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Second Quarter 2008 Earnings
The Dow Chemical Company

July 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 July 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.  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’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 second 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.  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 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.

G.E. Merszei:

Thank you Kathy, and good morning.

I’d 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 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 percent from the same quarter last year.

A major component of this revenue increase was in price, which was up 18 percent versus the same quarter last year.

We recorded double-digit price increases in all operating segments, and in all geographic areas.

Volume grew at a very healthy 5 percent, matching the highest quarterly increase we’ve had since 2004, even though volumes in North America were down 6 percent. 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.

For example:

• Europe was up 11 percent
• Asia Pacific was up 12 percent
• Latin America was up 5 percent, including the impact of recent divestitures

And, we posted volume growth of 12 percent in emerging economies, which today represent 27 percent of Dow sales.

Let me give you a few examples of the growth in these regions:

• Volume in Eastern Europe was up 19 percent,
• India was up 64 percent, and
• the Middle East was up an impressive 89 percent.

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.

At the business level, there are also a few important highlights:

First, EBIT⁽¹⁾ 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 percent on a sales gain of 25 percent, setting all-time records for both sales and EBIT.

We’re very proud of these stellar results at Dow AgroSciences, and 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 paying off.

Today, we run an optimized and extremely profitable ag chemical 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 percent,
• Performance Chemicals was up 6 percent, and
• And finally, in Dow AgroSciences, volume was up an impressive 13 percent.

This was the 5^th 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 JVs posted equity earnings of $251 million for the quarter.  This showcases once again the consistency and reliability of earnings from these ventures, and the strength of our JV strategy. 

This is the sixth consecutive quarter with equity earnings at an annual run rate of $1 billion or more.

Among the best performers 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 feedstocks.  Their advantaged position led to margin expansion as prices for their products increased.

Moving on to slide 7, our feedstock and energy costs increased $2.4 billion compared with the same quarter last year, and increased a billion dollars sequentially. These were the highest increases in Dow’s history.

This was an enormous challenge to overcome, because of both the magnitude and, 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 percent – an unprecedented move in our industry – to help mitigate the effect of these surging costs.

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, adjusted plant operating rates and announced the temporary idling of capacity.

For example, we reduced our ethylene oxide production by 25 percent worldwide and idled 30 percent 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 percent of its European capacity for producing STYROFOAM™ insulation to address weakness in the European building and construction industry.

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.

These sharp increases in feedstock and energy costs, increases in other raw materials and supply chain costs, coupled with overall weaker demand in the U.S., led to a decline in earnings per share to 81 cents 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 turn the call back to Kathy.

K.C. Fothergill:

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 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 oversupply, 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 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 business 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 material 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 a 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 a 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 December of last year and sold a 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 have improved dramatically compared with 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.  Now I’d like to turn the microphone back over to Geoffery for his update on strategy and outlook, beginning on Slide 13.

G.E. Merszei:

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.

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 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, to the U.S. EPA for regulatory review.

This marks a 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 9 new resins in its 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.

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.

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.

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.

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 poly-crystalline 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 remain on track to deliver capex at our 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 percent of our shares.

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 days 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 DSO at 39 days, compared with 38 days in the first quarter of this year and 40 days in the same period last year.

Finally in the area of financial discipline, our year-to-date Return on Capital and Return on Equity were 13 and 17 percent, 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 has further weakened the U.S. economy, has also created new uncertainties in demand around the world.

We believe the U.S. economy will 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 would be in the range we experienced in the second quarter.

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.

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.

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.

⁽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.

® ™ Trademark of The Dow Chemical Company or an affiliated company of Dow.