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Based on the comments by management, one should expect large buybacks from Dow Chemical (DOW) to begin early next year.

From the Q&A:

PJ Juvekar – Citigroup
“Thank you. And quickly, Geoff, you didn’t talk about stock buyback when you talked about your financial strategy. If you look around… many industrial companies are suspending stock buybacks to conserve cash. Can you just tell us how you’re thinking about buybacks?”

Geoffery E. Merszei – Executive Vice President and Chief Financial Officer
“Well, sure. As you know… thanks for the question, PJ. As you know, during the course of the third quarter, we completed our $2 billion program and we spent about $50 million on that The only reason why we haven’t announced yet another programs is because we have two very large transactions that are about to close plus, of course, your last point, which is on cash preservation.

But let me reiterate what our financial policy has been over the last two years and will continue to be is that at a minimum we’re going to cover dilution. This is on an annual basis. And you can count on a new program following the two transactions that we are about to complete.”

Peter Butler – Glen Hill Investments
“Andrew, wouldn’t Carl Gerstacker be backing up the proverbial truck right here to buy shares cheap? Gerstacker would say, “My God, if you can buy at a 7% yield, then you’re looking at good news from Kuwait and Rohm and Haas. Why wait for the stock to go higher?”

Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes. Look, Peter, as Geoffery answered because we have these two or three moving parts that are close in two or three months. But I think Geoffery indicated, I don’t know backing up the truck is a colorful way of explaining it. But I said this morning, the dividend is safe. This CEO is never going to cut it. I’m not going to be the first. The yield is unbelievable. The stock is undervalued by a long mile. I mean, so clearly, your analysis is our analysis.

We’re just going to get through the two transactions. Let us go on the other side of it. And then obviously, stock buyback is going to be top of mind. And these values hang in there in equity markets for the next several months. I think Mr. Buffett said it, well, Buy American. Well, we’re American.”

Robert Koort – Goldman Sachs
“Andrew, I think you said on one of the shows this morning that you don’t think a $3 trough number is reasonable anymore. I was wondering if you could tell me what the path to the trough looks like? Is it a demand erosion trough in ’09? Or do still think ’10 or ’11 is the trough?

And then, secondly, in your performance business particularly Performance Plastics obviously a pretty horrific margin partly influenced by the hurricanes, but what do you see in terms of the progression of your performance business margins as you go through the next couple of years? Thanks.”

Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes, I think, Bob, firstly on the trough. We’re going to spend a lot of November analyzing our view of ’09, ’10 and ’11 given these new market conditions. Clearly, ’09 now is going to be a tough demand year, everything we’ve just talked about. So we see an economic trough in ’09. The industry trough that we were forecasting for ’10 and ’11 is going to be impacted by both sides of that discussion.

One is the new demand forecasts are going to speak… stop projects happening. So people who are early in their project calibrations are going to delay projects compared to… this is on the commodity stuff in particular and the petrochemical stuff. In addition, there is going to be a lot of competitors out there who don’t have our leverage ratios, who are not going to make it. I mean people who are… with their debt ratios in the 90s who leveraged up in the good days are going to suffer. You pick your favorite companies, I’m sure you can find them in the commodity chain in particular.

And then, on top of that you’ve got frankly the other side of the coin, which is the people who have got low-cost feedstocks and now can negotiate better EPC contracts because everything is coming off… the price of steel, the price of copper, the price of engineering. You can start to bring these projects more in line with the better returns in the low feedstock cost regimen.

And so actually companies like Dow, who have put these joint ventures in place should benefit from the ‘010, ‘011 scenario compared to what we were before. And last point I’ll make, in a declining oil and gas environment, we have feedstock flexibility that we can bring to bear in our developed economies now, which we didn’t have up until a month or two ago.

In other words, naphtha, LPG, ethane… we’ve got flexi-crackers that we can bring to help us out in the ’10-’11 industry trough. So these are the sorts of things we’ll be discussing deeply in November and we’ll come out on the other side of that and give you guys a better view. Second question, Bob?”

So, here we are in October and in the next three months (give or take) the company will be fundamentally changed. The 7% yield is safe and starting next year, assuming the share price does not rally much from here, will feature large share repurchases.

Another point that I think is being lost here was Liveris’s comment about the competition and some of it falling by the wayside during the next year or two due to leverage ratios. Market share increases due to this need to start getting factored into estimates going forward. Along with the market share increase, the reduction in competition also give Dow enhanced pricing power with customers.

It is going to be a very interesting winter for shareholders…and an exciting one

FULL TRANSCRIPT

Disclosure (“none” means no position):Long DOW
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EPS affected by $.12 from the September hurricanes. Good news? Oil prices fell. Bad news? Couldn’t produce anything when it dropped.

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.

CEO Andrew Liveris: “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 (ROH).”

Here is how it breaks down. Ag and Performance Chemicals saw earnings increases. Basic Plastics, Chemicals, and Performance Plastics saw decreases. Those divisions also saw $76 million in hurricane related costs.

It is frustrating but we have to play the game for another quarter. Then the Kuwait and the Rohm deals close and the earnings profile is forever altered. Will it be an immediate panacea? No. It will remove oil (USO) as the immediate concern on the mind of investors.

Recession. Will it hurt? Yep. A global recession will hurt, well, the globe (hence the name). But, what do we have? A 7% plus dividend yield that is not going down, Berkshire’s Warren Buffett (BRK.A) as a fellow shareholder (the largest individual one) and company with a global footprint both in manufacturing and sales. It manufactures the basic building blocks for virtually every industry.

When it all shakes out the $.60 before charges did beat what the guys and gals on Wall St. expected ($.58) so we may see a bump in shares. I would also say we ought to see some Q4 expectations increase as it appears price increases are holding and oil continues its nose dive.

Also:
– The European Commission Monday cleared the creation of a joint venture between Dow Chemical Co. (DOW) and a unit of the Kuwait Petroleum Corporation. Dow and Petrochemical Industries Company will jointly control the new company, which will manufacture and market polyethylene, ethylenamines, ethanolamines, polypropylene, and polycarbonate.

– Dow AgroSciences has added 350 jobs around the world so far this year-200 of them at its Indianapolis headquarters-and the CEO of the agricultural-chemical company expects to continue expanding the work force into next year. “Global demand for food, feed, fiber and fuel reinforces the need for agricultural productivity, and Dow AgroSciences is well positioned as a technology leader to provide solutions,” CEO Jerome Peribere said in a statement.

The company in recent years has been evolving from a maker of herbicides and pesticides into a biotechnology firm using genetics to develop products that protect crops and improve yields.

Disclosure (“none” means no position):Long DOW, none
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