity, and the right way to do business as defined by Dow's 112 years of success.

In all of those years, we have only had trouble in three different places. And both of them due to change of regimes. I think you are aware of the other two places.

In this particular case, we have exceptional relationships with Kuwait. Nothing has changed there. Our ongoing relationship was validated by Kuwaiti investment authority coming along with $1billion to invest in the Rohm and Haas acquisition, despite the ruling family's decision late December to withdraw from the Venkay (ph) Dow venture.

We are still in negotiation and discussion with Kuwait. What happened was people called as people call a black swan event. The ruling family and parliament in Kuwait is going to incredible amount of this functionality. And that isn't going to finish any time soon.

On the other side of the coin, no situation is the same. Our Saudi relationships are exceptional. I had a dinner tonight in Houston with Saudi Arabia's (ph) management.

I would tell you that our Saudi profile is improving to the point where are preferred time and beyond just the Dow project, Rohm and Haas project, which is an exceptional project in the region.

So, each country is different. Oman was a special circumstance. We still like to think that over the timeframe that the Oman project is doable. So, Peter, it's very hard. You are a student of the world, so am I. I wouldn't characterize our relationships as broken or weak in the Middle East. I would call them as strong. And we just have a situation in Kuwait that needs to be remedied, that we will.

I believe will have a growth profile in Kuwait, when all is said and done.

Peter Butler - Glen Hill Investments

Okay. Thanks.

Andrew Liveris

Thanks you, Peter.

Operator

All right. We will move to a question from John Michmelti (ph). And I apologize, but he has dropped from the queue. So, we'll go ahead and take a question from Mike Judd with Greenwich Consulting.

Michael Judd - Greenwich Consultants LLC

Hi, this is real quick. You're likely to have some unusual charges in the June quarter, and maybe, even looking forward a little bit. Could you give some sense of what the cash portion of the unusual charges could be for the rest of the year, please. Thanks.

Geoffery Merszei

Yeah Mike, it's Geoff. I think we'll have some obvious cash charges when it comes to having close the Rohm and Haas transactions. There is some further banking fees. And we will have cash charges that are related to severance. In fact, severance both from our restructuring program, as well as the synergy program for Rohm and Haas. And we're still finalizing following the recent lock downs with Rohm and Haas, in terms of that $1.3 billion of synergy costs, in order to secure the cost synergies.

So, I mean, a number, I would rather not give you at the moment. We will be able to share, more numbers with your later on. But, the second quarter will have I would say, a major cash charge.

Michael Judd - Greenwich Consultants LLC

Thanks for the help.

Andrew Liveris

Thanks Mike.

Operator

And I don't think we have Mr. John Mcnulty that has come back into the queue. We will take his question. He is from Credit Suisse.

John Mcnulty - Credit Suisse

Hi thanks a lot. Sorry, I don't know how I get dropped off there. But a question regarding the cash flows. It looks like your burned through about 1 billion to 1.2 billion this quarter. And I know there is some seasonality to the business. But, given the trends that you are seeing in terms of some of the businesses modestly picking up, can you give us some color as to when you think you might be cash positive, so that you'd be generating cash going towards paying down some of the debt itself?

Geoffery Merszei

Look, I mean, seasonally, we normally have in the first quarter, a cash flow that is probably about $0.5 billion less than the regular quarter.

And in fact, I can tell you that from a working capital standpoint as you know, we reduced our working capital requirements in the fourth quarter. I think the number was $2.3 billion. And we only gave up about 300 or $340 million, $332 million I think it was in the first quarter.

So, in fact, and from my perspective, in fact the first quarter was probably better than expected. And for the full year we definitely will see a pretty strong free cash flow, definitely positive. I think on the working capital side, I said that we'll see an improvement of $0.5 billion, and we should see a free cash flow, I would say, around a $1 billion.

John Mcnulty - Credit Suisse

Great. Thanks very much.

Howard Ungerleider

Jennifer, we have time for one last question please.

Operator

Okay sir. We'll take that question from Bill Young with Kempstead (ph).

Unidentified Analyst

Good morning, gentlemen.

Andrew Liveris

Hi Bill.

Unidentified Analyst

One thing I still can't understand on the agriculture side is, why you would consider a full divestment. Ag business corresponds so well, it's about strategy going forward, and specialties performance, steady returns, asset life. And I can see the joint venture route. Have you considered doing a partial spin-off to a financial type of partner, similar to what you did a few years ago in the consumer products area.

Maybe, if you could just cover this whole divestment thing? It just doesn't fly to me.

Andrew Liveris

Yeah Bill. And you and many others in our investor universe have made a very similar comment. And look, January and February were extraordinary months in the Dow Chemical Company's history. We had our backs against the wall. We had a lot of situational issues that we won't go over. You know what they were.

Clearly, to monetize a growth asset was the last thing we wanted to consider at that point in time. For all the reasons you said, you'll note that in my verbal comments I said Dow sounds as a strategic asset.

So, you can rest assured it that if we reach the conclusion of a full divestment, it's because it is so compelling that we have to consider it for our shareholders. I mean, that's the way you should consider that sentence.

There are other ways to get from here to there. And you've just labeled them, and you've listed them. And they're much more consistent with our last five to six years of investment in the business, inclusive of more recent investments.

Even in the first quarter, we increased their R&D, and increased their CapEx. So, look, you are -- your headline is very accurate. There is a few more rows and columns to talk about, as far as the Dow goes on, story goes. But, you are very correct in summarizing it the way you did.

Unidentified Analyst

Okay, thanks a lot.

Howard Ungerleider

Thank you, Bill. 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. We look forward to talking with you on our next earnings call in July. Thanks very much.

Operator

Thank you, sir. That does conclude today's teleconference. We thank you all for your participation.

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Source: The Dow Chemical Q1 2009 Earnings Call Transcript

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