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Executives

Kathleen C. Fothergill - Corporate Director of IR

Geoffery E. Merszei - EVP and CFO; Member of the Board of Directors

Andrew N. Liveris - CEO & Chairma

Analysts

Donald Carson - Merrill Lynch

David Begleiter - Deutsche Bank

Peter Butler - Glen Hill Investment

Frank Mitsch - BB&T Capital Markets

Jeffrey Zekauskas - JPMorgan

Mark Connelly - Credit Suisse

Sergey Vasnetsov - Lehman Brothers

Robert Koort - Goldman Sachs

Kevin McCarthy - Banc of America Securities

P.J. Juvekar - Citigroup

Gregg Goodnight - UBS

John Roberts - Buckingham Research

Dow Chemical Co. (DOW) Q2 FY08 Earnings Call July 24, 2008 10:00 AM ET

Operator

Good day and welcome to The Dow Chemical Company Second Quarter 2008 Earnings Results Conference Call. Today's call is being recorded. At this time I would like to turn the call over to Corporate Director, Investor Relations, Kathy Fothergill. Please go ahead.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Thank you. Good morning everyone and welcome. As usual, we're making this call available to investors and the media via webcast. This call is the property of The Dow Chemical Company and any redistribution, retransmission, or rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited.

On the call with me today are Andrew Liveris, Dow's Chairman and CEO; Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer; and Jeff Tate, Manager in Investor Relations. Also with us is Howard Ungerleider, who will be taking over as head of Dow's IR team in August.

Around 6:30 this morning, July 24th, 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, available on the presentations page of the Investor Relations section or through the link to our webcast.

As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve risks and uncertainties. We can't guarantee 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 10-Qs, 10-Ks and annual reports are available on the internet at dow.com in the financial reports page of the Investor Relations section.

Now, starting with the agenda on Slide 3, Geoffery will lead off with an overview of the second quarter. I'll discuss the results of our operating segments, and then Geoffery will update you on actions we've taken to advance our strategy, and describe Dow's outlook for the months ahead. We would like to keep the focus of today's conference call on our second quarter results and business outlook, rather than on the transformational actions we've recently announced. After our prepared remarks, we'll move on to your questions for Andrew and Geoffery. Turning to Slide 4, you'll see a summary of our results for the quarter.

Now let me hand over to Geoffery, who will begin his comments on Slide 5.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Thank you Kathy, and good morning everyone. I would like to start today's call with a few summary comments about the second quarter that really capture the key issues. Those of you who follow our company closely know that we faced with some very strong headwinds over the past few months. In fact an extremely large surge in feedstock and energy costs, coupled with further weakening in the U.S economy were, the headlines for the quarter.

As you'll hear from our comments today, we took a number of immediate short-term actions which helped to mitigate these challenges. And for the long-term, we made great progress in advancing our strategy to transform Dow into an earnings growth company. So, let's get into the details. Sales for the second quarter were $16.4 billion which set another company record up 23% from the same quarter last year. A major component of this revenue increase was in price which was up 18% versus the same quarter last year.

And we recorded double-digit price increases in all operating segments and in all geographic areas. Volume grew at a very healthy 5%, in fact matching the highest quarterly increase we've had since 2004, even though volumes here in North America were down 6%. About half of this North American decline was the result of portfolio optimization and divestitures with the largest impact coming from the formation of Americas Styrenics.

Geographies outside of North America posted very strong growth. Let give me some examples here. Europe was up 11%, Asia-Pacific was up 12%, and Latin America was up 5%, including the impact of some of the recent divestitures. And, we posted volume growth of 12% in emerging economies, which today represent 27% of Dow sales. And let me give you a few examples of the growth in these regions. Volume in Eastern Europe was up 19%, India was up 64%, and the Middle East was up an impressive 89%.

Now although this growth in the Middle East comes on a relatively small base, it is further evidence of Dow's ability to expand in rapidly growing regions, and to move product where it is needed. Dow's broad global footprint which has been a focus of our recent investments, enabled us to capture this growth. And at the business level, there are also a few important highlights; First, EBIT in our combined performance segments rose compared with the same period last year. This, despite substantial increases in raw material and supply chain costs.

And Dow AgroSciences which is a significant component of our performance portfolio, was once again the star business for the quarter. This business increased its EBIT by more than 60% on a sales gain of 25%, setting all-time records for both sales and EBIT. Now we're very proud of these stellar results for Dow AgroSciences, now I would like to point out that they are not just a function of the robust Ag sector. Dow AgroSciences has been implementing a very disciplined strategy over the past several years, and it is clearly paying off.

Today we run an optimized and extremely profitable Ag chem business. And, we are investing in seeds and traits with recent acquisitions, Agromen and Triumph Seeds, in order to deliver cutting edge technologies that will fuel growth well into the future. The volume story in our performance portfolio is also a good one. In Performance Plastics, volume increased 7%, Performance Chemicals it was up 6%, and finally, in Dow AgroSciences, volume was up an impressive 13&.

This was the 5th consecutive quarter in which all three Performance segments posted solid volume growth. These results reflect the disciplined approach we have taken to investing in our Performance businesses. Through bolt-on acquisitions, increased R&D spending, and more marketing and sales resources our Performance portfolio is delivering the growth we need to transform the company.

Now, let's turn to our joint ventures on slide 6; another key element of our strategy. Our joint ventures posted equity earnings of $251 million for the quarter. This showcase is once again the consistency and reliability of earnings from these ventures, and the strength of our joint venture strategy. In fact this is the sixth consecutive quarter with equity earnings at an annual run rate of the $1 billion or more. Among the best performers during the second quarter was Dow Corning, which improved significantly from the first quarter, when a short-term spike in raw material costs dampened results.

