The Dow Chemical Company Q3 2009 Earnings Call Transcript

|
 |  About: Dow Chemical Co. (DOW)
by: SA Transcripts

The Dow Chemical Company (NYSE:DOW)

Q3 2009 Earnings Call Transcript

October 22, 2009 10:00 am ET

Executives

Howard Ungerleider – VP, IR

Andrew Liveris – Chairman and CEO

Geoffery Merszei – EVP and CFO

Analysts

P.J. Juvekar – Citi

Robert Koort – Goldman Sachs

Don Carson – UBS

David Begleiter – Deutsche Bank

John McNulty – Credit Suisse

Sergey Vasnetsov – Barclays

Peter Butler – Glen Hill Investment

Jeff Zekauskas – JPMorgan

Kevin McCarthy – Banc of America

Bill Young – ChemSpeak

Operator

Good day, everyone and welcome to The Dow Chemical Company's third quarter 2009 earnings results conference call. Today's call is being recorded. At this time I would like to turn the conference over to Howard Ungerleider, Vice President of Investor Relations. Please go ahead, sir.

Howard Ungerleider

Thanks, Lisa. 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; and David Johnson, Director and Investor Relations.

Around 6:30 this morning, October 22, our earnings release went out on PRNewswire and was posted on the Internet on Dow's Web site, Dow.com.

We have prepared some slides to supplement our comments in this conference call. The slides are posted on our Web site 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 of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release or on our Web site. Our earnings release as well as recent SEC filings are available on the Internet at Dow.com. The agenda for today's call is on slide #3.

Now I will have the call over to Andrew.

Andrew Liveris

Thanks, Howard, and good morning, everyone. On slide #4 I refer to the fact that the third quarter was another quarter of continued improvement for the Company and we made meaningful progress on a number of fronts. We delivered sequentially better results for the third quarter in a row, driven in part by our recently acquired business units that captured early cycle growth and a strong rebound in demand in emerging geographies.

Operating earnings of $0.24 per share were once again improved versus the prior quarter, reflecting the benefits of our broad geographic presence and our vast portfolio, which enabled us to capitalize on markets that are showing an economic rebound.

Specific areas of strength include Electronics and Coatings, where government stimulus spending is spurring domestic demand in China and other Asian economies. We achieved pricing power in the quarter, with price up 6% on a sequential basis. Now while volume was flat in China versus last quarter on a year-over-year basis, volume grew an impressive 10%.

And significantly we generated more than $600 million in cash from operations in the quarter. Our global operating rate improved 3 points to 78%, reflecting both rapid actions to rightsize our manufacturing footprint as well as improving economic conditions. We also reduced structural costs by more than $1 billion year-to-date and we now are at more than 110% of the 12 month cost synergy run rate goal for the integration of Rohm and Haas in just six months since we closed that acquisition.

We also closed two divestitures in the quarter. And we did so at very good multiples, generating nearly $1.5 billion in combined gross proceeds from the sale of TRN and OPTIMAL. And with the sale of Morton Salt closing on October 1, for $1.7 billion in gross proceeds, we completely repaid our bridge loan 90 days ahead of our goal. So as you can see, this was another quarter marked by strong execution, tight business management and a focus on delivering against our stated goals.

On slide #5 I refer to the fact that emerging geographies played an important role in our performance this quarter, particularly in Greater China, Southeast Asia, India, Latin America, and the Middle East, which all showed more robust growth. In China, government stimulus spending help spur demand for everything from appliances to automobiles.

Now here are some examples of the sequential volume growth we experienced in China, in particular. Electronic materials, up 15%; Coatings and Infrastructure, up 16%; Automotive, up 5%; and Polyethylene, up 10%. Brazil was another bright spot with volume growth of 18% versus last quarter. So as you can see, both China and Brazil have rebounded very quickly. We are seeing similar robustness in India and in other emerging geographies.

Now there are challenges that certainly remain out there, particularly in the mature economies such as those of the United States and Western Europe. In these areas the economic recovery remains somewhat muted at this point. In the United States this is due to high unemployment and reduced consumer spending that is creating a drag on economic recovery. More on this later.

On slide #6 we show that our vast end market reach in many applications industries gives us a unique view into the global economic recovery as we see virtually all sectors from many perspectives and many points of views. And by this I mean by geography, by industry, and by end market use.

We have had in place a robust tracking mechanism since the beginning of the year, the output of which you can see here. This June versus September comparison shows that demand destruction for the most part has ended and recovery has started.

The good news is that our strong global presence and broad market exposure continue to bolster our business as overall economic recovery begin, plus we are in key value chain and not overly exposed to any in particular. And demand recovery, which is highlighted in green, is now taking place in a number of key sectors, where Dow is well-positioned.

As I said, our new business portfolio was one of the key drivers of success in this quarter. If you turn to slide #7, let me now provide a few high level details per operating segment about what drove performance in the quarter. Higher growth, higher margin businesses such as Electronics and Coatings were significant contributors to our ability to capture early stage growth.

Consider EBITDA margins of more than 30% in Electronic and Specialty Materials, with total EBITDA and margins both improving on a year-over-year and sequential basis.

Foundry utilization rates in the quarter were more than 90%, as semiconductor production increased. In Specialty Materials, the home and personal care sectors were bright spots, helped by share gains in end markets that have been generally less impacted by the recession.

As were the products of Dow Water & Process Solutions, which reported a modest improvement in sales due to higher shipments of reverse osmosis membranes for large projects, mostly offset by lower demand from industrial segments.

Dow Corning also delivered a significant improvement in its results in the quarter due to a broad-based demand improvement, both geographically and in end markets, including Coatings, Advanced Materials, Electronics and Life Sciences.

In Coatings and Infrastructure margins also expanded in Coatings, up about 4.5 percentage points versus a year ago, reflecting stabilization in the sector. Improvements have been seen in all regions for both architectural and industrial coatings, especially relative to the first quarter lows.

