Business News

Dow Accelerates Implementation of its Transformational Strategy

Tuesday 09. December 2008 - New Streamlined Operating Model to Reflect New Portfolio and Current Economic Realities

Howard Ungerleider, Vice President, Investor Relations

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 is Andrew Liveris, Dow’s Chairman and Chief Executive Officer, and Geoffery Merszei, Dow’s Chief Financial Officer.

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 if our expectations change.

In addition, some of our comments may reference non-GAAP financial measures.

If you’d like more information on the risks involved in forward-looking statements, or reconciliation to the most directly comparable GAAP financial measure, and other associated disclosures, please see our SEC filings.

Now, let me hand it over to Dow’s chairman and CEO, Andrew Liveris.

Andrew Liveris, Chairman and Chief Executive Officer:

Thank you, Howard.

I’d like to share with you this morning the next step in Dow’s transformational strategy.

We have been working on changing our portfolio for several years, and in March ‘06 announced at an investor meeting in New York our priorities.

We have spent the last several years working intensely on forming asset light joint ventures with key partners such as PIC/KPC, Saudi Aramco, Siam Cement, and many others, as well as pruning our portfolio to create a leaner, higher growth, market centered group of businesses that could accelerate our transformation to an earnings growth company.

Clearly the two large transactions of the last 12 months were pivotal in that regard, with the announcement last Monday of the signing of the K-Dow deal being a pivot point in our transformation. We are on track to close the Rohm and Haas acquisition and we will have more to say on that deal very soon.

Through-out this strategy, we have been intensely focused on creating a new way of working at Dow, one that builds on our long history of Operational Excellence and Integration, but creates a market driven, technology centric company and culture based on our deep scientific capabilities. We always were attenuated to the need to shed unproductive assets, divest non-value creating businesses, and create agility and autonomy in how we react to the market place.

Today’s announcement marks the next phase in our transformation. Clearly we have the portfolio in hand to move to this new model, and equally clearly, we are accelerating this move given the deterioration in the world economy and in most of our markets.

We will create a leaner corporate center, a shared business services group, and three businesses operating models as shown on this slide. We will organize ourselves over the next several months to this design, thereby affording ourselves the opportunity to shed costs and create the culture that accelerates our transformation.

The three business operating models will be:

Joint Ventures/Asset Light
Performance Products
Health & Agriculture, Advanced Materials, and other Market Facing businesses.
The Joint Venture / Asset Light model allows us to position these assets with a partner for growth, while maintaining our integration – but with much less capital intensity and cyclicality. All of our basics joint ventures will be in this mode.

Performance Products is comprised of high-volume, technology-differentiated products and processes that place an emphasis on innovation. We have industry-leading positions with these products, such as in Polyurethanes and Epoxies, Specialty Chemicals, and many other product driven businesses.

Finally, Health & Agriculture, Advanced Materials, and other Market Facingbusinesses is comprised of businesses with higher margins and strong brands. The focus here is to use the full extent of Dow’s R&D engine to develop value-added customer solutions in fast growing markets. This is where Rohm and Haas and Dow AgroSciences are two prime examples.

These new business models will become effective in the first quarter, and we will provide more specific details early next year.

And these businesses will be supported by a shared business services group as well as a lean corporate center that will serve the needs of the businesses in a cost efficient and effective way.

Moving to this structure allows us to eliminate approximately 5,000 full-time jobs, about 11 percent of Dow’s current workforce. This is in addition to the Rohm and Haas synergies which I will discuss in a few minutes.

We are also closing 20 production plants in high-cost areas and divesting several non-strategic businesses.

The vast majority of these were already part of Dow’s Business Portfolio Optimization Group and were targeted for action. Today’s announcement means we’ll pursue these closures and divestitures at an even more aggressive pace than we have in the past. I should point out that about 2,000 roles of the total jobs being eliminated are expected to go with these divested businesses.

We are also in the process of temporarily idling approximately 180 production plants. These represent approximately 30 percent of our plants worldwide and are mostly split evenly between North America and Europe.

As a result, we will also be reducing our contractor workforce by about 6,000.

Now I would like to turn it over to Geoffery who will run you through the financial impact.

Geoffery Merszei, Executive Vice President and CFO:

Thanks Andrew. We estimate that today’s announcement will result in a pre-tax charge on fourth-quarter earnings of $700 million. The composition of this charge is approximately $350 million in anticipated severance payments and another $350 million in charges mainly related to the 20 plant shutdowns.

Now, all of this will lead to an EPS impact of between $0.50-0.60 per share in the fourth quarter.

And regarding cash flow, the majority of this impact will occur in 2009 in the form of severance payments as positions are eliminated.

We expect operating cost savings of $700 million, with a run rate of approximately $350 million at the end of 2009, and full implementation by the end of 2010.

These measures are in addition to the Rohm and Haas synergies of $800 million, bringing our total cost-reduction commitment to $1.5 billion by the end of 2010.

And I would also like to remind you that Rohm and Haas has a separate cost reduction program already underway, and this $110 million program would be additive to the $1.5 billion.

In addition to today’s announcement, we are implementing several actions to preserve cash in 2009.

First, we are committing to reducing working capital requirements by approximately $2 billion. This is a combination of tighter working capital management and a reflection of lower feedstock and energy costs.

Second, we are reducing our capital spending target by $600 million versus our 2008 levels.

These two commitments will lower our cash requirements by approximately $2.5 billion through 2009 and will deliver an additional $1 billion in free cash flow next year.

Now let me turn it back over to Andrew.

Andrew Liveris, Chairman and Chief Executive Officer:

Before I close out this presentation, I want to talk briefly about the dividend.

I know there are a lot of companies out there that are either cutting or eliminating their dividend. Dow is the only company in the Fortune 200 to have paid its regular quarterly cash dividend without reduction or interruption since 1912. That’s 388 consecutive quarters.

I’ve said it before but I will say it again. We will not break that string. Not Dow. Not on my watch.

So let me close this out. I know you have questions. Before I do let me summarize by pointing out that the actions we’re taking today are an acceleration of our long-term strategy to transform Dow into an earnings growth company. And this will strengthen our financial position as we respond to a rapidly changing and deteriorating economy.

While we are making a number of reductions in our cost structure, let me assure you we will not cut spending at the expense of growth.

We will continue to fund our growth projects like in Saudi Arabia, Kuwait, Brazil, and China. We will continue to fund R&D spending to drive innovation. And we will continue to support growth in Performance and market facing businesses, like Dow AgroSciences and Rohm and Haas.

And we will continue to pay, let me repeat, continue to pay, our dividend!