OPTIMAL in Malaysia, and EQUATE of Kuwait, are examples of joint ventures with access to cost-advantaged feedstock's. Their advantaged position led to margin expansion as prices for their products increased.

Now moving on to slide 7; our feedstock and energy costs increased $2.4 billion compared with the same quarter last year, and increased a $1 billion sequentially. These were the highest increases in Dow's history. This was an enormous challenge to overcome, because of both magnitude and perhaps more critically, the speed of the increase. As costs rapidly escalated, we moved quickly and decisively to raise prices across the board.

We announced two broad-based price increase initiatives of up to 20% and 25%, an unprecedented move in our industry, to help mitigate the effect of these surging costs. Now while we are successfully raising prices, we haven't yet fully restored our margins as our prices continue to lag our cost increases. But, we do have strong price momentum going into the third quarter.

In addition to responding to these external factors, we focused on a number of things that are in our control. We implemented further cost controls inside the company, adjusting plant operating rates and announced the temporary idling of capacity. For example, we reduced our ethylene oxide production by 25% worldwide and idled 30% of our North American acrylic acid production.

Addressing the slowdown in the automotive industry, we announced cost reduction measures at Dow Automotive focusing on facilities, people and spending. And, Dow Building Solutions temporarily idled 20% of its European capacity for producing STYROFOAM insulation in order to address weakness in the European building and construction industry. So, despite these actions, the massive cost surge led to immediate margin compression across our portfolio. It also extended the price lag effect in our Performance segments, where pricing was still catching up with the raw material increases of the first quarter.

Of these sharp increases in feedstock and energy costs, increases in other raw materials and supply chain costs, coupled with overall weaker demand right here in the United States led to a decline in earnings per share to $0.81 versus earnings per share of $1.07 in the same period last year.

Now, let's take a look at our reporting segments, and the key drivers of performance. And for this, I'll return the call back to Kathy.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Thanks, Geoffery. Starting with Slide 8, in Performance Plastics, you'll see a lot of up arrows as most businesses posted higher price and higher volume. Dow Automotive, the only business to show a volume decline, posted a solid 4% volume growth outside North America, but, suffered a double-digit decline in North America, in line with the industry.

Dow Building Solutions volume improved, as the impact of weakness in the U.S. residential construction industry was more than offset by growth in housing in many countries outside of the U.S. and in non-residential construction globally. Insulation materials from both Dow Building Solutions and Polyurethanes benefited from increased demand for insulation for energy conservation.

While we saw better volume in Dow Epoxy, particularly in the Systems business and Epoxy resins, there was a significant margin squeeze in intermediates, because of industry over supply, which limited our ability to raise prices enough to offset higher costs. For the segment overall, results were down because of higher raw material and supply chain costs, despite the higher volume and aggressive action on price.

Moving to Slide 9; for the eighth consecutive quarter Performance Chemicals posted year-over-year gains in both price and volume. Designed Polymers had another strong quarter with year-over-year gains in price and volume in every geographic area, and higher EBIT. These results reflected growth of Dow Wolff Cellulosics in food and pharmaceutical applications as well as higher results for Dow Water Solutions and a number of smaller businesses in the portfolio.

Dow Latex posted lower volume due to softer demand for acrylic latex in coatings applications and for S/B latex used in paper coating, the latter as a result of declines in the print advertising industry.

With weaker industry demand, it was difficult for the businesses to recover the higher cost of raw materials including propylene and butadiene.

Specialty Chemicals volume declined, because of supply limitations resulting from an extended outage at the St. Charles, Louisiana plant and intermittent supply problems at OPTIMAL. Volume for the business also declined because of the first quarter divestiture of two small U.S. based business units: Dow Haltermann Custom Processing and Haltermann Products. For Performance Chemicals' bottom line, substantial volume growth around the world coupled with very deliberate price actions, almost fully offset the impact of higher raw materials costs and our increased spending to support future growth.

Slide 10, highlights our strongest performer, Dow AgroSciences. Following a stellar first quarter, Dow Ag delivered even better results in the second quarter based on their strong product portfolio and robust industry conditions, posting price and volume gains in every geography. Sales of new Ag chem products increased 65% compared with the year ago, with strong growth of these products in North America, Europe, Latin America and Asia-Pacific, while sales of seeds and traits increased almost 40%.

Dow Ag reported record EBIT for the quarter, despite a significant additional investment in R&D and Sales & Marketing, investments designed to ensure continued strong results in the future.

Shifting to the Basics side on Slide 11, you can clearly see the impact of the surge in raw material costs on our Basic Plastics businesses. Despite price increases averaging more than 20%, margins declined significantly compared with the year ago, as the size and speed of raw material cost increases were too much to fully recover through price increases within the quarter. The decrease in volume for the segment is not fully reflective of industry conditions, because of several portfolio management actions Dow has taken over the past year.

Most significant was the formation of Americas Styrenics in May of this year. Sales of polystyrene in the Americas are now handled through this joint venture and are not consolidated in Dow's financial statements. We also shut down a large polypropylene facility in St. Charles in Louisiana in December of last year, and sold the polyethylene plant in Brazil in June 2007. Despite that divestiture, polyethylene volume was up 6% in the quarter with gains in all geographic areas.

We held firm on our price increases and may have lost volume in some cases, although in some instances, customers came back to Dow when they found they were unable to get the volume they needed elsewhere. Polyethylene inventories are at low levels throughout the distribution chain including at Dow.

Basic Chemicals results Slide 12, were disappointing. By far the largest component in the decline in segment EBIT was EO/EG. Ethylene Glycol price has trended down in recent months as a result of weakening industry fundamentals and although prices were higher in the second quarter than they were a year ago, the increase was far short of what was needed to cover the huge rise in feedstock costs.

