Transcript

CONTENTS
CALL PARTICIPANTS
2
PRESENTATION
3
QUESTION AND ANSWER
E. I. du Pont de Nemours and Company
NYSE:DD
FQ1 2015 Earnings Call Transcripts
Tuesday, April 21, 2015 1:00 PM GMT
....................................................................................................................................................................
S&P Capital IQ Estimates
-FQ1 2015-
-FQ2 2015SURPRISE
-FY 2015-
-FY 2016-
CONSENSUS
ACTUAL
CONSENSUS CONSENSUS GUIDANCE CONSENSUS
EPS
Normalized
1.31
1.34
2.29
1.28
4.00
4.00
4.53
Revenue
(mm)
9386.30
9172.00
(2.28 %)
9490.06
33911.28
-
35488.71
Currency: USD
Consensus as of Apr-21-2015 1:27 PM GMT
- EPS NORMALIZED CONSENSUS
ACTUAL
SURPRISE
FQ1 2014
1.59
1.58
(0.63 %)
FQ2 2014
1.17
1.17
0.00 %
FQ3 2014
0.53
0.54
1.89 %
....................................................................................................................................................................
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
FQ4 2014
0.71
0.71
0.00 %
E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
Call Participants
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EXECUTIVES
Ellen J. Kullman
Chairwoman and Chief Executive
Officer
Robert A. Koort
Goldman Sachs Group Inc.,
Research Division
Vincent Andrews
Morgan Stanley, Research Division
Gregory R. Friedman
Vice President of Investor
Relations
James C. Borel
Executive Vice President
Nicholas C. Fanandakis
Chief Financial Officer and
Executive Vice President
ANALYSTS
David L. Begleiter
Deutsche Bank AG, Research
Division
Donald Carson
Susquehanna Financial Group,
LLLP, Research Division
Frank J. Mitsch
Wells Fargo Securities, LLC,
Research Division
John P. McNulty
Crédit Suisse AG, Research
Division
Kevin W. McCarthy
BofA Merrill Lynch, Research
Division
Michael J. Ritzenthaler
Piper Jaffray Companies, Research
Division
P. J. Juvekar
Citigroup Inc, Research Division
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
Presentation
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Operator
Welcome to the DuPont First Quarter 2015 Conference Call. My name is John, and I will be your operator
for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn
the call over to Greg Friedman, Vice President of Investor Relations. Greg, you may begin.
Gregory R. Friedman
Vice President of Investor Relations
Thank you, John. Good morning, everyone, and welcome. Thank you for joining us to cover DuPont's first
quarter 2015 performance. Joining me are Ellen Kullman, Chair and CEO; Nick Fanandakis, Executive Vice
President and CFO; and Jim Borel, Executive Vice President, who is joining for the Q&A portion of the call.
The slides for today's presentation and corresponding segment commentary can be found on our website
along with our news release.
During the course of this conference call, we will make forward-looking statements, and I direct you
to Slide 1 for our disclaimers. All statements that address expectations or projections about the future
are forward-looking statements. Although they reflect our current expectations, these statements are
not guarantees of future performance, but involve a number of risks and assumptions. We urge you to
review DuPont's SEC filings for a discussion of some of the factors that could cause actual results to differ
materially.
We will also refer to non-GAAP measures and request that you review the reconciliations to GAAP
statements provided with our earnings news release and today's slides posted on our website.
For today's agenda, Ellen will speak briefly about our results for the quarter and the execution of our
strategy to create higher growth and higher value. Nick will review our first quarter financial performance
as well as our 2015 outlook. I will provide business segment insights, and Ellen will speak again with
concluding remarks, followed by your questions.
Before turning over the call to Ellen, I would like to briefly address DuPont's upcoming Annual Meeting of
Shareholders. At DuPont, we have a best-in-class Board of Directors that is overseeing management's plan
to transform our company to continue to deliver superior value for all shareholders. We look forward to
ongoing discussion and engagement with our shareholders as we approach the Annual Meeting.
Please note that the subject of today's call is the company's first quarter earnings. With that introduction,
it's now my pleasure to turn the call over to Ellen.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Thank you, Greg, and good morning, everyone. 2015 is an important year in DuPont's ongoing
transformation, and our first quarter results demonstrate our ability to grow next-generation DuPont
even in a challenging market environment. In the next few months, we will complete the most significant
step in our ongoing transformation, the separation of Chemours. We can already see the evidence of the
company we will be in the sales and operating earnings growth from our ongoing business over the past
several years. We expect to continue this growth trend as we build and leverage our leading positions in
large, attractive markets where our competitive advantages meet significant opportunities.
In this quarter, we delivered operating earnings of $1.34 per share. Currency markets significantly
impacted the quarter, resulting in a $0.27 headwind, $0.25 was due to currency and $0.02 from net
exchange losses.
I am pleased to report that we delivered volume and margin improvement in the majority of our post-spin
segments. Our intense focus on innovation, disciplined execution and ongoing cost reduction delivered and
will continue going forward.
Our performance was driven by volume and margin gains in our Performance Materials, Safety &
Protection, Nutrition & Health, and Industrial Biosciences segments. Each benefited from new products
and applications tailored to market demand. Even in Agriculture, which faced industry-wide challenges,
we benefited from pricing gains overall on an improved mix of products. As the Ag markets eventually
improve, we expect to be well positioned based on our strong pipeline of seed and crop protection
products, including DP 4114 and Leptra for insect protection, and Lumigen seed treatment.
