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Edited Transcript of DD earnings conference call or presentation 25-Jul-17 12:00pm GMT

Q2 2017 E I du Pont de Nemours and Co Earnings Call

WILMINGTON Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of E I du Pont de Nemours and Co earnings conference call or presentation Tuesday, July 25, 2017 at 12:00:00pm GMT

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* Edward D. Breen

E. I. du Pont de Nemours and Company - Chairman & CEO

* Gregory R. Friedman

E. I. du Pont de Nemours and Company - VP of IR

* James C. Collins

E. I. du Pont de Nemours and Company - EVP of Agriculture Business Segment

E. I. du Pont de Nemours and Company - CFO and EVP

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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - VP

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* David L. Begleiter

Wells Fargo Securities, LLC, Research Division - MD & Senior Chemicals Analyst

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* P.J. Juvekar

* Sandy H. Klugman

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Operator [1]

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Welcome to the DuPont Second Quarter 2017 Conference Call. My name is John, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Greg Friedman, Vice President of Investor Relations. Greg, you may begin.

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Gregory R. Friedman, E. I. du Pont de Nemours and Company - VP of IR [2]

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Thank you, John. Good morning, everyone, and welcome. Thank you for joining us for our discussion of DuPont's second quarter and first half 2017 performance. Here with me are Ed Breen, Chair and CEO; Nick Fanandakis, Executive Vice President and CFO; and Jim Collins, Executive Vice President responsible for our Agriculture segment. 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 call, we will make forward-looking statements. I direct you to Slides 1 and 2 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. We request that you review the reconciliations to GAAP statements provided with our earnings news release and today's slides, which are posted on our website.

Our agenda today: we'll start with Ed providing his perspective on the company's performance. Then Nick will review our second quarter and first half financial results. Third, Jim will discuss our Agriculture business. We will then take your questions.

With that introduction, it's now my pleasure to turn the call over to Ed.

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Edward D. Breen, E. I. du Pont de Nemours and Company - Chairman & CEO [3]

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Thanks, Greg, and good morning, everyone. This quarter, we continued the momentum we generated in the beginning of the year and delivered a strong second quarter. We again drove top and bottom line growth, including volume increases across the board and strong margin growth. The gains were driven by our productive innovation pipeline as well as favorable market conditions at Electronics & Communications, Performance Materials and Protection Solutions.

The second quarter's highlights were: total sales of $7.4 billion rose 5%, which was all organic growth. Segment operating earnings increased 9%. Operating earnings per share grew 11%. We delivered volume gains in all reportable segments, and segment operating margins improved about 80 basis points. Volume increases of 6% were the key growth driver for this quarter. Our focus on growth markets and new products is translating into strong results across the board.

Agriculture was a large contributor to the volume gains, which Jim will cover. Electronics & Communications growth was driven by film and laminate applications in consumer electronics markets, coupled with strength in semiconductor and photovoltaics. In Protection Solutions, our volume increase primarily came from applications of Tyvek and Nomex, with Tyvek active packaging as one new example. Industrial Biosciences generated volume growth largely from growth in biomaterials, led by Sorona sales in apparel, with bioactives up as well.

Our 11% growth in operating earnings per share reflected the volume gains as well as operating margin expansion. Electronics & Communications, Industrial Biosciences and Ag led our operating margin growth. And Nick will cover our segment results in more depth in a moment. We also delivered a strong first half for 2017 with sales up 5%, gross margins up 45 basis points, segment operating margins up about 170 basis points and operating earnings per share up 21% versus prior year. In addition, free cash flow year-to-date improved by about $200 million, excluding the additional pension contributions we made.

It's with strong momentum that we have what we anticipate to be our last earnings news release and investor call as DuPont. Of course, this is not an ending but a beginning as we approach the expected August closing of the merger with Dow to form DowDuPont. This past quarter, we completed nearly all the steps needed to close the merger without any significant new remedies. When the final steps are completed, we will announce our expected closing date. We remain confident that the transaction will close in August.

Our extensive integration planning will assure that when the merger closes, DowDuPont can immediately begin launching the projects to achieve our cost synergy target of $3 billion and stand up the strong independent companies we intend to create. Meanwhile, the Dow and DuPont boards have begun a comprehensive portfolio review for DowDuPont, which we announced in May. The lead independent directors of each company, working closely with the CEOs, are leading the process, assisted by McKinsey. We will update you when the process concludes.

DuPont is entering the final weeks leading up to the merger with solid momentum. Going forward, we expect the combination of 2 great companies and the intended subsequent separations to unlock significant value for shareholders, creating independent companies equipped to continue as growth leaders in attractive market segments.

Now with that, let me turn the call over to Nick.

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Nicholas C. Fanandakis, E. I. du Pont de Nemours and Company - CFO and EVP [4]

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Thank you, Ed. Beginning with Slide 3. Second quarter and first half operating earnings per share reflect continued strong top and bottom line performance in the segments, primarily driven by volume growth. Operating earnings per share of $1.38 in the quarter increased 11% while operating earnings per share of $3.02 in the first half increased by 21%.