In addition, industry demand slowed for EG in both polyester and PET, and we intentionally reduced operating rates to meet the lower demand levels. An extended turnaround at the Plaquemine EO/EG plant negatively impacted results in the quarter. Solvents & intermediates also saw a margin squeeze as price increases did not keep up with higher propylene costs.

In Chlor-Vinyls, caustic soda prices and margins had improved dramatically compared with the second quarter of 2Q07, but the decline in EDC and VCM margins has almost completely offset this gain. Within our Basic Chemicals segment most of our chlorine is exposed to weak PVC industry fundamentals. Higher value uses of Dow's chlorine in polyurethanes, epoxies and agricultural chemicals, for example are reported in other operating segments.

One final data point, our operating rate for the quarter was 83%, down from 86% last quarter because of a higher level of planned turnarounds, some unplanned outages, and our decision to throttle back some plants in order to reduce inventories. That wraps up the financial review of the quarter.

And now I would like to turn the microphone back over to Geoffery for his update on strategy and outlook, beginning on Slide 13.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Thanks, Kathy. There were a number of notable achievements in the second quarter that closely align with key elements of our strategy. These elements are growth, innovation, joint ventures and financial discipline. So, starting with Growth, the most important development was clearly our announced acquisition of Rohm and Haas. This acquisition will make Dow the world's leading specialty chemicals and advanced materials company.

It will combine the best-in-class technologies, broad geographic reach and strong industry channels of both companies to create an outstanding business portfolio with significant growth opportunities. We also have some excellent growth activities taking place in our Performance businesses. Dow Water Solutions announced that its FILMTEC membranes have been selected for one of the world's largest desalination plants under construction in Sydney, Australia. With the addition of this project, Dow Water technology is now in four of the five largest desalination plants in the world.

And also in the growth area, Dow Building Solutions announced the acquisition of Stevens Roofing. Stevens specialized… specializes in TPO commercial roofing systems, an area with significant growth potential. This aligns very well with our energy efficient building expertise.

Turning now to Innovation; Dow AgroSciences made two very important announcements in the quarter. First, the business announced it has submitted SmartStax, its new 8 way gene combination for corn, in the U.S. EPA for regulatory review. This marks the critical first step in clearing SmartStax for commercialization. Dow AgroSciences also announced it has exercised its option to obtain a commercial license for zinc finger technology from Sangamo BioSciences. With this technology, we will be able to tailor traits in agricultural crops, industrial products and plant derived biopharmaceuticals.

And, Dow Elastomers announced the availability of nine new resins in the INFUSE polymers line. These new products offer a unique set of physical properties, and we're seeing strong market pull in applications where soft-touch characteristics are desired. INFUSE is the latest in a long line of very successful products in our $1 billion Elastomers Business. We expect these products to add another $100 million of annual revenue in the coming years.

Now moving on to our Joint Ventures on slide 15, there is much news to report. Most notable was the announcement of the CEO and headquarters location for K-Dow Petrochemicals, our new joint venture with PIC of Kuwait. This new $11 billion polyolefins powerhouse will be headquartered in southeast Michigan, and will be led by Jim Fitterling, who has been successfully running our Basic Plastics business for the past several years.

And in May, Dow and Chevron Phillips announced the start-up of Americas Styrenics, a new market leader in polystyrene. This new company has the largest polystyrene manufacturing capacity in the Western Hemisphere. In Basic Chemicals, Dow and GACL of India announced the signing of a joint venture agreement for the construction of a 200,000 ton chloro-methane manufacturing facility on the western coast of India.

And, we also broke ground on a new propylene oxide plant in Thailand, with our partner Siam Cement. This plant will utilize new and innovative technology which is more economical, more environmentally friendly and will provide future growth opportunities in Asia-pacific. And finally under the topic of joint ventures, new capacity at Dow Corning's Hemlock Semiconductor unit came on-line during the quarter. This new capacity nearly doubles their production base for high value polycrystalline silicon used in the electronics and solar industries.

Now, let's turn to financial discipline, one of my favorite subjects. Capital spending was $597 million in the quarter, and we remained on track to deliver CapEx at a full year target of $2.2 billion. Regarding share buybacks, we invested another $393 million to purchase 9.6 million shares of Dow stock in the second quarter. Since the beginning of 2006, we have spent $3 billion to repurchase approximately 7% of our shares.

And moving on to working capital, despite the surge in raw material costs, we held our investment in working capital roughly flat with the level of first quarter. Given the $1 billion sequential increase in purchased feedstock and energy costs, this was a remarkable achievement. Three months ago we made a commitment to optimize our inventory levels, and we have made great progress. With active management, we reduced our day's sales in inventory significantly in the quarter to 60 days versus 67 days in the first quarter. And we continued to manage accounts receivable tightly, with the DSO, day's sales outstanding at 39 days, compared with 38 days in the first quarter of this year and 40 days in the same period last year.

And finally in the area of financial discipline, our year-to-date return on capital and return on equity were 13% and 17% respectively. Both are solid numbers. Now, before I turn to our outlook, I would like to mention that Dow won Best Workplace Awards in Germany, Mexico, Colombia and Argentina. These awards highlight our ability to create challenging and rewarding careers for our employees around the world, which allows us to attract and retain the best talent.

As we wrap up today's remarks, let's spend a few minutes on our outlook. The surge in oil prices, which have further weakened the U.S. economy, has also created new uncertainties in demand around the world. We believe the U.S. economy will likely continue to weaken for the rest of 2008, and that the outlook for the global economy remains uncertain. In addition, we expect continued volatility in feedstock and energy costs. If these costs were to stay at today's levels, then the sequential increase in the third quarter could be in the range we experienced in the second quarter.

Now despite this, we believe that Dow's strategy for diversification, geographically and in end-use applications will allow us to manage through these challenging times. Now over the next six months, we will remain focused on three key objectives; first, running the company. We will closely manage our day-to-day operations, with a primary focus on recovering lost margins. And we will be utilizing Dow's vast footprint to capture growth wherever it is in the world.