Business results in Dow Building and Construction improved sequentially, driven by the slow rebound in commercial construction, notably in North America as well as in Europe and Asia-Pacific. Several of the businesses I just discussed play a key role in our overall growth strategy and originate from our acquisition of Rohm and Haas, which are now part of our Dow Advanced Materials division.

On slide #8 you can see that in Health and Agricultural Sciences, Dow AgroSciences had a challenging quarter. In addition to seasonal weakness, weather, oversupply of key agricultural chemicals such as glyphosate and lower farm commodity prices negatively impacted quarterly results on a year-over-year basis, particularly in Latin America, where shifting commodity prices favored soybean versus corn. This shift unfavorably impacted us in two ways. Dow has a much larger share of corn in the region, so we sold less seed in the quarter.

And secondly, soy also requires fewer inputs, so Agricultural and Chemicals businesses were also negatively impacted. These are short-term challenges. Since we believe the long-term fundamentals for the agricultural sector remained firmly intact. That's why we continue to be investors in this vital sector. People will always need food and increasingly care about nutrition. In fact, Agricultural R&D expenses were up $16 million year-on-year. Notably, consumers are demanding healthier foods that are lower in saturated fat or higher in fiber content. Dow is responding with a zero trans fat Omega 9 canola and sunflower oils made from NEXERA, canola and sunflower seeds developed by Dow AgroSciences.

Global demand for grain is increasing as well as the growing middle class in emerging economies demand better nutrition. And farmers are looking to improve their crop yields to meet this increased demand. They are turning to Dow AgroSciences for new seeds that enhance yields and are insect resistant and herbicide tolerant. This is why we continue to invest for growth in our seeds and traits platform. In fact, our breakthrough SmartStax technology achieved two significant regulatory milestones in the quarter and it remains on track for a 2010 commercial launch.

We also achieved double-digit market segment share in cotton in the U.S., reflecting the investments we have made to grow its share in this high value segment, where adoption of biotechnology traits have been the most rapid. And these are just a few of the many breakthroughs in Dow AgroSciences robust technology pipeline, which will contribute to earnings growth in the future.

In Performance Systems, Automotive Systems showed a rebound in the quarter as the benefits of various government stimuli programs kicked in. Monthly volume gains in the quarter were driven by the stimulus programs in China, Brazil, the U.S. and Germany. In the U.S. the Cash for Clunkers government incentive program reduced excess vehicle inventory and OEMs responded by increasing production late in the quarter.

Dow Elastomers also reported strong demand from the automotive sector as well as sales in the food packaging applications, which have shown resilience throughout the recession.

In Performance Products, government stimulus programs fueled sequential volume growth in polyurethanes. However, margins were impacted by the steep increase in raw material costs. This also impacted epoxy in the quarter, where lower industry operating rates hindered our ability to raise prices. However, epoxy did report strong sequential volume growth in key end use applications as the build-out of 3G mobile networks in China, continued at a brisk pace. Also in China, consumer electronics such as PCs, car, electronics and LCD televisions rebounded from earlier lows.

As I wrap up the discussion on businesses in our Advanced Materials division, Dow AgroSciences as well as our Performance Systems and Performance Products divisions let me emphasize that these businesses are all linked by a common theme of innovation and differentiation, where technology is a key enabler to deliver solutions with higher and more sustainable margins. These divisions form the core of our transformed Company and they all performed admirably in the quarter.

On slide #9 our Basic Plastics franchise, especially polyethylene is also showing tremendous resiliency during the recession, with strong price increases in all geographic regions. Certainly, the recent favorable cost position for both raw materials and energy on the U.S. Gulf Coast, when compared with higher cost locations in Europe and in Asia have contributed to the strength of polyethylene, in particular. This allowed for a competitive global position resulted in ample export opportunities throughout the quarter.

And EQUATE, and our new Kuwait joint venture, the Kuwait Olefins Company, also delivered improved results sequentially, reinforcing our asset light strategy. Our Basic Chemicals segment face headwinds in the quarter. As you know, Chlor-Alkali is under pressure, both on the BCM side related to construction declines and on the caustic side, due to weak fundamentals in the alumina and pulp and paper industries.

The good news here is we are taking swift action to rightsize our manufacturing footprint to match true demand. And we continue to position these businesses to feed our high value, higher margin downstream performance businesses. So that is a brief overview of our operating segments.

I want to reinforce what we have been saying all year. We are focused on the items we can control. We are global and diverse. And we are positioning our new portfolio for robust growth and we are delivering on our commitments.

Geoffery has more to say on all of these points. Geoffery?

Geoffery Merszei

Thank you, Andrew, and good morning, everyone. So let me begin by reviewing our financial results for the third quarter. Starting on slide #10, you can see that third quarter sales were $12 billion, which was down 32% from a year ago, but up 6% from the prior quarter. Volume declined 9% year-on-year and was flat with the second quarter. Now this year-over-year volume decline shows a marked improvement versus the second quarter when we reported a 20% decline in volume versus the prior year with a positive trend emerging.

Now excluding Dow AgroSciences, which as you know is a seasonal business, volume actually increased by more than 3% versus the second quarter. And price was down 23% versus the year ago period, but up 6% again versus the second quarter. So these price gains helped to fully offset a sequential increase in feedstock and energy costs, which amounted to over $600 million.

We continue to make excellent progress on cost cutting as Andrew made reference to earlier achieving $380 million in savings in the third quarter. And equity earnings were up 84% sequentially driven by much better results at Dow Corning and EQUATE.

EBITDA, excluding certain items was $1.6 billion, down from the $1.8 billion in the year-ago period, and that is on a pro forma basis and flat sequentially. And if you exclude Ag, we delivered solid improvement of 9% versus the second quarter.