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Performance Materials and Safety & Protection were standouts this quarter, delivering significant gains in
volumes and margins by staying close to their customers and delivering value-added innovations. In our
Protection Technologies business, for example, strong demand for our Kevlar, Nomex and Tyvek products
yielded volume growth that more than offset the impact from currency while improving margins. Our
Performance Polymers business had solid performance, driven by volume growth in North America and
Asia Pacific, which more than offset softness in Latin America and Europe.
Innovation, coupled with disciplined attention to cost, drives earnings and margins. And at DuPont, cost
reduction remains a top priority. We continue to increase productivity and efficiency through our redesign
initiative. At the same time, we introduced more than 600 new products in the first quarter, a 5% increase
from the first quarter of 2014.
We also announced that we would be increasing our dividend for the second quarter by 4%, our fourth
increase since the beginning of 2012. Nick will tell you a bit more about that after he walks through the
specifics of the financial details behind these results, and Greg will then take us through the segments.
Then I'll be back to discuss our outlook for this year, the important progress we've made on our strategic
plans and how we will continue to deliver higher growth and higher value now and in the future. Nick?
Nicholas C. Fanandakis
Chief Financial Officer and Executive Vice President
Thank you, Ellen. Let's start with the details of the first quarter on Slide 2. Operating earnings per share
were $1.34 versus $1.58 in the prior year. As Ellen noted, operating EPS included a $0.27 headwind from
a stronger U.S. dollar, $0.25 due to currency and $0.02 from net exchange losses.
Our results reflect our focus on disciplined execution, innovation and ongoing cost reduction in a dynamic
environment, including a stronger dollar and challenging Ag and TiO2 markets.
Consolidated net sales were $9.2 billion, a decline of 9% versus the prior year, with 6 percentage points
of that decline due to currency as the dollar continued to strengthen against most other currencies,
particularly the euro, Brazilian real and the Japanese yen.
Prior year portfolio actions reduced sales by 2% in the quarter. While overall volume declined 1% during
the quarter, we delivered volume growth in most of our post-spin segments, led by Performance Materials
and Safety & Protection, which grew volumes 8% and 6%, respectively. Performance Materials volume
growth was driven by demand in the automotive sector in North America and China, and growth in
industrial and consumer markets.
Safety & Protection volume growth was driven by increased demand in global industrial markets and
continued strong public sector demand in Europe. Nutrition & Health and Industrial Biosciences also grew
volume by 2% and 1%, respectively.
Volume decline of 5% in Agriculture was due to expected reductions in global corn planted area, lower
insecticide demand in Latin America and timing of seed shipments. Electronics & Communications -- saw a
3% decline, as strong growth in consumer electronics was more than offset by the impact of competitive
pressures on Solamet paste.
Turning now to Slide 3. Currency was and is expected to be a significant headwind in 2015. Operating
earnings were negatively impacted by $0.25, which is included in segment results. Exchange gains and
losses was a $0.09 headwind in the quarter, $0.02 higher than the prior year. Additionally, although not
reflected in operating earnings, we recognized a $0.04 per share charge in connection with the Ukraine
devaluation.
A higher base income tax rate due to our geographical mix of earnings negatively impacted operating
EPS by $0.03 in the quarter. Our base tax rate for the quarter was about 22%, approximately 2 points
higher than the prior year. The segment results, including the $0.25 negative impact from currency, as
I described earlier, were down, as strong growth in Performance Materials and Safety & Protection were
more than offset by the challenging Ag and TiO2 markets.
Corporate and interest expenses provided a benefit of $0.05 in the quarter, which includes the impact
of our operational redesign initiative. In addition, a lower share count contributed a $0.02 benefit in the
quarter.
Turning now to Slide 4. I'd like to highlight some of our geographic results. As you can see, our
geographical mix of sales shifted year-over-year to a higher percentage of our reported sales occurring in
the U.S. and Canada. Excluding the impact of currency, the geographic mix would have been very similar
to prior year.
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Now let's turn to our first quarter segment operating earnings analysis on Slide 5. As you can see,
earnings growth in Performance Materials, Electronics & Communications and Safety & Protection was
more than offset by lower results in Ag and Performance Chemicals. The growth in Performance Materials
is driven by demand for ethylene and performance polymers, which more than offset the impact of
currency.
Electronics & Communications results were driven by increased demand in consumer electronics and
continued productivity gains, partially offset by the impact of lower metals pricing and currency.
Safety & Protection results increased as higher volumes and continued productivity were partially offset by
negative currency. Higher costs associated with an outage at Chambers Works facility were largely offset
by a benefit in connection with the advancement of an ongoing claim. Greg will provide further detail on
segment performance later in this call.
Turning now to the balance sheet and cash on Slide 6. We maintained our strong balance sheet position
during the quarter. Negative free cash flow of $2.7 billion reflects our typical seasonal agriculture cash
outflow in the quarter and was slightly better than the prior year.
Net debt has increased in the quarter over our ending 2014 balance, which reflects our normal seasonal
shifts. We used existing cash balances to fund our seasonal agricultural working capital requirements,
growth investments and dividends.
Today, we announced that our Board of Directors has approved a second quarter dividend of $0.49
per share, which represents a 4% increase over the $0.47 paid last quarter. This represents our fourth
dividend increase since the beginning of 2012.
On Slide 7, I'd like to highlight that we are continuing to execute on our operational redesign initiative,
which delivered about $0.10 of benefit in the first quarter. For the full year, we now expect to deliver
about $0.40 of savings as a result of this program. This represents a $0.05 per share increase versus our
January estimate. We remain laser-focused on productivity and continue to look for additional areas to
improve and accelerate our cost-reduction programs.
The spin-off of Chemours remains on track for completion on July 1, pending final DuPont Board approval.