And second, we will start operations of K-Dow Petrochemicals in the fourth quarter. And finally, we will move forward on our announced acquisition of Rohm and Haas. Work is already underway to prepare the necessary filings for regulatory approval. Rohm and Haas is transformative for Dow in many ways. In particular, their leading position in electronic materials and coatings, and the innovative spirit and corporate culture of the company, which we hope to grow and foster. So, as you can see we have demonstrated with our actions just how committed we are to furthering our transformation and to changing the earnings profile of our company.

Thank you very much for your time today and at this time I would like to open the call for Q&A. But, before I do so I would like to mention that this is Kathy Fothergill's last earnings call, as she will be retiring in August. I have had the pleasure working with Kathy for many years. Now throughout this time, I have always admired her high standard or professionalism, her deep knowledge of our company and our industry. And last, but not least, her ability to lead our Investor Relations efforts with distinction.

In fact, to be precise, Kathy has been part of 49 quarterly earnings announcements. And I am sure many of you on the call today will agree with me when I say that her presence will surely be missed. So Kathy, thank you, and best of luck in your future endeavors. Over to you.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Thank you, Geoffery. Thank you very much for those remarks. And I am sure that Howard and the rest of the IR team are going to do a fantastic job going forward. But now that does wrap up our prepared remarks and some not so prepared remarks. But for your reference a copy of the remarks will be posted on Dow's website later today.

Now we will move on your questions. And before we do though, I would like remind you that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and do anything that may come up during the Q&A.

Clara, would you please explain the Q&A procedure?

QUESTION AND ANSWER

Operator

Absolutely, thank you very much. [Operator Instructions]. And we'll go first to Don Carson with Merrill Lynch. Go ahead.

Donald Carson - Merrill Lynch

Yes, thank you. Quick question on Ag. Andrew, I know in the past you described how Ag is, I think you have used an Australian term, punching above its weight. A very strong first-half. How much was this performance depressed by the increase in R&D spending? Can you quantify that? And can you talk a bit about the second half outlook, given this businesses strong position in South America? And then finally, you describe yourself as a bridesmaid on the whole Invinsa joint venture process, but what do you see as the potential for the whole AgroFresh Invinsa business as it is reunited with Dow AgroSciences?

Andrew N. Liveris - Chief Executive Officer & Chairman

Thank you Don. And I didn't realize that was an Australian term, so thanks for that clarity too. But, yeah look, we've said that Ag is on a tear, and we put in R&D preferentially this year. We increased SOD, which is inclusive of R&D of course, but we increased the R&D investment. And our SOD is probably around $20 million, $25 million extra resources this year. And that is all over… that's for the whole year, right? But the increase is front-loaded to the first-half.

So, they have done a lot of good work to deserve that increase. So, it's probably depressed, to use that term, an extraordinary result just a little. But frankly, it is the pipeline they have been developing and that leads to the point you made about their presence down in South America and what we can expect in the second half the year. Obviously the Northern Hemisphere dominates in terms of revenues and profits, but we have an increasing presence in Brazil and an increasing presence in Latin America in general.

And, I think you should continue to see Ag outperform as the quarters roll by year-on-year, which is definitely our strategy in the way we've positioned Dow AgroSciences. And clearly… it's been they have been given the charter to do both on M&A. And they're finding properties. Geoffery mentioned a couple in his talk. And we will have more to say about that as the next months unfold.

Yeah, bridesmaid, I am not sure, I used that term, but that's good. I can use that one on Invinsa. And then I think that's a tremendous opportunity. And the more we get to know about it as we go through these next few months, it is a bonus growth synergy that I think, as we went through to due diligence on the Rohm and Haas transaction, we noted what might be some of the clauses in those contracts that could inhibit us extracting growth synergies, and we saw nothing that could inhibit us. And, we look forward to, when the deal closes making that very synergistic with our programs at Dow AgroSciences. I see upside on that Don.

Donald Carson - Merrill Lynch

Just overall, I mean, Dow is more of a performance and commodity Company, although less so on the latter. But, do you think that Ag can get the proper evaluation as part of this broader Dow, Rohm and Haas entity?

Andrew N. Liveris - Chief Executive Officer & Chairman

I really do. I really think what we've got here is rising tide lifting all boats. And I think that's an American expression. But anyway, I will tell you that Dow AgroSciences deserve more rapport in the context of let's say not so much the pure multiple of Monsanto, but clearly DuPont/Pioneer. That will happen because we have now… when we closed Rohm and Haas, another Performance businesses, which has upsized in the portfolio.

And, of course size matters, and high performing Performance businesses, such as Dow AgroSciences and the new Dow, Rohm and Haas combination will lift the multiple. And, we don't talk much about that, but questions like yours are clearly… that's our whole strategy, by being a consistent high quality earnings growth company, we will lift the multiple of this company.

Donald Carson - Merrill Lynch

Okay. Thank you.

Andrew N. Liveris - Chief Executive Officer & Chairman

Thank you Don.

Operator

Thank you very much. And we will go next to David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank

Good morning. Andrew, just on strategy as you move to a performance-based business, can you comment what's your view of the EO/EG business longer-term, as well as chlor-alkali obviously use chlorine in some value-added applications, but what's the longer-term potential of these two commodity businesses?

Andrew N. Liveris - Chief Executive Officer & Chairman

Yeah, well, I think… I think we've clearly spoken on, with MEGlobal's formation on how we view EO and EG. But we've also spoken with K-Dow, and as we bring that to a close pretty quickly, K-Dow will own all of our EO derivatives of note that are in the commodity space or semi-commodity space. And with time K-Dow/MEGlobal, MEGlobal we've announced will be part of K-Dow. K-Dow will seek to move its footprint to the advantaged feedstock location.