Interest expense declined by $37 million sequentially, reflecting a reduction in the outstanding balance of our bridge loan in the quarter. And this expense will continue to come down as we make further progress in deleveraging our balance sheet.

On slide #12 you can see the EPS recon for the quarter. On a GAAP basis we earned $0.63 per share. And excluding certain items and discontinued operations, we earned $0.24.

Now certain items included $0.46 in gains from the sale of our stake in the OPTIMAL joint venture and our interest in the Dutch refinery, TRN as well as $0.01 of EPS impact related to discontinued operations during the quarter.

And certain items also included a loss of $0.03 related to transaction and integration costs and a loss of $0.03 from the early extinguishment of debt. These results were also favorably impacted by a lower than expected tax rate in the quarter, which on an EPS basis equates to roughly $0.05.

Now admittedly, our tax rate has fluctuated to a greater degree this year than normal, due to a number of factors. Now these include the acquisition of Rohm and Haas, which added more than 250 legal entities, and in fact, we prior to that already had 450, so now we have 700 legal entities that we need to consolidate, where we realized gains and losses around the globe.

And in addition, the significant improvement in equity earnings, which as you know are recognized on an after-tax basis can heavily influence our effective tax rate in a given period.

So now, if you consider our long-term historical average tax rate, we believe 25% is a good number to use on a go-forward basis. And taking all of this into account, operating earnings were substantially higher versus the second quarter.

In fact, taking into account the higher than normal expenses related to the integration and the bridge amortization fees, our operating results would have been higher by approximately $100 million.

So now let's go into some of the details of what drove our top-line performance starting on slide #13. The largest sequential price gains were in Basic Plastics, which was up 13% and Performance Products, which was up 6%. And on the geographic level, Europe was up 13% and North America was up 5% compared with the prior quarter.

In turning to volume trends, as you can see on slide #14, you see that volume was flat versus second quarter, but up by 3% when you exclude the seasonality of course of Dow AgroSciences.

Now there were a number of bright spots that drove the sequential improvement, including Electronics and Specialty Materials, which was up 7%; Performance Products, up 10%; and Coating and Infrastructure, which was up 4%.

And taking a geographic look, certain regions outside of North America and Europe posted very strong growth versus the second quarter. For example, Latin America was up 12%, and India, Middle East and Africa was up 5%. And on a sequential basis volume was flat in Asia-Pacific.

Now this was due to seasonal declines in Ag and weak demand in many of our basic businesses reflecting continued softness in China's export economy. Polyethylene was a notable exception, where volume in fact was up 10%.

Now the good news is stimulus spending aimed at domestic demand favorably impacted some of our highest growth businesses such as the Electronics and the Coating segments. This contributed to a year-over-year volume increase of about 10% in China overall.

Dow's broad global footprint, which is a key competitive advantage for our company, enabled us to capture this growth. Approximately two-thirds of our company business is transacted outside the United States.

Now another important indicator of economic recovery is shown in our operating rate that you can see on slide #15. You can see the increase here is three points to 78%. This marks a third consecutive quarter of improvement in this important measure. And our third quarter rate also surpassed the operating rate from the third quarter of last year and above the full year 2008, the average, which in fact was 77%.

Now another notable contributor to results in the quarter were equity earnings, which improved substantially. You can see that on slide #16. Results here were up 84% to $224 million, sequentially driven by strength in Dow Corning, where third quarter performance was very solid

Silicone sales were up sequentially by more than 18% with substantial improvement in margins and earnings. So while year-to-date silicone sales are still below the 2008 level, Dow Corning is reporting a broad-based improvement in demand in many end markets, such as Coatings and Advanced Interface Materials, Electronics and Life Sciences.

And for your information, silicone demand has historically been a very good indicator of economic activity, particularly here in the United States.

Another strong contribution came from EQUATE, which benefited from feedstock costs that are much lower than the other parts of the world and of course along with the higher plastic prices.

So it is also worth noting that equity earnings are now rapidly approaching a more normalized level of approximately $250 million per quarter, about $1 billion on an annualized basis.

So let's move on to cost control and you can see on slide #15, we reduced structural cost by $380 million in the quarter. Pro forma SG&A was down more than $100 million on a year-over-year basis, reflecting our ongoing cost management actions.

And capital spending year-to-date was $894 million on a pro forma basis. We remain on track to achieve our 2009 goal of $1.4 billion in CapEx spending.

As you can see on slide 18, we have made great progress against our goal of capturing $1.3 billion in cost synergies from the Rohm and Haas acquisition. We have achieved an end of third quarter annualized run rate of more than $875 million. And that puts us more than 110% towards our 12-month run rate goal in just the first six months.

We continue to make excellent progress in all of the key synergy categories and have realized $433 million in savings year-to-date. These savings are comprised of the following as you can see on slide #19.

$213 million in purchase savings from leveraging the supplier contracts between Dow and the Rohm and Haas entity. $88 million from corporate functions where shared services have been optimized. And $79 million from accelerating existing Rohm and Haas restructuring programs and $53 million from savings in manufacturing supply chain and other areas.

Now looking at the details on an annualized run rate basis you can see our progress on slide #20. Purchasing synergies continue to ramp up nicely, already surpassing the 12-month run rate goal.

It's important to note here that savings in purchasing go far beyond raw material purchases with approximately two-thirds achieved through the reductions in other areas. For example, cost savings from MRO, Maintenance, Repair and Operations, logistics and corporate services totaled $255 million. This is on a run rate basis.

And speaking to our cost synergies are making the most impact, the vast majority of these savings in the range of about 80% to 85% are showing up in cost of sales.

From an operating segment view the majority of the savings can be found on the combined Performance and in the Advanced Materials portfolio.