As we noted in our January earnings news release, we intend to return all or substantially all of the
estimated $4 billion of one-time proceeds back to shareholders via a share repurchase within 12 to 18
months of the separation, with a portion returned by the end of this year.
As we previously communicated, Chemours' capital structure at separation is expected to support a
quarterly dividend to shareholders, such as the sum of DuPont's and Chemours' aggregate third quarter
dividend is equivalent to DuPont's aggregate quarterly dividend immediately prior to the separation.
Chemours expects to clear a quarterly dividend in the amount of $100 million for the third quarter 2015.
This amount is expected to be paid to shareholders as of a record date following separation. We will
provide further updates as this information becomes available.
Looking ahead for the remainder of the year. The global currency markets have continued to be volatile,
with further strengthening of the dollar against a broad basket of currencies that we operate in versus our
January estimate. As a result, we now expect an $0.80 per share headwind from currency for the full year
2015 based on last week's rate assumptions, increased from the $0.60 per share headwind previously
communicated in our fourth quarter 2014 earnings call.
We are working aggressively to mitigate the stronger currency headwinds by accelerating cost savings
from the operational redesign and other corporate and business actions. Given this additional $0.20 of
currency headwind, we now expect to be at the low end of our previously communicated range of $4
to $4.20 operating earnings per share for the full year 2015. This includes the full year outlook for the
Performance Chemicals segment.
We expect results to be driven by our underlying sales momentum from the ramp-up of our recent product
launches like Cyazypyr insecticides, new product application in Kevlar and new product introductions like
our next-generation Solamet paste, and the full year benefit of accelerated cost reductions through our
redesign initiatives. We are confident in our ability to execute our plans and deliver growth, even in a
dynamic market environment.
With that, I'll turn the call over to Greg to review the segments.
Gregory R. Friedman
Vice President of Investor Relations
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
I'd now like to provide some brief segment insights focused on our first quarter results and second quarter
segment outlooks. As a reminder, the slides, with complete segment commentary, are posted on the
investor center website under Events & Presentations, along with the other materials for today's call.
Starting with Slide 8. In Performance Materials, we delivered strong volume growth in the quarter, which
helped to offset the impact from currency and lower ethylene prices. Segment volume increased 8% on
solid North America and Asia demand in auto and increased ethylene sales. Operating earnings increased
12%, as higher volumes and a stronger mix overcame the negative impacts from currency and portfolio
changes. Operating margins increased approximately 400 basis points, primarily due to mix enrichment.
For the second quarter, we anticipate sales will be low-teens percent lower, due primarily to portfolio
changes, currency and lower ethylene prices. Excluding these items, sales would be up in the low singledigit range. Operating earnings are expected to be up in the mid-single-digits percent, on higher volume
and continued mix enrichment.
In Electronics & Communications on Slide 9, operating earnings improved 13% on a stronger product
mix and from productivity actions. Sales were 10% lower, with continued growth in consumer electronics,
which were more than offset by the impact of competitive pressures on sales of Solamet paste and the
negative impact of lower metals pricing and currency.
We believe our competitive position in PV paste is stabilizing and expect to launch the first in our series of
new Solamet paste products in the second quarter, with additional introductions later in 2015. We expect
continued solid demand for our materials into consumer electronics.
Second quarter sales are forecast to be down low-teens percent due to the negative impact of metals
pricing, currency and from lower Solamet paste sales. Second quarter operating earnings are expected to
be down low single-digits percent, as productivity will partially offset the impact of lower sales versus a
strong prior year quarter.
Moving to Slide 10. Safety & Protection delivered solid improvement in volume, operating margin and
operating earnings. Sales were down 4%, as 6% volume growth was more than offset by the negative
impact of currency, as well as the Sontara divestiture.
Volume growth was broad-based in global industrial markets, including demand for Tyvek protected
materials, Kevlar high-strength materials and Nomex thermal-resistant fiber, driven by sales into the
mechanical, military, medical packaging and chemical markets.
First quarter segment operating earnings of $184 million were up 5% on volume growth and productivity
improvements. Higher costs associated with lower plant utilization at the Chambers Works facility were
largely offset by a benefit in connection with the advancement of an ongoing claim. In addition, the
segment improved operating margins by 170 basis points year-over-year.
In the second quarter, we expect sales will be down in the mid-single-digit percent range, and volume
growth will be more than offset by the impact of currency and portfolio changes. Operating earnings
growth will be in the mid-single-digit percent range due to continued demand for our products, ongoing
innovation and continued operational productivity.
Slide 11. In Industrial Biosciences, we continued to deliver solid results, as volume and operating margins
improved despite the challenging environment. Sales were 5% lower, as 5% higher bioactive volumes
were more than offset by the impact of currency. Volumes growth in enzymes was driven by food market
demand, partially offset by lower biomaterial sales in the U.S. markets.
Operating earnings of $56 million were even with the prior year, overcoming the negative impact of
currency. Operating margins continue to improve, with a 100 basis point increase versus the prior year
and a 540 basis point increase in total versus the first quarter of 2013.
We expect higher volumes to continue in the second quarter, driven by benefits from new product offerings
in bioactives and increasing penetration into emerging markets. These stronger volumes will offset
the negative impacts of currency and softer U.S. biomaterial volumes, resulting in sales and operating
earnings results about flat with the prior year.
In Nutrition & Health on Slide 12, the business produced volume and operating margin improvement this
quarter. Sales were 6% lower, as a 2% increase to the volume was offset by an 8% negative impact from
currency. We generated strong volume growth in probiotics, cultures, texturants and ingredients systems,
partially offset by lower volume in the specialty protein market in North America.
Volume growth was strong in EMEA, despite pressures from the Russia food import ban, offsetting
weakness in Latin America. Operating earnings decreased $4 million, as volume gains and improved mix
were more than offset by the negative impact of currency.