So, you will start to see a diminishing impact on The Dow Chemical Company's footprint in terms of Basic Chemicals in terms of high-cost disadvantaged EO locations. That's clearly our strategy. Now it's a migration strategy and it will be really driven by K-Dow. But it is in their interest, and of course in our interest, to see that happen fast.

They have -- by the way, I was just with the Kuwaitis in London yesterday, and we're quite excited by the suite of projects that the Kuwaitis are coming up with that will advantage MEGlobal/K-Dow. We talked about that in a separate question, I guess.

Now on chlor-alkali and chlor-alkali integration, our strategy has been very clear. We do not want to be in merchanting CVCM. We are targeted into value-added chlorine applications. AgroSciences, cellulosics, PO, epichlorohydrin, these are all value-add that appear in different parts of our EBIT columns because of that integration. They don't appear in Basic Chemicals. But having said that, we have the Shintec contract, which we have renegotiated, which will get us back to what we need to do on that part of the chlorine chain by 2011. So that's a good move.

And then finally, the most important, which is our footprint shift to advantaged low-cost energy locations, of which the two most significant chlor-alkali projects we have on the books, the Ras Tanura project with Saudi Aramco, and the Shenhua project in China. Those two low-cost footprints will take chlorine to, let's call it an asset-light model for The Dow Chemical Company -- chlorine outside of value-added chlorine.

David Begleiter - Deutsche Bank

That is very helpful. Just lastly, how would you describe the success of your last two price increases on a qualitative basis?

Andrew N. Liveris - Chief Executive Officer & Chairman

Qualitatively I think quite good. We said up to 20% and up to 25%. These were surge-oriented prices across the board. We said the change will determine where we can go. We've got more than half stickiness on the first up to 20%, just through the month of June and July. So we've got a great run-rate going there. And we are seeing some early data on the up to 25% that suggests we can do more than half as well.

So, look, if we end up with -- for the whole company sequentially up half of 45%, that's half of 45% that would not have happened instantaneously to cope with the surge. Now can we do more? Well, it depends. Right? It depends on all things that Geoffery reported on, which is what demand destruction are going on out there. We are seeing demand destruction in the US.

But we're not seeing it internationally. In fact, we have had incredibly strong volumes internationally, which gives us a good feel that we can continue to recover the triple digit oil price increase that we have seen sequentially in the last two quarters.

David Begleiter - Deutsche Bank

Thank you.

Operator

Thank you very much. And we will go next to Peter Butler, with Glen Hill Investment.

Peter Butler - Glen Hill Investment

Okay, good morning. Kathy, during the last 12 years next to the throne, next to several assorted CEOs, none as charming as Andrew, however, did you ever see anything that you would have done different on any of the major things that broke during this 12 year period?

Kathleen C. Fothergill - Corporate Director of Investor Relations

Peter, I don't think right now is the time to go down memory lane. I would rather talk about where we are going forward.

Peter Butler - Glen Hill Investment

Well, that's a good way of putting off the question. Another question I have is does that count as a question without an answer, since I'm not getting an answer?

Kathleen C. Fothergill - Corporate Director of Investor Relations

Just keep going. Ask Andrew and Geoffery your question.

Peter Butler - Glen Hill Investment

If this were 1974 instead of 24 years later, Dow would be looking at huge positive earnings surprises coming in the next couple of quarters. Is this management seeing the same things? In other words, is this management as tough as Dow's management back then in getting and holding price increases, even if oil does decline?

Andrew N. Liveris - Chief Executive Officer & Chairman

Peter, this is Andrew, yes. And you know me well enough to know that I have talked to the tough management of that timeframe. And what it takes to not only restore margins, but obviously get reinvestment grade pricing into the value creation that we all have to have to make the chemical industry robust, not just in United States, but globally. We have a lot of customers who are putting price increases through right now in their value chains. That would not have happened without Dow's leadership. And I think it is a good question to ask. And maybe I should just leave it with the one word, yes.

Peter Butler - Glen Hill Investment

That yes did include the acknowledgment that the earnings should be looking pretty splendid?

Andrew N. Liveris - Chief Executive Officer & Chairman

I think the very first question -- I can't remember if it was Don or Dave now -- but I would tell you this, we are going to move the earnings profile northwards, not just with how we have performed on financial discipline despite these horrendous increases, these huge unprecedented surges, but also because of our footprint shifts, the two big ones. The asset-light, which I know you are a fan of and we are a fan of and our partners in the low-cost feed stocks and the cash machine that we are generating out of our joint ventures, these are cash machine that no other chemical company on the planet will be part of.

Then second, the Rohm and Haas transaction and the value creation that will occur because we will be in solid downstream growth markets around the planet. Those two things will give this company a northeast earnings profile, heading to the right growth side of the equation.

Peter Butler - Glen Hill Investment

Okay, thanks for the help. And I note that you probably aren't getting nearly as much credit as you should for the management execution of what you have been talking about.

Andrew N. Liveris - Chief Executive Officer & Chairman

Well, we are patient here. Just like your question to Kathy, she won't go down memory lane. Ten years from now, its not that same question, Peter.

Peter Butler - Glen Hill Investment

Okay, thanks for help.

Operator

Thank you very much and we will go next to Frank Mitsch, with BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Good morning, Kathy, let's talk about the future. I am not quite sure what your future plans are, but do you think are you might be able to accompany me to the Mets/Red Sox World Series this year?

Kathleen C. Fothergill - Corporate Director of Investor Relations

I would be more than happy to do that Frank.

Frank Mitsch - BB&T Capital Markets

All right. Terrific, so I won't say goodbye on this call obviously. The results in the Chemicals business obviously where rather disappointing. And you noted that some of it was due to extended plant turnarounds, and you mention that the operating rate had kicked down. Is there any way that you can quantify what, if you want to use the phrase, unusual operating conditions impacted the quarter, whether for the Chemical sector alone or for the overall Dow Chemical Company?