So let's turn to slide #21 and our restructuring efforts. Here again, we have excellent progress to report. As you can see, we have delivered more than $220 million in realized savings. This is year-to-date and have achieved an end of third quarter annualized run rate of more than $400 million. And we remain ahead of our goal here as well.

And regarding workforce reductions on slide #22, now while these decisions are obviously very difficult, they are a key part of our total cost savings effort and we have already achieved 77% of our stated goal.

So in summary, we are well on our way to achieving all of our synergy and restructuring cost savings

Now I would like to turn to some other significant financial achievements as you can see on slide #23. We completed the sales of OPTIMAL, TRN and Morton Salt for net proceeds of about $2.7 billion, which enabled us to repay the bridge ahead of our goal. The repayment of the bridge is a key milestone for the company and why so? Well, because with the repayment comes the elimination of the debt to EBITDA covenant.

Now our balance sheet is left with only one meaningful financial ratio covenant across all of Dow's remaining debt. And that is a 65% debt to total capital requirement, which has been in our $3 billion revolving credit facility for a long time.

At the end of the third quarter, as you know we had a gross debt to total capital ratio of 52.7%. After taking into account the more than $2.5 billion in cash on our balance sheet, which by the way is higher than usual, but we believe prudent in these difficult uncertain times, we have a net debt to total capital ratio of 49.8% at the end of the third quarter.

And if you consider the proceeds from the sale of Morton Salt, which occurred immediately following the close of the quarter, in fact, it occurred on October the 1st, then our net debt to total capital ratio would have been just under 48%.

I am also pleased to report that the Dow name remains strong in the financial markets. Our $18 billion in net fixed assets, assets which have no encumbrances, is just one of the many reasons that enabled us to successfully return to the commercial paper market in the quarter. In fact, as of the close of yesterday, we have approximately $1.2 billion of commercial paper outstanding.

And cash flow from operations improved by more than $400 million versus the prior quarter. And if you consider the impact of nonrecurring cash payments, primarily related to the integration of Rohm and Haas, then this number would have been approximately $100 million higher.

And last, but not least, we kept tight control on working capital with DSO at 66 days, which was flat with the second quarter, while we reduced DSO by 2 days to 45 in the same timeframe.

And now I will turn the call back to Andrew for our outlook and some comments about our upcoming investor day.

Andrew Liveris

Thank you very much, Geoffery. On slide #24 I address the economic outlook for the rest of 2009, which in our view appears to be stabilizing with strong growth in Asia-Pacific, especially China, and other emerging geographies like Brazil, India and Southeast Asia.

We also believe that the global economy is now on firmer footing. Just a few facts for you. World trade is beginning to pick up as imports and exports appear to have touched bottom in the second quarter. China, Korea and Taiwan report renewed growth in exports with Korea's improvement led by increases in semiconductors, automotive and LCDs.

Thirdly, U.S. industrial production rose for the third straight month in September. And there are more such footprints. However, we believe that the pace of the recovery will still be slower in Europe and the U.S., with the latter in particular having the high unemployment issue for a sustained period throughout 2010, which obviously will continue to be a drag on consumer spending.

We see the continuation of economic rebound at a stronger pace in the emerging world, which we are capitalizing on today with our broad portfolio, and which continue to be a benefit to us as a broader global economic recovery occurs.

We remain extremely well-positioned, especially now with the integration of Rohm and Haas, which has proceeded smoothly and successfully. In particular, the continued sequential margin strength and the year-on-year increases we have now seen in Dow Advanced Materials, show that the early cycle earnings power of our new portfolio is already demonstrated.

So in summary, market stability has improved, but we continue to remain cautious about the ability of some economies to sustain growth. And of course, this is especially true of the United States and Europe. And until these economies return to normal, we believe global growth will be muted.

Therefore, as we have stated, all of this year, our 2009 and 2010 operating plans do not count on material improvement in market conditions. We will continue to remain tightly focused on the factors we can control, such as costs, capital and cash flow management, which one more time we showed in the quarter.

Dow continues to benefit from the smooth integration of Rohm and Haas and the decisive actions we took to accelerate our own restructuring efforts and of course the cost synergies.

We have also made significant improvements to our balance sheet. We have strengthened our financial structure. And we are providing more flexibility in how we execute any further divestitures, which will be made on a timely and strategic basis.

Going forward we will continue to manage our business with the same dedicated focus in the quarters ahead, and are confident that we are firmly on track to position Dow as an earnings growth company.

And speaking of growth, on slide #25, I would like to spend just a few minutes in conclusion, talking about the tremendous progress we have made in shifting Dow's focus to one of a customer-driven, growth-oriented company. We believe that the moment has arrived, and it is about deploying the right organization with the right skills for the appropriate business opportunities to unleash the earnings power of the new Dow. And Dow has long deployed these three distinct business models very successfully as is shown on the slide. These are a highly integrated low cost model, that is of course ideally suited to our Basics portfolio. Polyethylene and Chlor-Alkali are good examples of that.

Two, a performance oriented model, that' focused on product leadership and technology differentiation. Think about our world-class polyurethane and epoxy franchises when I talk about this model.

And thirdly, our market-driven model, that's customer-centric and solutions-based. Our formulated systems, Dow Water & Process Solutions and Dow AgroSciences have all been excellent examples of our successes in this business model.

And with the acquisition of Rohm and Haas, our new Dow Advanced Materials division brings additional breadth and depth to this part of the company. And as we have said in the past, these business models are supported strongly by a lean corporate center. On this point we are set to announce a new strategic partnership that will make our already lean and efficient corporate center even more so.

We will share more details on that news along with the many innovative technologies, products and businesses that will drive our future earnings growth at our upcoming investor day on November 12. This will be a great opportunity to hear directly from our executive leadership about our transformation into a market-driven, Performance, AgroSciences and Advanced Materials company.