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
In the second quarter, we expect continued volume growth in those product lines and the specialty protein
market to remain very competitive. Sales are expected to be high single-digits percent lower due to
continued strong currency headwinds. Operating earnings are expected to be low-teens percent lower,
primarily due to the negative impact of currency.
In Agriculture on Slide 13, the business performed well, given the overall difficult market conditions in the
industry. First quarter results were slightly better than expected in January, primarily due to disciplined
cost actions. 2015 is playing out to be one of the most competitive seasons in recent years, given the
challenging economic environment in the Ag sector and with seed suppliers having abundant inventories
globally.
Lower insect pressure in Brazil and continued elevated distributor inventories in the Americas are
presenting headwinds in crop protection markets.
First quarter Agriculture segment sales were $3.9 billion, down 10%, as 3% higher local prices were offset
by 8% negative impact from currency and 5% lower volumes.
We were able to capture 3% higher prices across the segment, driven by an improved mix of Pioneer's
newest corn hybrids and soybean varieties, and pricing actions in parts of Europe and Asia partially
offsetting the impact of a stronger U.S. dollar.
Volume declined 5% due to lower corn planted area, lower insecticide volumes in Latin America and earlier
timing of seed shipments. The largest headwind to volume we continue to face is the further shift from
corn to soybeans. We have seen growers in Brazil reduce corn plantings in the past summer and Safrinha
seasons, and our North America seed order book confirms the continued shift to soybeans away from corn.
First quarter operating earnings were significantly impacted by currency and declined 21%, as lower sales
were partially offset by productivity improvements and disciplined cost actions taken in response to the
current market environment in agriculture.
Even in this difficult environment, we continue to perform and execute on the variables that are within our
control, including bringing new products to market that meet customer demand.
We are seeing a positive impact from mix on price, as growers demand our newest corn and soybean
genetics. And we continue to build our robust pipeline, with growth prospects in near term from new corn
and soybeans genetics and technologies like event DP 4114 and Leptra insect control.
For the first half of 2015, which reflects the majority of the Northern Hemisphere season, we now expect
agriculture segment sales to be high single-digits percent lower, with operating earnings low- to mid-teens
percent below 2014, as local pricing gains and cost reductions will be offset by currency and lower corn
seed and insecticide volumes.
On Slide 14, in Performance Chemicals, sales were down 14% due to lower volumes and prices, combined
with the negative impacts of currency and portfolio changes. Challenging industry fundamentals continued
in the first quarter, as TiO2 volumes were down 12% and price down 7%. On a sequential basis, price was
down 5%. Price pressures in the quarter were driven in part by lower-than-optimal industry utilization
rates and stronger regional competition.
In Chemicals & Fluoroproducts, volumes were even with the prior year, as higher demand for
fluoropolymers was offset by lower sales of fluorochemicals, principally due to the reduction in R-22
production allocations. Demand for our next-generation refrigerant, Opteon 1234yf, was up 30% on
continued adoption by automotive OEMs.
Operating earnings were down 37%, driven primarily by lower TiO2 prices and volumes, the negative
impacts of currency and the impact of portfolio changes.
For the second quarter, we anticipate sales and operating earnings will be flat versus the prior year, with
currency anticipated to remain a significant headwind year-over-year. Segment volumes are expected to
improve sequentially versus the first quarter, due to increased seasonal demand for refrigerants and TiO2.
Demand for fluoropolymers and chemicals is also expected to improve.
Now I will turn the call back to Ellen.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Thanks, Greg. 2015 is a pivotal year for DuPont, with the upcoming separation of Chemours as the most
significant and visible step in our ongoing transformation to a higher-growth, higher-value company.
The rationale for our strategy is reflected in the 19% compound annual growth rate of adjusted operating
earnings from 2008 through 2014 from our post-spin business that comprised the next-generation
DuPont. This new portfolio will continue to build momentum as we leverage our leading positions in
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
3 strategic focus areas where we have robust opportunities and strong, well-established, competitive
advantages, where our science and engineering capabilities can deliver the greatest value for our
shareholders.
The next-generation DuPont will continue to drive the productivity of our exceptional science and
innovation platform to deliver value-added products and solutions. We will take advantage of our global
scale and market insights to continue to develop the right products for the right markets and deliver them
efficiently.
Cost discipline and productivity will continue to be a top priority. And with this important transition through
our operational redesign, we're building a more agile organization that is truly purpose-built and scaled for
the next-generation DuPont.
We are investing in modernizing and upgrading a number of our systems to enhance the market,
transaction times, speed and quality of decision-making, to drive greater performance on a smaller cost
base. The discipline and effort we are applying now is preparing the organization for the next step change
in growth and value at DuPont.
By the end of 2015, we expect to have annual run rate savings of approximately $1 billion and at least
$1.3 billion in total expected savings by the end of 2017. As we advance this program of change, we will
deliver more opportunities that improve productivity.
The combined force of our science and market insight, applications expertise and global scale is evident
in each of our businesses and forms the foundation of our continued success. While agricultural markets
may continue to face challenges in the near term, we remain confident in the long-term fundamentals for
grain and oil seed demand, in our growth strategy and in the continued benefits of our successful research
investments and new product launches.
These broad strengths enabled us to grow sales at a 10% rate from 2008 to 2014, outperforming each of
our leading competitors. We believe the best validation of the strength of our innovation happens in the
market. Our success is reflected by the fact that we increased North American corn share by 6 points and
soybeans by 9 points from 2008 to 2014. And farmers planted Optimum AQUAmax seeds on over 10% of
all U.S. corn acres in 2014.
