Business News

Dow Reports Third Quarter Results

Friday 24. October 2008 - Significant Price Increases and Consistent Equity Earnings Mitigate Impacts of Declining Global Demand, Record High Feedstock and Energy Costs, and Hurricanes

Third Quarter 2008 Highlights

— Sales for the quarter increased 13 percent from the same period last year to $15.4 billion.

— Price increased 22 percent, with double-digit price gains in all operating segments and all geographic areas. This was the largest year-over- year percentage increase in price since the first quarter of 2005.

— Volume was down 9 percent globally, reduced by the impact of Hurricanes Gustav and Ike, further weakening of demand, and the Company’s focus on implementing price increases in the quarter. Excluding the impact of acquisitions, divestitures and the hurricanes, volume was down 5 percent.

— Earnings for the quarter of $0.46 per share were unfavorably impacted by certain items such as the hurricanes ($0.09 per share in costs and $0.03 per share in margin on lost sales), purchased in-process research and development charges of $0.03 per share, and acquisition-related expenses of $0.02 per share (see supplemental information at the end of the release for a description of these items).

— Purchased feedstock and energy costs surged 48 percent, an increase of $2.6 billion over the same quarter last year, the largest year-over-year increase in the Company’s history and the third consecutive quarter in which these costs reached new highs. Margin expansion was not achieved in both Basic and Performance segments, as the hurricanes idled approximately 80 percent of the Company’s North American capacity in September, when feedstock costs were declining.

— Agricultural Sciences set a new third quarter sales and EBIT(1) record, with sales up 24 percent to $976 million. Price was up 16 percent and volume up 8 percent compared with the same quarter last year.

— Equity earnings were $266 million for the quarter. This was the seventh consecutive quarter that earnings from joint ventures exceeded $250 million.

Comment

Andrew N. Liveris, Dow’s chairman and chief executive officer, stated: “Dow performed well in the third quarter despite a difficult economy and increased costs. Our ability to take proactive measures, including the implementation of two broad-based price increases and aggressive cost controls, allowed us to post solid results against worsening market conditions, record high raw material costs and two hurricanes on the U.S. Gulf Coast.”

3 Months Ended 9 Months Ended
(In millions, except for Sept 30 Sept 30
per share amounts) 2008 2007 2008 2007

Net Sales $15,411 $13,589 $46,615 $39,286
Net Income $428 $403 $2,131 $2,415
Earnings per Common Share $0.46 $0.42 $2.26 $2.49
Earnings per Common Share
Excluding Certain Items (1) $0.60 $0.84 $2.40 $2.91


(1) See supplemental information at the end of the release for a
description of these items. In addition, the interruption of
operations caused by the hurricanes in the third quarter of 2008
resulted in an estimated pretax $50 million in margin on lost sales,
the equivalent of $0.03 per share, which is not included in the
amounts presented in this table.


Review of Third Quarter Results


The Dow Chemical Company (NYSE:DOW) reported sales of $15.4 billion for the third quarter of 2008, 13 percent higher than the same period last year, setting a third quarter sales record.

Net income for the quarter was $428 million, reflecting $81 million in costs (after tax) related to Hurricanes Gustav and Ike, a $27 million charge for purchased in-process research and development related to recent acquisitions, and expenses of $18 million related to the Company’s pending acquisition of Rohm and Haas. This compares with net income of $403 million in the third quarter of 2007, which included a $362 million charge related to a change in German tax law and a $39 million charge for purchased in-process research and development.

Earnings for the quarter of $0.46 per share were unfavorably impacted by the hurricanes ($0.09 per share in costs and $0.03 per share in margin on lost sales), purchased in-process research and development charges of $0.03 per share, and acquisition-related expenses of $0.02 per share (see supplemental information at the end of the release for a description of these items).

Price was 22 percent higher than the same quarter last year, with double- digit increases in all operating segments and in all geographic areas. This was the largest year-over-year percentage increase in price since the first quarter of 2005. However, feedstock and energy costs surged $2.6 billion over the same period last year. Margin expansion was not achieved as the hurricanes idled approximately 80 percent of the Company’s Gulf Coast capacity in September, when feedstock costs were declining.