We will also detail more expansively what we think Dow is capable of delivering in terms of growth and provide granularity on the normalized earnings power of our new portfolio. A key feature of this event will be an innovation themed gallery walk, which we will highlight the many products and technology platforms we have underway that will fuel earnings growth into the future.

Our reinvigorated innovation engine and its alignment to key mega trends, such as energy, transportation and infrastructure, consumerism and health and nutrition will be on full display. These will be hosted by business and technology leaders from many areas of our company, which will give you the opportunity to see and see and be part of our breadth and depth of management as well as to speak directly with Dow's key innovators. As you can tell, I am extremely excited about this event and I know we will see you all there.

I now will turn the call back to Howard.

Howard Ungerleider

Thanks, Andrew. That wraps up our prepared remarks. For your reference a copy of these comments will be posted on Dow's Web site 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 any comment may come up during the Q&A. Lisa, would you please explain the Q&A procedure?

Question-and-Answer Session

Operator

Yes, thank you, sir. (Operator instructions). We will take our first question from P.J. Juvekar with Citi.

P.J. Juvekar – Citi

Good morning. In Electronics, did you have any new contract wins in either 32-nanometer or 22-nanometer fabs?

Andrew Liveris

No, P.J., we did not. And fundamentally what we are seeing there is no significant market share changes or competitor wins. In fact, third quarter '09 versus third quarter '08 we only saw about a 2% price decline against the entire semiconductor technologies businesses. Now, we don't break out specific pricing effects we've had, but equally in slurry, there was no significant slurry market share shifts in either wins for either us or anyone else. And while I've got this whole point, we think the outlook for 2010 is improving much quicker than we anticipated earlier this year. Our forecast for silicone and semiconductor sales are predicting double-digit positive growth for 2010. Gartner, the research group, is predicting actually a forecast in silicon consumption of 22% in 2010, which is one of the strongest rebounds that the entire industry would have seen in a downturn. So we are very well poised to grab that.

P.J. Juvekar – Citi

Great, thank you. So no change in market share. And just quickly on Ag, farmer incomes have dropped, so do you expect the sort of weakness that you saw in Ag to last into next year? Thank you.

Andrew Liveris

P.J., on Ag there was a lot of factors impacting the Q3, none of these ideally we believe, is this, lots of one-time is in here, the corn soybean shifted our (inaudible) in Brazil, for example. So no. We believe the dynamic on Ag remains intact as I said on my remarks, food, seed, fuel, as well as of course nutrition factors are all driving and we have a tremendous couple of big events next year, SmartStax are referred to and we also got DHT which I didn't refer to, so we believe we will benefit from a growing need for food and farm products.

Operator

We will take our next question from Robert Koort with Goldman Sachs.

Robert Koort – Goldman Sachs

Thanks very much. And complements to Howard on the slide deck here. It has a lot of helpful information so we appreciate that. Particularly on slide #14, when you guys walked through your volume bridge from the second quarter, you showed quite a bit of pick-up. I'm wondering if you could tell me what we might expect on a seasonal basis? Is this truly underlying growth or is it just a seasonal issue?

Andrew Liveris

Thank you for your question. If you look at slide #14, and you will see we say flat versus second quarter, but up versus, if you exclude Ag. And then we've already said Ag had some one-timers. We believe the underlyings are good in Electronics, in Specialty Materials, in Coatings, in Infrastructure, and our Performance businesses. And of course, now with that being two-thirds of our portfolio, the underlying volume increases you're seeing here we believe is sustainable even in a weak economy globally. If you put the economy globally at 2%, because the U.S. is sitting, if you like, between 0 and 2, depending on which forecast you want to read. What we've done is we have positioned this portfolio with a big tilt to the emerging economies.

In the Electronics business alone, with our exposure to Asia now with Rohm and Haas legacy businesses, the Coatings businesses and what's going on in China with respect to infrastructure spend; these are all we believe sustainable volume increases. What we have done on the Basic side is we're doing price volume management. So there the volumes sequentially were actually not up, but price was up. And you will see us on the Basic side continue to titrate price volume management. So volume will not be remarkable on the Basic side, because margin is what we're going for. But on the good, high quality, high margin Performance businesses, we believe we can sustain the sorts of volume increases that we've seen out there based on true demand.

Robert Koort – Goldman Sachs

And on that point, I guess when I look in the appendix slides on the Specialty businesses it seemed pretty remarkable the pricing you got through the quarter that it appears now it's coincident with raw material inflation. Is there something that you're doing, approach it different that it isn't creating the typical lag there?

Andrew Liveris

Yes, I think what you are seeing is we are a company that has always been good at price volume management, but we now institutionalized portfolio management. So all year now we have run the business operating team meetings that we call them, where we get the business directors in and they are working as a group, as a team, on how to titrate margin expansion and sustain price versus what assets we keep running. And our asset take-out, even on the performance side has been quite remarkable to match against the new demand dynamics that's out there. So with the raw material inflationary issue, we've been able to keep ahead on most of the Performance businesses.

Now not true on polyurethanes in the quarter, but we believe we can keep doing that and keep showing margin expansion even on an inflationary hydrocarbon environment. Now of course the inflationary hydrocarbon environment has to be mitigated about this newfound competitiveness in the United States on the ethylene chain. Natural gas, ethane and the ability for Dow to have flexi crackers, and for our ability to go light and help all the chain on ethylene has been a significant new advantage especially on the export front. So price volume management, a raw material advantage, and the corollary that we've done on assets to take out low performing assets, all of that is active. And we believe that will allow margin expansion to occur in the Performance businesses.

Robert Koort – Goldman Sachs

Perfect, thank you.

Operator

We'll take our next question from Don Carson with UBS.