As we look ahead, an exciting pipeline of new products, like DP 4114 and Leptra, gives us confidence in
the future and our opportunities for growth. With 4114, we saw strong efficacy and yield performance
in the research trials last summer, and are aggressively integrating this trait into the highest-performing
Pioneer's genetics as we prepare for an accelerated product introduction and volume ramp-up.
This year, corn hybrids containing 4114 will be tested in our impact trials, which are the final stage of
product testing before commercialization. In 2016, we expect to include 4114 and expand it on farm
grower trials under strict stewardship while we await final regulatory approvals.
In Brazil, we look forward to customer demonstrations of Leptra hybrids in the summer of 2015 and a
commercial launch for the 2015-'16 Safrinha season as we await final regulatory approvals. We expect
Leptra hybrids will provide enhanced value proposition for growers in Brazil to help them manage
lepidopteran pests, including fall armyworm, and maximize the yield potential of Pioneer genetics. We
believe that Leptra will help us strengthen our position in the Brazil market, as we ramp up volumes in
2016.
In Crop Protection, our robust pipeline continues to deliver, and we've increased the combined target for
our novel insect control products, Rynaxypyr and Cyazypyr, to approach $2 billion in peak annual sales.
We are also expanding our Lumigen seed treatment offerings, such as Dermacor, Lumivia and Lumiderm,
while preparing to launch Zorvec for highly effective disease control and Pyraxalt for novel insect control in
rice.
As we approach the 4-year anniversary of our Danisco acquisition, I want to provide you with a progress
report. We're on track with our initial plan and we're seeing the tangible benefits of our strategy. Cost
synergies have exceeded our original targets and were achieved earlier than planned. We're making
solid progress in the market and with productivity, as demonstrated by the volume and operating margin
improvements this quarter in both Nutrition & Health and Industrial Biosciences, despite the challenging
environment.
Nutrition & Health has now reported 7 consecutive quarters of year-over-year operating margin
improvement. Longer term, this acquisition has provided DuPont with world-leading industrial biotech
capabilities to create transformational, new bio-based businesses and unlock future growth opportunities.
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
In Nutrition & Health, we're combining strong customer relationships with our science and application
know-how to create new value. We have seen strong growth in key areas, such as probiotics and cultures,
and we're investing in research and development and global capacity to take advantage of market trends
like increasing interest in wellness in the form of our HOWARU probiotics.
We're also introducing local solutions through collaborations with customers across the globe, such as our
YO-MIX starter cultures, which meets the needs in the developing world for a nutritious yogurt product
that can maintain long life without refrigeration. In 2014, we delivered strong growth, with operating
earnings up 27%, expanding margins over 200 basis points.
Meanwhile, we are currently at the front end of the growth curve in Industrial Biosciences. We have a
great business that delivered 25% operating earnings growth and 300 basis points of margin improvement
last year. And our core markets, which include animal nutrition and food enzymes, home and personal
care, and grain processing are very strong.
Even as we continue to invest in our core areas and grow our margins, ongoing advancements in science
and technology, and demand for renewables and sustainability, are rapidly expanding the markets for
bio-based industrials. With our advanced science and technology capability, we're uniquely positioned to
innovate in this fast-growing area.
We're focused on creating new categories of renewably sourced bio-based products, such as cellulosic
ethanol, Ag biologicals and industrial enzymes. One notable example is Tide Coldwater Clean detergent,
which is the first branded product to use cellulosic ethanol as an ingredient in a scalable commercial way.
In Advanced Materials, we're building on our historic strength in application-based innovation and
delivering on clear routes to growth. During the quarter, our core capabilities in chemistry, polymers,
engineering and now, biosciences, enabled us to expand operating margins and increase volumes as
we delivered highly tailored, value-added solutions for customers. Strong demand continued from the
automotive and aerospace industries for lightweight, fuel-efficient materials like new versions of Kevlar,
Nomex, Zytel and Vamac.
We continued to penetrate alternative energy and clean technology markets. Also, we're meeting the
needs for miniaturization of electronics and the increasing demand for protective materials in industrial,
construction and military and first responders. We're just getting started in other areas of opportunity and
are confident that leveraging our industrial biotechnology and production agriculture expertise will allow us
to capture developing opportunities for sustainably sourced renewable and differentiated polymers.
We also expect continued growth through additional innovation, such as Solamet paste and Kevlar film, to
increase the efficiency and lifetime of photovoltaic cells.
For the past 6 years, DuPont's Board and management have been active champions of constructive
change. Our efforts have delivered results, clearly visible in our 19% compound annual growth rate
and adjusted operating earnings since year-end 2008 through 2014; total shareholder return of 266%,
outperforming the S&P and our peers; and the total return of $14 billion in capital to shareholders. Our
disciplined capital allocation strategy reflects our commitment to return capital to our shareholders and
invest in growth opportunities.
We are confident in the future as we look ahead to a year of continued performance and transformation.
We remain focused on delivering higher growth and higher value by investing in and leveraging our
innovation platform; increasing penetration in developing markets and delivering localized solutions;
continually driving lower cost and improving operational efficiency; and actively managing our portfolio, all
while providing differentiated value-added solutions that customers expect.
In conclusion, our portfolio is well positioned to exceed the pace of longer-term macro trends driving
growth. The world needs a safe, secure supply of food for a growing population and rising middle class.
Our capabilities directly address the need for increased productivity in agriculture and enable us to develop
new products to address increasing demand for wellness and more nutritious foods. And our science and
application expertise continue to deliver advanced materials that power, fuel and transport the world
sustainably and energy efficiently. Our leading science and powerful innovation platform makes us the
partner of choice for companies supplying these markets.
