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First Quarter 2008 Earnings
The Dow Chemical Company

April 24, 2008

Quarterly Earnings Conference Call/Webcast
With Investors, Financial Analysts and the Media

Remarks by:
Geoffery E. Merszei, Executive Vice President and Chief Financial Officer
Kathleen C. Fothergill, Corporate Director, Investor Relations

The following is a summary of prepared remarks made during Dow’s conference call/Webcast concerning its quarterly earnings on April 24, 2008. The news release and financial statements are also available on www.dow.com.

K.C. Fothergill:

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. Any redistribution, retransmission, or rebroadcast of this call in any form without Dow’s express 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.

Around 6:30 this morning, April 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’d 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. 

Starting with the agenda on Slide 3, Geoffery will lead off with an overview of the first quarter.  I’ll discuss the results of our operating segments, then Geoffery will update you on actions we’ve taken to advance our strategy, and describe Dow’s outlook for the months ahead.  After that, we’ll move to your questions for Andrew and Geoffery.

Now Geoffery, let’s move to Slide 4 and your comments.

G.E. Merszei:

Thank you Kathy, and good morning.

I want to start today’s comments on a high note, because I believe Dow performed exceptionally well in the first quarter, given the challenges of a weaker U.S. economy and significant increases in raw material costs.

In fact, if I could sum it up, I would say this quarter was about balance – we struck a good balance between taking fast and aggressive action on short-term business challenges and making progress toward our ultimate goal of transforming Dow into an earnings growth company.

Here, you can see the highlights of the quarter.

We delivered record quarterly sales, with broad-based price gains, and volume growth in emerging geographies. For example, we posted volume gains of 7 percent in China, 4 percent in Brazil, 11 percent in Argentina and 14 percent in Russia.

Our stand-out business for the quarter was clearly Dow AgroSciences, which set a quarterly record for both sales and EBIT. Sales increased 27 percent, with an 11 percent jump in price and a 16 percent jump in volume.

And, once again, we posted strong and consistent equity earnings of $274 million. This was the fifth consecutive quarter in which equity earnings were above $250 million.

All of this good performance has occurred despite the fact that our raw material costs rose 42 percent – that’s $2.2 billion (year over year). This was the largest quarterly increase in the Company’s history, and nearly equal to the increase we experienced for all of 2007.

As you can see on Slide 5, all of this led to earnings per share of $0.99 versus $1.00 per share in the same period last year – I believe a remarkable achievement considering the challenges we faced during the quarter.

These results are evidence of our strategy at work.

Over the past several years, we have taken many deliberate steps to transform Dow to an earnings growth company, such as investing in our Performance businesses and growing our global footprint.

In the first quarter, our combined Performance businesses posted a volume gain of 6 percent, reflecting both organic growth and growth from acquisitions.

From Polyurethanes, to Epoxy Systems, to Dow Wolff Cellulosics – last year alone, we announced 11 acquisitions, all of which are consistent with our strategy to preferentially invest in our Performance businesses.

These bolt-ons have moved Dow further downstream where we are closer to the customer and the marketplace. As a result, we are better able to deliver total solutions that demand higher margins.

And, we are delivering value.

For example, our Polyurethanes Systems Business has consistently delivered higher margins than we could achieve by selling the same products through our Components Business.

And as I said, Dow AgroSciences posted incredible growth. Again, this did not come by chance, but because of the hard work we have done to take cost out and to grow through acquisitions and investments in new technologies and new products.

Dow AgroSciences’ results in first quarter speak for themselves.

Now, let’s talk about geographic strength, which was another important factor in our results for the quarter. Dow has two-thirds of its business outside of North America, with a significant presence in many emerging geographies where growth is robust.

And, our joint ventures have three quarters of their sales outside of the U.S.

This combination of international business exposure provided Dow with protection against a weaker U.S. economy.

Growing our Performance businesses and expanding our global footprint has been done with a view of the “long-term.”

But, we know we must also deliver solid results in the face of “short-term” challenges as well, such as rapidly increasing raw material costs and the current weakness in the U.S. economy, where housing and automotive continued to be a drag on results.