Don Carson – UBS

Yes, thank you. Andrew, wanted to follow-up on this new found competitiveness in the U.S. Gulf Coast. Obviously, with high oil to gas ratio that's increasing the competitiveness of ethane-based crackers in the U.S. and obviously in Western Canada as well. So two questions there. Near-term, do you see this very strong export window, it's narrowing somewhat, do you see it disappearing with new capacity in the Middle East? Just wonder what you think the sustainability of the export window is. And looking at a longer-term, does this new found North American competitiveness increase potential partner interest in partnering the ethylene chain business once again? And if so, do you think that has positive implications for the potential value you might get for these assets?

Andrew Liveris

You are right on. I will get to your second question first. I mean there's definitely new found value in the U.S. assets based on the natural gas. Natural gas is a wonderful story for this country and it's a wonderful story for Dow. And because of that the value of our franchise in the United States, especially because we've rightsized it to be a domestic demand asset base, that's a very significant point. Remember, we did that this year. We took out all the purchases.

So, we are now fundamentally end market domestic demand-oriented and exports, which at these price levels on natural gas and ethane and this dollar level are very competitive. In fact, they are competitive by 40% versus Northeast Asia's naphtha-based production. So, clearly we have a new value and a new set of partner possibilities on this franchise. We're being very deliberate in our discussions there because of that exact point. So, that answer your second question. Flip it to the first question, the way we're approaching ourselves on all this is to basically say that it's still disadvantage versus the Middle East. So, that doesn't change. So the ethylene supply/demand balance, clearly, as we go into next year with a lot of Middle East capacity coming on, we've got 10 million pounds coming on in general over the next 18 months.

Half of that is Middle East. And some of it is us of course with the Kuwait assets. What we're going to be very careful about there is that we don't build new assets in the United States or Canada based on export. You can't do that anymore. So you got to keep yourself focused on domestic demand. I believe the U.S. is the last place that product will find itself to from the Middle East. Europe will be more impacted. And so, when you have some surpluses, which I believe you'll have next year, the operating rates will hover in the low-to-mid 80% based on capacity rationalization that's occurred, but of course, mitigated by excess supply, in particular competitive stuff from the Middle East. So we believe we're fine in North America. We're fine in Europe as long as we paid clear attention to the thing that gives us advantage, which is our flexible fees. We believe we can manage our margins. This business has outperformed in a down year.

Don Carson – UBS

Just as a follow-up, the Basic Chemicals is not as well positioned, what's your strategy for the chlorine envelope in the U.S. Gulf Coast?

Andrew Liveris

Very, very quickly, we are rightsizing it to suit our performance businesses period. We do not want to be long-term commodity ECU oriented. We've got a lot of that already. We're consolidating into the Gulf Coast. We've moved out of Canada, etc., We'll keep doing that. We're moving more and more to our Performance footprint. Actually, over 70% of the fluorine we now produce is going to our Performance businesses.

Don Carson – UBS

Okay, thank you.

Operator

We take our next question from David Begleiter with Deutsche Bank.

David Begleiter – Deutsche Bank

Thank you, good morning.

Andrew Liveris

Good morning.

David Begleiter – Deutsche Bank

Andrew, just following up the last question, are you more inclined to keep the old K-Dow JV inside Dow (inaudible) competitiveness in the Gulf Coast and the lack of interest or willing buyers overseas?

Andrew Liveris

Well, we do have interest in buyers, so just to answer that the way I answered on the previous question with Don. We have got strategic traction. There is no question. What we are now seeing is because of our actions, especially all the ones we did post the K-Dow collapse, all the rightsizing of assets, the natural gas feedstock flexibility point we just made, clearly, clearly, the value of that franchise has increased. So what we are doing is we're improving our negotiating ability to put the right successor deal in place. And the people we are talking to know that. And so that's good news for our shareholders. Do we still go ahead and do a K-Dow? At the right price, we will, because we are building a portfolio with more predictable earnings capability, more high margin businesses and frankly, commodity assets, long-term, the petrochemical business, its rightful place is in advanced feedstock locations.

Operator

And move on to our next question from John McNulty with Credit Suisse.

John McNulty – Credit Suisse

Yes, good morning. With the volume improvements that you saw in a couple of your businesses, Coatings, the Performance segments, I'm a little bit curious as to why sequentially the EBITDA margins really softened up in almost every single one of the businesses. So can you kind of walk us through how we should think about those businesses maybe going forward?

Andrew Liveris

So, John, the one thing that happened in the quarter is it was referred on the earlier question, there was oil price movement and naphtha movement and clearly propylene movement. Propylene was actually up 40%. So this is now the lag issue. Even though we did well on price in some of these Performance businesses, it's still in polyurethanes, epoxies, lags. So we've got work in front of us to raise prices there. We are working on that to catch up on the propylene side. So that explains the observation you made.

John McNulty – Credit Suisse

Okay, and then just as a quick follow-up, with regard to the better than expected cost cuts that you're seeing on the Rohm and Haas cost cuts and synergies, is that strictly because it's coming in faster, or do you have greater hope that maybe you can do better than the 1.3 that you had put out there a while back?

Andrew Liveris

The answer is we are sticking to the 1.3, because as you know the world changed dramatically last December and we put a lot of effort working with our Rohm and Haas legacy leaders to put together the target of 1.3. When we first announced the deal it was around 800 million. So we really raised the number significantly. And on top of that we put another $1.2 billion of our own restructuring in place. So that's a $2.5 billion take out end of year 2010 run rate number, which a lot of that will hit the bottom line next year. So we said that we would do that because of what's happened to the world economy, that we would rightsize assets, not just in Rohm and Haas, but in Dow.

We're way ahead as Geoffery explained. We believe that, that will hit the bottom-line as we go into the next year and the next calendar year. And as a consequence of that, we have margin expansion in our future because we're controlling what we can control. All the while paying strong attention to not atrophying the business model of Rohm and Haas. We're putting a lot of work and time and attention on that. You will see that in full color on November 12.