We continue to move forward with disciplined focus and purpose to deliver value now and position DuPont
for future success. As we see the momentum of the next-generation DuPont, we are energized by the
progress we have made, but are even more excited by the opportunities the future holds.
Greg?
Gregory R. Friedman
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Vice President of Investor Relations
Thanks, Ellen. We'll now open the line for questions. John?
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Question and Answer
....................................................................................................................................................................
Operator
[Operator Instructions] And our first question comes from Frank Mitsch from Wells Fargo.
Frank J. Mitsch
Wells Fargo Securities, LLC, Research Division
It looks like Mr. Vergnano has his work cut out for him. I'm curious as to -- given the declines in
Performance Chemicals, the confidence that you have in being able to get that $4 billion midnight
dividends, what sort of valuation metrics went into that figure? And -- yes, so if you could help us with
that, that would be great.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Well, Frank, thanks for the question. As you know, Performance Chemicals is at a cyclical low. We see
that there are -- although headwinds that were faced in the first quarter by a challenging TiO2 market,
capacity utilization in the low 80s, inventory levels of customers largely unchanged, that the fundamentals
are stabilizing. And so we -- as we look forward, we see not only improvements from seasonal volumes in
TiO2 and refrigerants, because they're coming into their season, we have some new products, and that's
going to offer us a stronger pricing environment in both fluorochemicals and specifically, refrigerants, and
fluoropolymers. And we do anticipate better results in chemicals and fluoro versus the prior year going
forward. Productivity continues to help and will continue to help. But so they are at a cyclical bottom. And
as we have valued Chemours, we took a look at not only at the cyclical bottom, but at the range that it's
been experienced over the last few years. So Nick, do you want to give some specifics?
Nicholas C. Fanandakis
Chief Financial Officer and Executive Vice President
Yes. Frank, so as we looked at the capital structure of Chemours, we dialed in all of the things that Ellen
just talked about. We dialed in the plan for the expectation of what the EBITDA is going to be for the year.
We worked with the rating agencies to have some preliminary evaluations done of the business. Of course,
everything is predicated on that final point in time. But we're so close right now that I feel very good
about the midnight dividend, the debt level that we're going to be able to place on the entity along with
the dividend structure that we've been proposing.
Operator
Our next question is from Bob Koort from Goldman Sachs.
Robert A. Koort
Goldman Sachs Group Inc., Research Division
You guys gave good health around the sales line by division of what FX has done to the results. Can you
give us a sense on an earnings level? And outside of PChem, is there any meaningful transactional risk
from currencies?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. So certainly, currency, and I put portfolio in the same kind of bucket as we've had significant portfolio
changes within several of the segments. But if you look at things like N&H, if you took out portfolio
and currency, their earnings, operating earnings would have been up 12%. If you take a look at S&P,
their operating earnings would have been up 17%. If you look at Performance Materials, up 29%. The
headwinds, x portfolio and currency, were Agriculture and were Performance Chemicals, where they would
not have gotten into positive figures. I mean, it's interesting, Bob, when you look back a few years ago,
you take out currency and portfolio, with the headwinds we've seen in Agriculture and the headwinds that
we've seen in the chemicals cycle, x currency, we outearned this time last year. And I think that's a very
powerful statement to the strength of the portfolio and the strength of the new DuPont that we're creating
going forward.
Operator
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Our next question is from David Begleiter from Deutsche Bank.
David L. Begleiter
Deutsche Bank AG, Research Division
Ellen, in your comments, you referenced the seed share gains in both corn and soybeans the last few
years. Into '15, given the challenging environment, do you think you can grow share or at least maintain
share of both corn and soybeans?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. So thanks, and we -- it's a little too early to comment on North America's share. I can tell you, what
we've been very pleased at is the mix we're seeing, we saw in the first quarter. And you can see that with
what price has done in Agriculture and it's the stronger mix. I don't know, Jim, what would you add to
that?
James C. Borel
Executive Vice President
Yes, I think it is a little too early to try to predict share. But we are very confident about the
competitiveness in corn and soybean products, as well as the services that we're bringing to growers. In
corn, we're continuing to strengthen our triple-stack portfolio and expect to make progress in '15. So a
little too early to predict share, but overall, we feel good about our competitiveness.
David L. Begleiter
Deutsche Bank AG, Research Division
And Ellen, just in Performance Materials, volume growth was 8% in the quarter. But x the ethylene sales,
what was the volume growth? And what should be the underlying volume growth in that segment this
year, do you think?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. So obviously, ethylene was a benefit in the quarter. I think if you take that out, I think their volumes
would have been up 3% to 4% in the balance of those businesses, benefiting from stronger automotive in
the United States and in Asia. Certainly, Europe and Latin America weren't helping the -- weren't any help
in the automotive market. But I mean, I think the important part there is, we're really seeing the benefits
from the application development, the innovation centers that we put it in a few years ago and the real
benefits we're seeing at the customer in the polymers, and not only the Performance Polymers, but also in
the Packaging & Industrial Polymers areas.
Operator
Our next question is from John McNulty from Credit Suisse.
John P. McNulty
Crédit Suisse AG, Research Division
So maybe a follow-up on the Chemours platform. Nick, I think you had said you've got comfortable with
the ability to dividend the $4 billion out because you've kind of reviewed where you're thinking about
where the EBITDA goes. Can you give us an update as to what your EBITDA forecast is for that platform
as you're looking at 2015?
Nicholas C. Fanandakis
Chief Financial Officer and Executive Vice President
Yes. That hasn't gone public yet. We've worked with the rating agencies around that plan, but we've not
gone public with the numbers on that. And that won't be public until they go for the debt offering.