As raw material costs increased to all-time highs, we moved quickly to raise prices across the Company. Here, our expertise in price/volume management played a critical role - both in our Performance businesses as well as in our Basics segments.

Our Basics portfolio performed very well.
Basic Plastics posted robust price gains – more than 30 percent in North America, and more than 20 percent in Europe and Latin America.

Volume was only down slightly – 3 percent at a global level – which was partly due to capacity reductions in North America and Latin America in 2007, and to somewhat weaker industry demand.

But, the good news is we have not seen any significant decrease in demand outside of North America.

In summary, I believe the first quarter was a very good quarter indeed, one in which the  balanced execution of our strategy delivered strong results.

At this point, I’d like to speak briefly about the performance of our joint ventures, whose results were an important factor in the success of the quarter.

Slide 6 should be a familiar slide, since we have shown it in the past.

EQUATE and MEGlobal had a very strong quarter. At Dow Corning, a short-term spike in key raw material costs negatively impacted performance, however, we still expect Dow Corning to deliver robust growth in 2008, and excellent full-year results.

In an effort to bring more clarity to the value these JVs generate, I would like to introduce some new data on our principal JVs that we will be providing each quarter. A list of our principal JVs is supplied in the appendix of today’s presentation.

We will now report on sales, EBIT and depreciation and amortization for our principal joint ventures each quarter, as shown on Slide 7. Here you can also see Dow’s proportionate share of these amounts.
On Slide 8, we have calculated the equity earnings and EBITDA.

Under the equity method of accounting for joint ventures, revenue, EBIT and depreciation and amortization for our JVs are not consolidated in Dow’s income statement, just the bottom-line effect of these items is included as equity earnings.

As a result, investors who use EBITDA as a measure may not fully appreciate the value of Dow’s JVs.

As you can see, Dow’s proportionate share of the EBITDA of these joint ventures is significantly greater than their contribution to Dow’s equity earnings.

More information about these principal joint ventures is included in our recently updated JV White Paper available on our website.

On that note, let me hand it over to Kathy, who will provide additional detail on the performance of each of our operating segments.

K.C. Fothergill:

Thanks, Geoffery.

Starting with Slide 9, for the fourth consecutive quarter Performance Plastics posted year-over-year gains in both price and volume.  In Polyurethanes Systems, the higher volume came both from the Hyperlast acquisition and from organic growth, as we continue to shift more of our Components business into downstream, higher value Systems.  While volume for Dow Automotive and Dow Building Solutions was down, the decline was relatively modest as growth internationally mitigated lower volume in the U.S.  The picture in Dow Epoxy was mixed.  We’ve had a good start with our Epoxy Systems business, bolstered by three acquisitions late in 2007.  We intend to pursue the same model with Epoxy that has been so successful in Polyurethanes … moving downstream to higher value systems applications.  Overall volume in Epoxy was down because of our exit from the peroxymerics business and because we decided not to chase business in Intermediates where margins are compressed because of added industry capacity.  For the segment overall, margins were down because of higher raw material and supply chain costs, despite higher volume and aggressive action on price.

Moving to Slide 10 … Performance Chemicals had a good quarter, with strong volume and higher price.  The year-over-year decline in EBIT was focused almost exclusively in Dow Latex, which was impacted by lower demand for acrylic latex used in architectural coatings.  Margins were also squeezed in S/B latex used in paper coating and carpet applications, where the rise in raw material costs outpaced price increases.  We saw good volume growth in S/B latex for coated paper in Europe, Latin America and in Asia Pacific, with the recent startup of our facility in China.  Designed Polymers turned in a strong performance, with higher price, higher volume and higher EBIT.  There are a number of high quality, high growth businesses in this portfolio, including Dow Water Solutions, Dow Wolff Cellulosics, and smaller businesses like ANGUS Chemical and Specialty Polymers, which contributed to top- and bottom-line growth. 