John McNulty – Credit Suisse

Great, thanks very much.

Andrew Liveris

Thanks, John.

Operator

Our next question comes from Sergey Vasnetsov with Barclays.

Andrew Liveris

Hi, Sergey.

Sergey Vasnetsov – Barclays

Good morning. Hi. Slides #13 and #14 to me one of the most interesting in this presentation and clearly shows that Howard and his team work over the weekend has paid off. So I just wanted to ask you to comment a little bit more, how you were able to achieve a pretty meaningful price increases in an overall sales very weak economy and still fairly low operating rate. And perhaps you can comment specifically on Europe and Performance products.

Andrew Liveris

Sergey, I would like to say there is some magic here. This is Dow 101. I have already referenced the run the business group. The business division leaders sit together. They bring in the business directors. They rotate them through. The ones who are doing well come in on a Friday. The ones who are doing less well spend the weekend with them. So that is the Dow that we have. We are managing across the envelopes better because we are lock-stepped together between with the propylene point I made a few minutes ago, where do we maximize the value of propylene derivatives. So each business has to come with the high value price volume strategy. So it's margin management 101, block and tackling, execution, tight business management and nothing other than that.

Sergey Vasnetsov – Barclays

Excellent. A question to Geoffery. Given that the bridge loan has been paid down and presumably financial pressure is much less on the company than it was a few months ago, what's your timing and interest in moving ahead with Styron divestiture?

Geoffery Merszei

Actually, the Styron divestiture is well underway. The process is well underway. We are in discussions both with financial as well as with potential partners. And I think we will be able to announce more on where we stand on the Styron divestiture by the next quarterly earnings announcement. I expect by that time to have a lot more information.

Sergey Vasnetsov – Barclays

Just one quick question. Based on recent management changes, there seem to be more shift towards (inaudible). Andrew, is this true? And if so, can you talk about the drivers for that?

Andrew Liveris

Sergey, you cut out just a touch on one of your key parts of your question. More shift to what?

Sergey Vasnetsov – Barclays

Of power of decision-making towards the regional business.

Andrew Liveris

Yes, I'm glad you asked that. Look, we will have a lot to say about that on November 12. But long story short, you are very conscious as are many people on this call about Dow's traditional geographic strength. Geoffery and I are both products of it. We are putting a lot more emphasis on execution. We have the portfolio we want. We are executing 101. We want to implement in the geography with customers and partners, so we are putting more emphasis on our geographic structure. More to say on November 12.

Sergey Vasnetsov – Barclays

Thanks.

Operator

Our next question comes from Peter Butler with Glen Hill Investment.

Peter Butler – Glen Hill Investment

Good day. Good day.

Andrew Liveris

Good day.

Geoffery Merszei

Good day.

Peter Butler – Glen Hill Investment

Looking out three years or four years what sort of earnings potential do you see from SmartStax? And related to that, you are starting to contribute some Dow technology to that with your24D herbicide tolerance gene. What are you seeing out there three years or four years from now?

Andrew Liveris

Okay, so, Peter, On November 12, we are going to talk a little more about this. But just so you know, you said, in our view the way we believe it, which is SmartStax is a greater than $0.5 billion (inaudible) MPV. We're obviously very equipped to take advantage of that game changing technology. Clearly, we are not Monsanto, but we are entitled to using SmartStax to grab new share. And then you've got to the key point, which is DHT. We believe DHT could be two times to three times the value of SmartStax. It's proprietary to us. We intend to launch in 2012 with DHT stacked onto SmartStax and that will give us even more market share. So Dow's answer to our not so strong position in seeds and germ plasm is through technology enablement. You can expect us to strike agreements with our collaborative partners out there. We will have more to say about that as well. But that's new found earnings power that will start to appear in the 2010, 2012 timeframe.

Peter Butler – Glen Hill Investment

Thank you. I guess, related to this is, have you guys figured out any, do you have any new ideas on how to get some value in the stock market for some of these assets that are pretty well hidden like Dow Corning, Dow Ag, your joint ventures in the Middle East, etc.,?

Andrew Liveris

Well, I'm going to also defer to November 12th only to let you know that we believe that two-thirds of the company is Dow AgroSciences, Dow Corning, Advanced Materials, Performance Systems, Performance Products. So the way we will answer your question ultimately is the new Dow will reflect that portfolio, which are all high margin, high growth businesses. So we believe Dow Corning is a key part of our portfolio. We will represent it at the November 12th event. You will see key leaders from Dow Corning there. And we are very interested in the see-through point you just made by having a whole Company look like Dow Corning and Dow AgroScience and Advanced Materials. More on that on November 12, Peter.

Peter Butler – Glen Hill Investment

Okay, thanks.

Operator

We will take our next question from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas – JPMorgan

Hi, good morning. Sherwin-Williams in their third quarter earnings talked about the North American construction industry for them stepping down in the fourth quarter as the backlogs of the construction industry have been depleted. Is that something you are seeing or do you see gradual improvement in North American construction in the fourth quarter?

Andrew Liveris

Well, we have two views to construction. One is our building construction business, which as you know there is a piece of it that's new builds and there is a piece of it, a big piece of it that's DIY. The DIY is doing just fine, thank you very much as people spend more on their current houses. The new build are tepid, and therefore are creating all sorts of effects on the other side of the shop, which is Coatings. On the DIY we're seeing improvement in architectural coatings demand, but not so good on the new builds and not so good on the commercial side.

So the consequence of that, we saw, of course, the Sherwin release, depending on where your portfolio is tilted, basically gives you a better view of the sustainability, especially on the DIY side. We believe the DIY side is sustainable and the new builds will start coming back as we go into 2010 on the residential side, but will be tempered by the commercial side. So all in all, we believe that the way we're positioned, we're fine. We won't be overexposed in any particular area. In fact, it tilts more positive than we've seen it in the past.