John P. McNulty
Crédit Suisse AG, Research Division
Okay. Maybe then just as a follow-up, on a different angle. Speaking to the Ag business, when we look
at the -- obviously, you had some headwinds there, but when you look at the decremental margins, they
were pretty significant. Maybe you can walk us through some of the issues there, especially considering
that you were getting some pricing that was noted in the earlier remarks?
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Ellen J. Kullman
Chairwoman and Chief Executive Officer
Well, as you know, currency is a huge headwind for us in Agriculture. Jim, why don't you take us through
that?
James C. Borel
Executive Vice President
Yes. I think certainly currency. The other thing is volume based on corn acre -- planted acre declines that
are expected. And we also saw insecticide volumes down based on the lower pressure of Helicoverpa in
Brazil versus a year ago. And so mix had a negative impact on -- a slightly negative impact on margin in
addition to the currency and volume.
Operator
And our next question is from Kevin McCarthy from Bank of America.
Kevin W. McCarthy
BofA Merrill Lynch, Research Division
I guess 2-part question on the Chemours spin. First, on the dividend, you took it up to $0.49. With the
$100 million to be paid out by Chemours, is there any opportunity to maintain that $0.49? Or should we
expect it to revert to something like $0.46 or $0.47, equilibrating for that $100 million? And then second,
on the repurchase, Nick, can you do an ASR to bring forward shrinkage of the share count? Or should we
expect the execution pretty ratably over the 12 to 18 months?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. I think that we've been clear relative to the dividend, that the combined dividend of Chemours and
DuPont would equal the dividends that DuPont had just prior to the spin. The Chemours dividend is their
third quarter dividend. And I think that you can do the math going forward is what that would mean. Nick?
Nicholas C. Fanandakis
Chief Financial Officer and Executive Vice President
Yes. And so as far as the returning of the midnight dividend back to the shareholders through share
buyback, what we stated is over the 12 to 18 months, Kevin, we're going to look to see exactly what tool
and mechanism we use to secure that -- to complete that share buyback. There's potential for an ASR.
There's also potential for open market. But it will be over that period of the 12 to 18 months timeframe.
Operator
And our next question is from Don Carson from Susquehanna Financial.
Donald Carson
Susquehanna Financial Group, LLLP, Research Division
A question on Ag. You've given us the first half outlook, down low- to mid-teens operating earnings. But
what's your outlook for the second half, given how important Brazil is? And then you also talked about
2015 being one of the most competitive seasons in recent years. So what's your view on the normalized
growth and margin potential of Ag as we get into 2016 and beyond?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Jim?
Nicholas C. Fanandakis
Chief Financial Officer and Executive Vice President
So first of all, Don, I think the longer-term picture or as you go forward, in Ag, we still feel very confident.
Number one, the fundamentals under the markets remain strong, growing population and limited
resources, et cetera, that beg for more science that we can deliver. And also, our pipeline in both seed and
chemistry continues to be very strong. So we remain confident about our long-term trajectory. In terms
of the second half, obviously, Brazil is going to -- the real, hard to predict exactly, but we're assuming
that that's going to continue to be a negative hurt. Probably too early to call the Latin America planting
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E. I. DU PONT DE NEMOURS AND COMPANY FQ1 2015 EARNINGS CALL APR 21, 2015
expectations. But obviously, we'll be watching that as we come out of -- as the U.S. gets planted and the
market starts to adjust to the expectations there.
Donald Carson
Susquehanna Financial Group, LLLP, Research Division
And just to follow up. So what's your current top line and margins for the trend outlook for the next few
[ph] years in Ag? Can you be more specific?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Sorry, you're really hard to hear, Don. Let me see if I got it. So you're looking for the trend outline on
those top line and bottom line for Ag, for the next 2 [ph] years?
Donald Carson
Susquehanna Financial Group, LLLP, Research Division
Correct.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Is that the question?
Donald Carson
Susquehanna Financial Group, LLLP, Research Division
Yes.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Well, yes, that's a -- Jim, well, how would you answer that?
James C. Borel
Executive Vice President
Well, I think that the answer is going to depend on how the environment over the next 12 to 18 months
plays out. So as I mentioned earlier, longer term -- in the bigger picture, we're still very confident about
our trajectory. And then the question is going to be what happens with currency and planted acres in some
of these crops over the next 12 to 18 months.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes, stocks to Houston. And so we are looking to see that, that should be an improving picture. I think as
each quarter goes on and we understand exactly where those numbers are coming out, both here and in
Latin America, it's going to have a big impact on the recovers.
James C. Borel
Executive Vice President
We've got a number of new products that will be continuing to move forward in the marketplace. And we'll
continue to make sure we're disciplined around our costs as well during the kind of turbulent times.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes, I think that's what it is. I think a differentiator is the pipeline. I mean, we take a look at the pipeline,
both in terms of the crop protection chemicals we talked about, insecticides and fungicides, in terms of DP
4114 and Leptra, in terms of T Series Soybeans penetration. And so we've got a very strong portfolio of
seed treatment, et cetera, coming in. And I think that regardless of the environment, I think we've got a
strengthening picture for our Agricultural segment.
Operator
Our next question is from P.J. Juvekar from Citi.
P. J. Juvekar
Citigroup Inc, Research Division
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Ellen, one of the ways to combat FX is to get local pricing. Can you talk about segments where you believe
you can -- you have the ability to get pricing going forward?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes, P.J., so I mean, that's very much dependent on the sector and on the competitive nature, where our
-- if you're selling in Europe and you have European competitors, it's a little harder to get price than it is if
you're selling in Europe against U.S. or Asian-based competitors. So I mean, I think the interesting thing
is that based on the fourth quarter, our teams have gone out and reinvigorated the pricing analysis down
based on the currency change. And each individual product line, each individual precedent is driving the
appropriate actions for their sector based on that, where we make versus where the competitors make.