Kathleen C. Fothergill - Corporate Director of Investor Relations

Probably on the operating rate Frank, it's 1 or 2 percentage points. But we did have significantly higher turnaround costs in the quarter than we normally do. I guess I don't want to quantify it specifically, but you're going to be $50 million, something like that, in that range ballpark of higher costs than we might normally have. Second quarter is always pretty high, so there is something like that.

Frank Mitsch - BB&T Capital Markets

All right, so we could maybe look at $50 million improvement sequentially if things are operated on a smoother basis. Andrew, you spent a fair amount of time talking about the price initiatives and so forth. And obviously you had margin compression here in the second quarter with the unprecedented increases in hydrocarbon costs. And Geoffery mentioned that you could possibly be looking at the same order of magnitude increase Q3 that you sought in Q2.

Should we be expecting that you're going to bridge that gap between pricing and raw materials in the third quarter, or might we just be pushing out the date that you actually get margins back to where they were?

Andrew N. Liveris - Chief Executive Officer & Chairman

Yeah Frank, look, we have a much better shot at getting it in the third than we did in the second because it came very late in the second. So our momentum going into the third is strong and frankly with volumes around the world being as robust as they are, it gives us great -- more certainty that we aren't getting demand destruction with the price increases. There may be pre-buying going on in some markets.

But as we analyze markets around the world fundamentally, apart from building construction in Europe, mostly Southern Europe, we're still seeing, especially emerging country growth, being double-digit on the volume. And therefore revenue side, it is not higher on the revenue side. So, all of that to let you know that we think the momentum in terms of margin expansion gets restored in oil, and its associated input stays in these ranges.

As you have noted and others have noted, what is really important to us is stability. If we can hover around these ranges now, $120, $130 oil and therefore its associated naphtha equivalents, then frankly that gives all of us a platform to operate from in terms of restoring the margin and then expanding the margins if we can.

Right now, apart from the US, I think we are all seeing great strength around the world that is enabling us to keep price momentum and therefore -- we went very close Frank, if you look at how close we came to keeping our margins level despite this unprecedented surge, we did pretty good. And so with the full quarter to work with we have better certainty to get to even or better.

Frank Mitsch - BB&T Capital Markets

All right, terrific. Thank you.

Andrew N. Liveris - Chief Executive Officer & Chairman

Thanks Frank.

Operator

Thank you very much. And we will go next to Jeff Zekauskas, with JPMorgan.

Jeffrey Zekauskas - JPMorgan

Good morning. On average shouldn't your raw material costs be down sequentially in the third quarter? Natural gas has gone from -- I don't know -- $12 to $9 and oil has come from $135 to $125?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Yeah Jeff, this is Geoffrey here. Just to take oil, Brent crude average price as of this morning, let's say, $124, $125. At today's level it is still higher than our average cost during the first quarter. The average cost in the first quarter was around $122. I'm using crude as a reference point. And we are already towards the end of the first month of one-third of the quarter. So if you use an average rate for the third quarter of let's say around $125, $126 then you are talking about over $0.5 billion additional cost for the company to absorb.

Jeffrey Zekauskas - JPMorgan

I guess as my follow-up. I think your average prices in the first quarter were up 17% and your prices were up 18% in the second quarter. Can you give us an idea of what your sequential price increase is and some idea of the carry through you're getting?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Sequentially the price increase was 5% Jeff.

Jeffrey Zekauskas - JPMorgan

5%? Okay, thank you very much.

Operator

Thank you. And we will go next to Mark Connelly, with Credit Suisse.

Mark Connelly - Credit Suisse

Thank you, just two quick things. First, can you help us understand why the Latin American volumes -- volume growth were the weakest among the nine US regions? It looks like pricing there was fine. Was there one big contributor to that weaker growth, or is it widespread? And the second question was just whether CP Chem added to or hurt equity earnings this quarter?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Mark, when it comes to Latin America, if you exclude the Americas Styrenics new venture, then in fact our volume in Latin America actually increased by 9%. And then your second question on the equity earnings, it had hardly any impact on the equity earnings.

Mark Connelly - Credit Suisse

Okay, thanks very much.

Operator

Thank you very much. And we will go next to Sergey Vasnetsov, with Lehman Brothers.

Sergey Vasnetsov - Lehman Brothers

Good morning. Couple of questions on volumes and prices, European volumes were up 11%, which is extremely strong even compared to last year being down 2% and so I think last year you had some turnaround. Can you talk about what is going on there?

Andrew N. Liveris - Chief Executive Officer & Chairman

In Europe, clearly Eastern Europe is a big factor here in the markets. If you look across Eastern European markets, we're still seeing double-digit volume growths. And I think that's a big part of it. We also had some hydrocarbon sales, which as you know, we have a big European hydrocarbon operation there that does in fact transact merchant lease, so that was a part of it as well.

And frankly, outside of Southern Europe weakness, most of Europe was actually quite strong. We looked at some of the breakdowns on markets and for example in Germany it was including industrial equipment demand. In other words, the German equipment manufacturers are still doing very well. And we have associated sales, like for example, paper latex and paper equipment. It's that sort of stuff, a strong Germany, a weak Southern Europe, a strong Northern Europe in general and a very strong Eastern Europe.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

In fact, for Eastern Europe, which represents about 15% of Europe in total, the volume in fact was up a very strong 19%.

Sergey Vasnetsov - Lehman Brothers

Incredible. On the Ethylene glycol, just some quick comments there. I think as you've stated, this business is taking a break. They make so much money for Dow for the past six quarters, hopefully you wouldn't forget that. And the second question is on price momentum. Geoffrey, you mentioned that sequential was 5% in the second quarter, but your price initiatives came pretty late. What kind of price momentum sequentially you expect in the third quarter?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

I can't answer that and it's a mixed bag depending on market conditions in the various segments, in the geographies, some of the contractual terms that we have to live with. So, it's frankly too early to tell.