Volume was down 9 percent compared with the same quarter last year, reflecting declining global demand, the impact of Hurricanes Gustav and Ike, various asset shutdowns and divestitures, and the joint venture formation of Americas Styrenics. Volume was also impacted by the Company’s focus on increasing selling prices in the quarter. Excluding the impact of acquisitions, divestitures and the hurricanes, volume was down 5 percent.

Equity earnings were $266 million for the quarter, once again demonstrating strong and consistent contributions from joint ventures to the Company’s results and marking the seventh consecutive quarter in which equity earnings have exceeded $250 million.

“Dow performed well in the third quarter despite a difficult economy and increased costs,” said Andrew N. Liveris, Dow’s chairman and chief executive officer. “Our ability to take proactive measures, including the implementation of two broad-based price increases and aggressive cost controls, allowed us to post solid results against worsening market conditions, record high raw material costs and two hurricanes on the U.S. Gulf Coast.”

Performance Plastics

In the Performance Plastics segment, third quarter sales increased 10 percent over the same period last year to $4.3 billion. Price increased 14 percent, with double-digit gains in all geographic areas, while volume declined 4 percent. Despite robust price gains across the segment, selling prices continued to lag significant increases in purchased feedstock and energy costs, increases in other raw material costs, and the impact of Hurricanes Gustav and Ike. Further declines in the North American automotive and housing industries, coupled with softening demand in the same industries in Europe and Asia Pacific, impacted results in a number of business units including Dow Automotive, Dow Building Solutions, and Specialty Plastics and Elastomers. Demand in Dow Polyurethanes declined, as furniture and bedding applications softened. In contrast, Polyurethane Systems reported continuing strong demand in oil and gas applications. While margins declined for epoxy intermediates in the face of rising raw material costs and additional industry capacity, recent acquisitions in Epoxy Systems reported solid demand in wind energy and infrastructure applications. Third quarter EBIT for Performance Plastics was $146 million, compared with $409 million in the third quarter of 2007. Results for the quarter included $35 million in hurricane-related costs.

Performance Chemicals

Sales in Performance Chemicals were $2.5 billion for the quarter, up 14 percent compared with $2.2 billion posted in the same period last year. Globally, price was up 21 percent, with increases in all businesses and in all geographic areas. In North America, Asia Pacific and Latin America, price improved by more than 20 percent. Volume decreased 7 percent, due in part to the impacts of Hurricanes Gustav and Ike, and the Company’s focus on increasing selling prices in the quarter. Designed Polymers reported strong demand in food, pharmaceutical and personal care applications in Dow Wolff Cellulosics, which partially offset weakness in construction polymers. Dow Water Solutions reported growing demand for FILMTEC(TM) reverse osmosis membranes and ion exchange resins, as global water industry fundamentals remain strong due to water scarcity and growing demand. Margins for Dow Latex expanded in the quarter, due to the Company’s strong focus on price, which was aided by a limited supply of a key raw material. Demand for biocides was also strong, due to ongoing growth in oil and gas exploration and production. Equity earnings in the segment were $137 million, up $47 million on better results from Dow Corning and OPTIMAL. Performance Chemicals reported EBIT of $275 million for the quarter, compared with $219 million for the same period last year.

Results for the quarter included $14 million in hurricane-related costs, while results in the same period in 2007 included a charge of $9 million for purchased in-process research and development related to acquisitions.