And you can do the math balance to see where that comes out. So there are opportunities and there
are headwinds in that. And I think the most important thing is that our people are on top of it and really
driving that. But at the end of the day, our major focus is still on value and use. It's still on the innovation
as a differentiator, and we continue to use that. I mean, I think you see that in Ag with the positive pricing
in a very difficult Ag environment, where the pipeline and the new products are giving us benefit, even
when the acres are down. So this is a detail orientation out in the field to really drive the best results.
P. J. Juvekar
Citigroup Inc, Research Division
And just a quick follow-up on your biomaterials, biofuels platform, you commented on that. How does that
platform compete at today's oil price?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Well, bioactives really aren't impacted by the price of oil. And that's where tremendous amount of
growth and opportunity are coming from. We see it in the animal nutrition area, we see it in the human
nutrition area. We see it in -- even in ethanol, where increases in gasoline are really continuing to drive
opportunities there. So bioactives remains strong. Now in the biomaterials, and specifically, Sorona,
margins are pressured by oil because of lower feedstock costs for competing carpet fibers. And so you're
seeing that in their results and that there are some headwinds associated with that. And bio -- in cellulosic
ethanol, well, that's just coming up, the plant is coming up this quarter, and we're continuing to drive that.
So all in all, in the bioactives area, which is really where tremendous amount of opportunity is, there is no
headwind from an oil standpoint.
Operator
Our next question is from Mike Ritzenthaler from Piper Jaffray.
Michael J. Ritzenthaler
Piper Jaffray Companies, Research Division
So within Agriculture, so encouraging to see higher pricing in such a competitive environment. But I'm
curious if you could elaborate on how much further cost action is needed to sort of buoy the operating
income in that segment and kind of the nature of those cost actions. And whether growers now are
shifting on traits in North America and grower profit will be more constrained globally influences how you
view R&D investments over the next couple of years. And then if there's a way to quantify volume and
price x crop protection.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. I mean, so look, we are valuing new seller. It is the genetics, it is the capability of our seeds that
creates the opportunity for us there. And farmers make the choice of the seed first. But Jim, why don't
you elaborate on that?
James C. Borel
Executive Vice President
Yes. Well, a number of different aspects there. So first of all, farmers are obviously scrutinizing pretty
closely their -- all of their input purchases. But that said, as Ellen said, as we deliver more value to the
farmer, whatever the commodity price, they -- that's reflected in -- we can capture part of that value.
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So we're continuing to move forward there. You asked about costs. We -- if we go back to the Fresh
Start work that we worked across corporately, obviously, the Ag businesses were a part of that. So we've
really been working on streamlining the operating model. Productivity is a way of life, so we're constantly
looking for ways to improve productivity, to speed up operations and focus our costs. You asked a little
bit how that might impact R&D investments. I think the way I would describe that is, we are fully funding
the strategic research projects that are going to drive the pipeline and the future value, continue as you
normally would around making sure that we're really focused on the most important opportunities. So
R&D investment will continue strongly, particularly in the most important projects.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes. As far as the seed, Pioneer split those.
James C. Borel
Executive Vice President
Seed crop protection.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Yes, I'm sorry, seed crop protection. In Crop Protection, sales weren't as impacted as Pioneer's were. They
did a little better from that standpoint, so plus or minus around that decline, and Pioneer's a little above
and crop's a little below. But a lot of that is going to play out. The season is not over yet. There's still a lot
of opportunity coming through North America in the second quarter and getting prepared for the summer
and Safrinha seasons in Brazil. So a lot of time left in these seasons for this year. And we're really excited
about the products and the progress that we're making.
Operator
Our last question is from Vincent Andrews from Morgan Stanley.
Vincent Andrews
Morgan Stanley, Research Division
And you kind of just addressed some of this. But I just want to sort of reconcile with the crop chem
inventory levels being elevated in the Americas and you still sound very enthusiastic about Rynaxypyr
and Cyazypyr. So is it that those products will continue to grow sales this year, but you might have some
headwinds in the balance of the portfolio?
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Well, I think that's going to really depend on the pest pressure and as we come through the season. So
Jim, some more color there?
James C. Borel
Executive Vice President
Yes. Well, first of all, you're right, they will depend on pest pressure. We're positioned very well and
we're continuing to expand Cyazypyr in countries around the world. As that moves through launch, we're
starting to move Pyraxalt, then Zorvec, the fungicide, forward. So crop protection and seed treatment in a
number of countries. So Crop Protection's pipeline continues to be a really important part of their growth
and a way of continuing to strengthen the margins over time.
Vincent Andrews
Morgan Stanley, Research Division
And Jim, do you just have a quick sense of whether you referenced that the corn acres in the order book
suggest that farmers are switching to soy. Do you think it's more or less of a switch than what sort of is
implied by the USDA forecast?
James C. Borel
Executive Vice President
Yes. At this time in the season, it's almost impossible to say. Farmers are really just getting in the field
early stages. It's going to depend on what happens with the weather over the next couple of weeks and
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what actually goes in the ground and what the final acres will be. So we don't have any better information
than what you've heard.
Gregory R. Friedman
Vice President of Investor Relations
Well, thank you, everybody, for joining the call today. The IR team is available for follow-up questions if
there are any.
Ellen J. Kullman
Chairwoman and Chief Executive Officer
Thank you, all.
Gregory R. Friedman
Vice President of Investor Relations
Thank you.
Operator
Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now
disconnect.
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