Andrew N. Liveris - Chief Executive Officer & Chairman

Certainly on your EO/EG point, remember how I answered that previous question, we love EO/EG when it is in the MEGlobal form, or the Tegal form. We just don't like the EO/EG that is in the high-cost form.

Sergey Vasnetsov - Lehman Brothers

Exactly, okay. Thank you.

Operator

Thank you very much. And we'll go next to Bob Koort, with Goldman Sachs.

Robert Koort - Goldman Sachs

Thanks very much for taking my question. Andrew, I was wondering if you could maybe look a little bit longer term for me. This year obviously the export markets have been very kind to the olefin, polyolefin industry, but given the expansions in the Middle East, some by your joint ventures, I would guess the competitive nature of the US market and its ability to export will get compromised looking forward. One, do you agree with that?

And then, two, what do you think happens to the landscape in North America? Do we just have secular decline in growth rates? Will we actually have to have some shutdowns by the industry? And where would Dow fit within that framework?

Andrew N. Liveris - Chief Executive Officer & Chairman

I think the most important qualifier I will put on the answer immediately Bob, is it will be K-Dow that will add to the ethylene polyolefin's question from here on in, once we close the deal this next few months. But having said that of course we know a lot about it and we can help address your question. Firstly, you've got to have a quick look at the US macro here. With headline inflation going where it is, and the Fed not really lowering rates any more, in fact the chances are rates will keep going up. Obviously they are triturating that very closely.

The US dollar weakness will turn maybe to a strengthening. If that happens, I think it speaks to your point about export volumes being lost. We agree with that view. Okay, so with that premise staying a key premise, and with your other point, which is the Middle East producers taking all the low-cost export markets, which they have been doing now for some time, to Asia and to Europe and could come here eventually through either finished product or even resin itself, So, we think the answer to that is also yes with surplus capacity being build at the Middle East by the '10, '11 and '12 timeframe.

So I think it speaks to your point, which is some rationalization needs required. K-Dow will be a part of that probably. We have some recapitalizations of St. Charles that we're looking at. I have mentioned that on calls before. And we haven't put that into debate yet. But it is not just us, there are other guys out there that would have to look at their equations and where we are by far the largest consumer of ethylene in the US and K-Dow will be huge when it is formed. So I think we will be part of answering that question, but I do think the industry has some more to do.

Robert Koort - Goldman Sachs

And then extending that more to what you'll be involved in over the next decade as you transition out of the plastics business, you are in a venture with Aramco, it seems like the Middle East has ambitions of being more downstream. What would you expect to happen to the competitive asset base of your Specialties business and the scope for investment here versus abroad?

Andrew N. Liveris - Chief Executive Officer & Chairman

I think the real kernel of your question is less the term Specialty and more what I would call building blocks. So there are key building blocks that are based off the integration that is provided out of refinery businesses such as Aramco's that we're going to help create by building PO and acrylic acid and epichlorohydrin and a few other key building blocks. That will in turn help what I call what are now Performance businesses that are semi-commoditized also now into the low-cost equation.

Which I think therefore speaks to your question, which is the next traunche of supply destruction in key high-cost markets like the US and Europe will be in those building blocks. I think that is an inevitability, I think the commoditization of so-called Specialties will be accelerated by those building blocks being built in low-cost locations. Of course, Dow will be a key part of that by being part of not only the Aramco project, but also the China project with Shenhua.

Robert Koort - Goldman Sachs

Terrific, thank you.

Operator

Thank you very much. And we'll next to Kevin McCarthy, with Banc of America Securities.

Kevin McCarthy - Banc of America Securities

Yes, good morning. Caustic soda following the K-Dow deal will be arguably your most important totally owned commodity. And it looks like that market has improved dramatically just over the last 30 days. If I look at the back-half of the year, do you have any contractual caps or provisions that would limit your participation in the strength there, or should we expect that to drive better performance in the Chemicals segment in the second half?

Andrew N. Liveris - Chief Executive Officer & Chairman

Without getting overly specific, Kevin, we do have some caps and some contractual limitations, but we still see it as increasing -- getting better from here.

Kevin McCarthy - Banc of America Securities

Okay and then financial question for Geoffery, if I may. You have been very active in repurchasing shares, including during the second quarter. Given the pending Rohm and Haas deal, should we anticipate an even keel there in the back half of the year, or would you expect activity to diminish?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

I think that -- look, for the time being, until we close the K-Dow transaction, I think we're going to take a little breather from a large buyback. Having said that, we do remain committed to reducing our share count over time. So, there will be a time when we will be back very actively, but we're going to take a breather for the time being.

Kevin McCarthy - Banc of America Securities

Thank you very much.

Operator

Thank you. And we will go next to P.J. Juvekar, with Citigroup

P.J. Juvekar - Citigroup

Yes, hi good morning.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Hi, P.J.

P.J. Juvekar - Citigroup

Ethylene profitability dropped, and that probably caused some of the decline in Performance Plastics, given that you transfer at leaner cost. So it is hard to see how much of the decline is from ethylene and how much is it from Performance Plastics. Can you just shed some light on that?

Andrew N. Liveris - Chief Executive Officer & Chairman

P.J, let us get back to you on that. We're not so sure we can -- because of the way we do transfer, which is across not just, of course, our Performance plastics, but it is transferred everywhere and so at cost. As you know, when you buy products credits to enable that transfer to occur. So, can we come back to you on that?