Jeff Zekauskas – JPMorgan

Okay, and then as my follow-up, I think your SG&A, ex-items, was about $657 million in the quarter. And it was $663 million in the second quarter, so there really wasn't much change. Is there something that artificially elevated your SG&A number in the third quarter, given all your cost cuts?

Geoffery Merszei

Yes, Jeff, I'm actually glad you brought that up. Because what we had in the second quarter is that we actually had a reversal of some bad debt reserves in the second quarter. So the second quarter was, say, artificially lower than normally is. And it really is a reflection of our great work on the accounts receivable side. Year-to-date we have a write-off of less than $10 million. And as you know, early in the year a lot of people were in trouble and so this is a reflection of a special item in the second quarter.

Jeff Zekauskas – JPMorgan

What was the size of that item?

Andrew Liveris

It represented the vast majority of the delta.

Jeff Zekauskas – JPMorgan

Okay, thank you very much.

Operator

Our next question comes from Kevin McCarthy with Banc of America.

Kevin McCarthy – Banc of America

Yes, good morning. Andrew, I was wondering if you might comment on the impact of the weaker U.S. dollar on Dow in terms of trade flows, any expected impact on input costs related to oil? And also any near-term financial considerations given hedging or lack thereof?

Andrew Liveris

Kevin, clearly the spot export situation is looking pretty sustainable over a weak U.S. dollar basis. So our assets in Freeport, for example, are running at capacity, which is a great statement for our U.S. asset base. So of course the flip of that is high oil price. So you get it on one side and you lose it on the other unless you can actually get prices up. And clearly you saw us doing that. So we're paying a lot of attention to your point. Where is oil going? Where is naphtha going?

That impacts our European business in particular on input. But clearly on our export competitiveness out of the U.S., while the U.S. domestic demand economy is still not strong, we have the export side, and I think that's a great help. And that assists of course our ability to be competitive for the long-term. We will keep taking out assets because the value creation has to be there, depending on sustained views, and we don't operate based on sustained views on currency. Let me feed that over to Geoffery then on the financial side.

Geoffery Merszei

Clearly, as you know, with a Company with two-thirds of its business transacted outside of the United States, we do have an exposure. And basically, a weak U.S. dollar turns out to be positive for us. Keep in mind that actually in the third quarter if you compare it to year-over-year, the dollar actually strengthened if you take the average rate. So on a year-over-year basis it negatively impacted us by about $0.13. We don't make a big deal about this, but that is a fact. So there was a negative impact year-over-year of about $0.13. Of course, since the beginning of the third quarter, the dollar of course weakened, and so that had a favorable impact of about half of the impact that I just described on a year-over-year basis. So long-term with a weakening dollar trend that translates positively for Dow on the bottom line.

Kevin McCarthy – Banc of America

Quick follow-up, if I may, Geoff, on tax rate, you mentioned some of the considerations causing volatility there, what should we anticipate for the fourth quarter and 2010 on the tax line in terms of the rate?

Geoffery Merszei

The tax rate is admittedly a little frustrating with all of the moving parts right now. Then, of course, with the relatively lower earnings the moving parts do have quite an impact. But going forward we do expect a rate of about 25%, which is pretty close to what we said earlier in the year. So for modeling purposes, both for the remaining part of the year as well as for next year, why don't you use 25%.

Kevin McCarthy – Banc of America

Very good. Thank you very much.

Howard Ungerleider

Lisa, we have time for one last question.

Operator

We will take our final question from Bill Young with ChemSpeak.

Bill Young – ChemSpeak

Hi, good morning, gentlemen. Couple of real quick things. I've noticed, Andrew, a kind of a change in your attitude on Ag, if you go back pre-Rohm and Haas acquisition closing. From today it sounds like possibly a joint venture or a partial IPO, it seems like it's kind of moving away from consideration although maybe not definitely. So I wonder if you could comment on that. And second, on the commercial construction side, I think you said in your press release that there is a slow rebound coming, which seems to be a little different from what you said a few minutes ago.

Andrew Liveris

Okay, so on Ag, firstly, the third question that earlier in the year everything was on the table in this company to ensure that liquidity and leverage was not an issue on a go-forward basis. Repairing the balance sheet post-Rohm & Haas was priority one, two and three. Preserving the investment grade rating, priority one, two and three. So going forward as the year-end folded we had proof points. Those proof points came fast and they came ahead of everyone's expectations. And we are not exactly happy with where we are, but we are a long way forward from where we were six months ago. A key earner like Ag is a very important part of our growth portfolio. So you are right. There is a tonality shift, but it doesn't stop us from maximizing shareholder value by looking at the right deal for the right reasons at the right time.

Where there was Peter Butler's question on a see-through model for Dow AgroSciences, that could be an answer. A collaboration model, all the way up to joint venturing with the right strategic partner that could be an answer. In the meantime, we're going to invest for growth. And we will have differentiation and high margins, which will continue to improve the value of Dow AgroSciences. We had a process, we had substantial offers, we put it on hold, and now we're very orientated to looking at collaborations. Now, clearly on the commercial construction side, it's a very difficult market to read. I differentiated, that's what I want to explain myself on the DIY part. But on balance what we said on the press release remains true.

Bill Young – ChemSpeak

Okay, great. Thanks a lot.

Andrew Liveris

Thank you, Bill.

Operator

And that concludes today's question and answer session. I would like to turn the conference back over to Mr. Ungerleider for any additional or closing remarks.

Howard Ungerleider

Yes, thanks, Lisa. We're going to have to end the call at this point, but we'd like to thank you very much for joining us this morning and appreciate your interest in Dow Chemical Company. We very much look forward to speaking with you at our Investor Day in New York on November 12 and again on our fourth quarter earnings call in January. Thanks very much.

Operator

That concludes today's teleconference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!