Slide 11 highlights our star performer this quarter … Dow AgroSciences, which benefited from the strong industry conditions that you’ve read so much about … but these outstanding results didn’t just “happen”.   Dow AgroSciences has developed an excellent portfolio of crop protection chemicals, which stands them in good stead at a time when farmers are trying to maximize the yield of high value crops.  We also saw higher price and volume in our seeds business in the quarter.  Of course, the weather is always a factor in Ag results.  There was a very early start to Spring in Europe, and early season purchases of cereal herbicides boosted sales.  It later turned quite cold … so we’re not sure how the seasonal pattern in Europe will shake out this year.  However, we are confident that Dow AgroSciences will continue to show very strong growth, year over year. 

Shifting to the Basics side on Slide 12 … Basic Plastics results show our focus on price/volume management.  In light of the extraordinary run-up in feedstock and energy costs, we pushed price up by 24% and were still unable to fully recover the cost increase.  In Polyethylene, volume was off slightly in North America and Europe, as customers turned somewhat cautious … buying only what they need.  This lower demand in North America and Europe was partially offset by strong increases in Asia Pacific, as exports from North America continued to be advantaged vs. local production.  Polypropylene volume was impacted by the shutdown of our plant at St. Charles Operations in Louisiana in December of last year, as well as planned and unplanned turnarounds at other Dow facilities on the Gulf Coast.  Industry conditions for polypropylene were somewhat soft, reflecting ample supply and slower demand for durable goods such as carpet and appliances.  In Polystyrene, margins were compressed as higher prices were not enough to offset a significant rise in raw material costs.  

Year over year, Basic Chemicals … Slide 13 … reported sharply higher price and slightly lower volume.   In Chlor-Vinyls, volume declined due to the combined impact of weak PVC industry conditions in North America and Dow’s exit of the caustic soda business in Western Canada at the end of last year.  Margins for caustic were up significantly from a year ago, but the impact of this improvement was masked by a sharp decline in margins on the vinyl side.  As you know, chlorine has many high value uses in Dow … in polyurethanes, epoxies and agricultural chemicals, for example … all of which are reported in other operating segments.  So Dow’s Basic Chemicals segment doesn’t reflect the full value of the ECU.  Ethylene Glycol reported strong year-over-year improvement, with most of the gain coming from higher results at our JVs including MEGlobal, EQUATE and OPTIMAL. 

One final data point … our operating rate for the quarter was 86%, down 1% from a year ago and from fourth quarter, principally because of a higher level of planned turnarounds.

That wraps up the financial review of the quarter.  Now I’d like to turn the microphone back over to Geoffery for his update on strategy and outlook.

G.E. Merszei:

Thanks, Kathy.

There were a number of notable achievements in the first quarter which support key elements of our strategy.

These elements are Growth, Innovation, Joint Ventures, and Financial Discipline.

Starting with Growth on Slide 14, Dow AgroSciences announced it would further expand its plant biotechnology business with the acquisition of Triumph Seed here in the U.S. Triumph markets sunflower, corn, and sorghum seeds across the U.S. and in approximately 25 countries.

Moving on to Latin America, Dow announced a feasibility study to expand TDI production in Brazil.

Dow is the #1 producer of TDI in Latin America, and a new expansion would help retain our leading position, as well as fuel growth by meeting increasing demand for polyurethane products in this fast growing region.

We also announced plans to break ground this year on a state-of-the-art membrane chlor-alkali production facility in Freeport, Texas.

This new, energy efficient facility will provide chlorine feedstocks which are critical to Dow’s Performance businesses.

Dow Water Solutions announced that its FILMTEC™ reverse osmosis membranes are being installed at three wastewater reclamation and reuse facilities in conjunction with the 2008 Beijing Olympic Games.

And, PetroChina Petrochemical Company selected UNIPOL™ Polypropylene Process Technology for its new facility in China. The world-scale facility is the fourth polypropylene plant within the past 24 months to license this technology in China.

Under the topic of Innovation, in the first quarter 32 percent of sales came from new products introduced in the past 5 years. This is consistent with our past performance in this area.

Dow Building Solutions introduced STYROFOAM™ S-I-S Brand Structural Insulated Sheathing, the first ever three-in-one solution that combines structure, insulation and water-resistance in one convenient product.