P.J. Juvekar - Citigroup

Sure. And the second question is Dow has always been good at hedging. You guys have made a lot of money in the past in hedging raw materials. I would imagine that hedging is getting a lot more difficult given these volatile raw material prices. So, can you talk about what your hedging strategy is now?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

Well, P.J, we are in the hedging business. The volatility, as you correctly pointed out, is very, very high. But on the other hand, we are opportunistically in there hedging -- there are different ways to hedge. You can do it physically and you do it via paper and we have a time horizon of 12 months in general. And I can't tell you more than that other than the fact that we are opportunistic hedgers.

P.J. Juvekar - Citigroup

So, what percentage of your raw materials would you be hedged let's say going into the fall?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

I can't give you that, because like I said, it is opportunistic. When it comes to -- there is more of a pattern with natural gas. With natural gas we look at the hurricane season. We're in it right now. So during the period that we're in now our hedge ratio would be a little bit higher and then as the hurricane season drops, let's say by October, September, October, then the hedge ratio is lower. And then again for the winter season, December to February, March, it gets higher again. So there is a little bit more of a pattern on natural gas, but that is about it.

P.J. Juvekar - Citigroup

Thank you.

Operator

Thank you very much. And we will go next o Gregg Goodnight, with UBS.

Gregg Goodnight - UBS

Good morning all. You mentioned your improvement in AG had a big contribution from your new products. I was wondering if you could quantify for us the level of contribution on a year-over-year basis say for revenue and earnings, if not on an actual number basis on a percentage of the improvement basis.

Andrew N. Liveris - Chief Executive Officer & Chairman

That's a pretty hard number for us to nail, but it is not a very big number. Remembering some of the roll forwards here, Ag is one of the highest percent of revenues generated from products introduced in the last five years -- businesses we have in Dow. And Dow's average is around 34% great, so you assume that on a rolling five year basis that number is north of 34%. But to give you an Ag specific on a quarterly basis, we don't measure it like that. But we can also get back to you. But this gives me an opportunity to let you know that we clearly are -- next year, the SmartStax launch and how we roll that out will be a big part. We have a substantial amount of freighted sales now. That number is what approaching 90%, Kathy?

Kathleen C. Fothergill - Corporate Director of Investor Relations

Yes, about 90% of our sales.

Andrew N. Liveris - Chief Executive Officer & Chairman

90% of our sales in the US and so I would tell you that those sorts of things with SmartStax next year and AAD soon thereafter is going to be a big part of being able to report the percent of revenue and profit generated from new stuff in 12 months with those two launches will be very large.

Gregg Goodnight - UBS

In terms of specific names, which Ag products contributed the most to your incremental improvement this year, focusing in on this year?

Kathleen C. Fothergill - Corporate Director of Investor Relations

There were several products that were listed in our press release. But we're talking about cereal herbicides. We're talking about [Spinatarim], which is an insecticide. Aminopyralid, which is a herbicide for range and pasture. Those are the products that are making a significant contribution.

Gregg Goodnight - UBS

Okay and the 34% number, would that be typical of this year, a 34% contribution year-over-year improved performance from your new your products, or is that more of a longer term average?

Kathleen C. Fothergill - Corporate Director of Investor Relations

Now the 34% is -- that's total Dow percent of sales from new products.

Andrew N. Liveris - Chief Executive Officer & Chairman

In five years.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Yes, anything that has been introduced in the last five years. And that has been running around 32, 33, 35% for the last couple of years.

Andrew N. Liveris - Chief Executive Officer & Chairman

And we don't look at it as a one year roll. But let's get back to you on whether we can give you that -- or give all of you that sort of data.

Gregg Goodnight - UBS

Okay, thanks for your help there.

Kathleen C. Fothergill - Corporate Director of Investor Relations

And just watching the time here we will go now to our last question.

Operator

Excellent and thank you very much. And we'll go to John Roberts, with Buckingham Research.

John Roberts - Buckingham Research

Just a quick accounting question, I guess. But are you -- you're still using standard costing on your transfer pricing or -- and do we have a fourth quarter adjustment that needs to occur between the segments to true things up for what has happened so far this year?

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors

On your first question is yes and on the second question in terms of adjustment, I'm not sure on your question. Can you clarify that a little further?

John Roberts - Buckingham Research

The hydrocarbon and others segment obviously is away from whatever they thought they were going to do at the beginning of the year when their standard transfer pricing was set.

Kathleen C. Fothergill - Corporate Director of Investor Relations

No, we adjust our standards during the year. We don't just have one fixed standard cost for the whole year. We do roll formed new standards typically every quarter.

John Roberts - Buckingham Research

I guess I'm surprised by the lack of volatility, I guess, within that segment given the overall volatility in the marketplace.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Well, we have been pushing price.

Andrew N. Liveris - Chief Executive Officer & Chairman

In terms of margins, it's all the price -- the year-on-year price that you're seeing. So frankly it's very much back to what we said at the beginning of this call and I have said for a while. We're managing two very large moving parts. And the fact that you're not seeing a lot of margin volatility, in fact that so far we have been pretty close, if not ahead.

John Roberts - Buckingham Research

Great. Okay, thank you.

Operator

Excellent and thank you very much. And this does conclude our question and answer session.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Clara, could you hold on just a second.

Andrew N. Liveris - Chief Executive Officer & Chairman

It is Andrew again. For all of those of you still on the call, I just want to add my thanks to Kathy. She has been tremendous. And Peter Butler, I think, asked about memory lane, and we will get a chance to celebrate with Kathy here as the months go by, but I just want to personally thank her. And really appreciate the professionalism, strength, integrity, and really the tremendous work she has done to make Dow a better company. And we'll miss you, Kathy.

Kathleen C. Fothergill - Corporate Director of Investor Relations

Thank you very much, Andrew. And I would like to thank all of you for joining us on this call. And our team looks forward to talking with you on Dow's next earnings conference call in October. Goodbye.

Operator

And this concludes today's conference call. Thank you for your participation. And have a great day.

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