Agricultural Sciences

Agricultural Sciences posted sales of $976 million, 24 percent higher than the same period last year and setting a third quarter sales record in what is traditionally a seasonally slow quarter. Price was up 16 percent, while volume grew 8 percent, reflecting organic growth and growth from recent acquisitions. Dow AgroSciences’ broad portfolio of both agricultural chemicals and seeds continued to benefit from robust global demand for agricultural output. Sales in seeds and traits increased in the quarter led by higher demand for sunflower oil and seed in Latin America. Corn sales in Brazil also rose in the quarter, due to an improved farm economy and a solid performance from the Agromen acquisition. Strong demand was reported for cereal and broadleaf crop herbicides in North America and northern Europe, due to high cereal prices, an increase in planted acres and the very successful launch of Pyroxsulam in Canada, which exceeded customer expectations. Glyphosate sales were up in the quarter, driven by higher price due to tight industry supply conditions. Strong volume growth continued for new products Penoxsulam rice herbicide and Aminopyralid herbicide for range and pasture. Spinetoram insecticide sales continued to ramp-up from product launches in the United States. The business announced two new bolt-on acquisitions in the quarter – Dairyland Seed and Renze Hybrids. These represent the fifth and sixth acquisitions Dow AgroSciences has completed since May 2007. Third quarter EBIT for Agricultural Sciences was $61 million, which includes a charge of $27 million for purchased in-process research and development related to recent acquisitions and $2 million in hurricane-related costs. This compares with EBIT of $15 million in the year ago period, which included a charge of $50 million for purchased in- process research and development related to acquisitions.

Basic Plastics

Sales in Basic Plastics rose 7 percent to $3.5 billion, up from $3.3 billion in the same period last year. Price increased 25 percent, and was up in all businesses and in all geographic areas. Volume decreased 18 percent, due in part to the shutdown of polypropylene capacity in St. Charles, Louisiana in the fourth quarter of 2007, the sale of polyethylene assets in Cubatao, Brazil in the third quarter of 2007, the joint venture formation of Americas Styrenics in May 2008, and the impacts of Hurricanes Gustav and Ike. Robust price increases in Polyethylene more than offset increases in purchased feedstock and energy costs. Demand for Polypropylene was down, due to lower consumer spending and slowdowns in the housing and automotive sectors. Equity earnings were $55 million, versus $39 million in the same period last year on improved earnings from EQUATE. EBIT for Basic Plastics was $481 million compared with $556 million in the same period last year. Results in the quarter reflect a charge of $11 million for hurricane-related costs.

Basic Chemicals

Basic Chemicals sales of $1.5 billion for the quarter were flat with the same period last year. The segment recorded a 20 percent gain in price, and a 20 percent decline in volume. Compared with last year, volumes were lower due to the sale of the caustic soda business in Western Canada in December 2007. Caustic soda prices benefited from ongoing favorable industry supply/demand fundamentals, but demand for vinyl chloride monomer used in polyvinylchloride (“PVC”) production continued to decline as end-use applications for PVC, namely residential building and construction applications, remained extremely weak. Results for the Chlor-Vinyls business were also impacted by Hurricanes Gustav and Ike, which extended an earlier unplanned outage at the Company’s facility in Freeport, Texas. Volumes were down substantially in the Ethylene Oxide/ Ethylene Glycol (“EO/EG”) business, due to weak industry fundamentals, new capacity from Middle Eastern suppliers, and a decline in polyester fiber demand in Asia Pacific. The EO/EG business was also negatively impacted by the two hurricanes in the quarter. Equity earnings in Basic Chemicals were $61 million, versus $115 million in the year ago period due to lower results at MEGlobal and EQUATE. EBIT was $64 million, compared with $205 million in the third quarter of 2007. Results in the quarter reflect a charge of $26 million for hurricane-related costs.

Outlook

Commenting on the Company’s outlook, Liveris said: “The global economy is now feeling the full effects of the same economic issues that have plagued the U.S. for the past several quarters. These issues have now been exacerbated by the lack of credit, resulting in a drop in demand not only in the U.S., but around the world. In our view, we will likely see a global recession through most of 2009.

“Dow is well positioned, however, to weather this increasingly difficult economic downturn. We have a strong balance sheet, we have a track record of strong financial discipline and we are accelerating our focus on what we can control, namely costs and capital, asset restructuring, and other interventions. In addition, we will continue to implement our transformational strategic actions, such as closing our petrochemicals joint venture with PIC of Kuwait and closing our announced acquisition of Rohm and Haas.”