We also received final approvals for an innovative new polycarbonate product.

A leading optical media company, as well as two of the worlds largest CD and DVD replicators, announced a new Dow Polycarbonate product will now be specified for use in CDs and DVDs, and possibly high definition DVDs in the future.

Innovation at Dow Automotive was also recognized in the quarter.

Automotive News magazine bestowed its highest honor, a 2008 PACE Award, to Dow Automotive for its IMPAXX™ energy absorbing foams, which help create safer vehicles without adding weight.

Moving to Joint Ventures, I am happy to report discussions are going well on our announced JV with Petrochemical Industries Company of Kuwait, and we remain on schedule to close by latest end of the year.

Our JV with PIC is consistent with our strategy to grow our Basics businesses by creating new companies that can fuel their own growth. As an alliance between a world class chemical company and one of the world’s leading oil producers, this new company will be well positioned to capture growth in key geographic regions, such as China, India and the Middle East.

We also announced plans to build a new specialty elastomers train with our JV partner Siam Cement in Thailand. When completed, the new facility will supply customers in the fast growing Asia Pacific region with some of the most technologically advanced plastomers and elastomers in the world.

This investment is consistent with our strategy to invest in fast growing regions such as Asia Pacific.

And, one last comment about JVs. EQUATE Petrochemical Company was honored with the first Corporate Social Responsibility award in Kuwait. The Award recognizes several ambitious programs EQUATE has underway that serve its employees and society as a whole.

Let’s move on to one of my favorite subjects, Financial Discipline, on Slide 17.

Capital spending was $359 million. We remain on plan to deliver capex at our full year target of $2.2 billion, roughly equal to our level of depreciation.

Regarding share buybacks, we repurchased 10.8 million shares in the first quarter – the most shares we have purchased in one quarter in a decade. Since the first quarter of 2006, Dow has spent $2.5 billion buying back 61 million shares.

And, as part of our active portfolio management process, evaluation of our business mix continues.

In February, we announced the formation of a new business portfolio, appropriately named “Dow Portfolio Optimization.”

The charter of this new business group is to evaluate and define a value-creating path forward for select Dow businesses. The goal is to find appropriate growth opportunities for these businesses or to divest them.

Another example of active portfolio management in the quarter was the announced shut down of rubber assets in Berre, France. This is consistent with our strategy to re-direct technical resources and investments to Performance businesses.

Moving on to Working Capital, admittedly, here we have some work to do. While our Day Sales Outstanding in Accounts Receivable is a tight 38 days, our Day Sales of Inventory has crept up to 67 days.

Reasons for this include an increase in export business from North America, which lengthens the supply chain; the deliberate building of inventory in anticipation of second quarter turn-arounds; and changes in product mix.

This said, we are committed to optimizing our inventory levels.

And finally, on Financial targets, Return on Capital was 14 percent, and Return on Equity was 19 percent – both solid numbers.

As we wrap-up today’s prepared remarks, let’s spend a few minutes on our outlook.

At a macro-economic level, we’re seeing softness in the U.S., and customers here are taking a more cautionary approach to their business.

As for Europe, Western Europe is slowing, but holding out well, and Eastern Europe remains strong.

And the rest of world remains healthy.

Turning to Dow, we expect second quarter to be another good quarter. We anticipate continued growth in regions outside of North America, and robust growth in emerging geographies, which constitute today 28 percent of our sales in 2007.

With more than two-thirds of our exposure internationally, we are well positioned to capture growth in Eastern Europe, Latin America, Asia Pacific, India and the Middle East.

We also see another strong quarter for Dow AgroSciences, plus continued growth from other Performance businesses.

At the same time we know raw material costs are going to be a key challenge, so we are keeping the pressure on price/volume management across our entire portfolio.

In closing, I believe our strong global footprint, promising growth opportunities at both the geographic and business level, and continued focus on price and volume should deliver another solid quarter.

 

⁽¹⁾ Earnings before interest, income taxes and minority interests (“EBIT”). A reconciliation of EBIT to “Net Income Available for Common Stockholders” is provided in Dow’s 1st Quarter 2008 Earnings Release.

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