The business continued to drive productivity as demonstrated by operating cost declining about 100 basis points in the first half as a percentage of sales on an operating earnings basis. As a percentage of sales, SG&A cost declined about 70 basis points and corporate costs declined about 40 basis points.

Consolidated net sales for the quarter of $7.4 billion increased 5% versus prior year, driven by a 6% increase in volume, partially offset by 1% lower local price. All of our reportable segments had volume growth in the quarter, with Agriculture, Electronics & Communications and Protection Solutions leading the way. Consolidated net sales for the first half of $15.2 billion increased 5%, all on volume growth. Sales grew in most segments, led by Agriculture, Performance Materials and Electronics & Communications.

Slide 4 outlines our growth from a regional perspective in both the second quarter and first half. In the quarter, we grew North America, Europe and Asia Pacific, while sales in Latin America were down versus prior year. Growth in North America was primarily driven by Agriculture, while growth in Asia Pacific was primarily due to Electronics & Communications and Performance Materials.

For the first half, we saw strong growth in each region, led by improvements in Asia Pacific and North America. Strength in consumer electronics and semiconductors, coupled with increased demand for our polymers in automotive, drove the improvement in Asia Pacific. In North America, Agriculture led the way, driven by benefits from the timing of seed deliveries, increased insecticide and fungicide sales and higher soybean seed sales.

On Slide 5, I want to highlight that the primary driver of earnings per share growth in the second quarter is segment results, which contributed $0.13 to the quarter. Volume growth in all of our segments resulted in an increase in segment operating earnings.

Turning to Slide 6 for the first half results. Consistent with the quarter, segment results drove the year-over-year improvement in operating earnings, contributing $0.37 per share to the first half. Top line organic growth in most of our segments improved segment operating earnings. Exchange gains and losses contributed $0.07 per share to the first half results. The benefit is primarily due to the absence of prior year currency devaluations in both the Ukraine and Argentina.

Lower net corporate and interest expenses added $0.04 to earnings per share in the first half, primarily due to cost savings and higher interest income on marketable securities. A lower tax rate added $0.03 to operating earnings in the first half, primarily reflecting a benefit associated with the adoption of a recent accounting pronouncement. As we noted in the first quarter, the company adopted this new guidance regarding accounting for certain aspects of share-based compensation. Lower average shares outstanding contributed $0.02 per share to the first half.

Now let's turn to second quarter segment operating earnings analysis on Slide 7. Segment operating earnings increased $144 million or 9% in the quarter versus last year, with operating margin expansion of about 80 basis points. Growth in Agriculture, Electronics & Communications and Industrial Biosciences drove the improvement in the quarter.

Turning to Slide 8. For the first half, segment operating earnings increased $418 million or 13%, with operating margin expansion of about 170 basis points. More than half of the improvement was due to Agriculture, which Jim will cover in more detail. Performance Materials operating earnings increased $86 million. Volume growth of 6% was driven by increased demand for polymers in global automotive markets and high-performance parts in semiconductor and aerospace markets. Operating margins in this segment expanded by about 175 basis points year-over-year.

Electronics & Communications operating earnings increased $53 million. Volumes grew 14% in the first half, driven by demand in consumer electronics and semiconductor markets as well as stronger photovoltaic material sales. Operating margins improved by 335 basis points in the first half.

Industrial Bioscience operating earnings increased $26 million. Top line organic growth of 9% reflected volume and local pricing gains in biomaterials and bioactives. Operating margins expanded by 210 basis points in the first half.

Nutrition & Health results increased $22 million. Growth in probiotics was offset by declines in systems and texturants and protein solutions, resulting in volumes that were flat versus prior year. The business continues to focus its portfolio on higher-growth, higher-margin products such as probiotics and cultures. Plant productivity, mix enrichment and cost savings drove the improvement in operating earnings. Operating margins in this segment improved by 165 basis points. I refer you to the materials we posted on our website today for further details on segment results.

Turning now to the balance sheet and cash on Slide 9. For the first half, we had negative free cash flow of about $4.6 billion, reflecting $2.8 billion in higher pension contributions as well as Agriculture's typical seasonal cash outflow. In May, we completed a $2.7 billion discretionary contribution to our principal U.S. Pension Plan. When adjusting for the additional pension contributions, our free cash flow increased by about $200 million year-over-year. The improvement is primarily due to the timing of tax and other payments, including the first half 2016 prepayment to Chemours for delivery of certain goods and services. Higher merger-related costs partially offset these improvements.

The businesses continue to drive towards best in class in relation to working capital. When comparing to the same period last year, business working capital levels remain about flat despite sales growth, as continued improvements in accounts payable were offset by increases in accounts receivable. Our continued focus on productivity has resulted in improvements across each of our business working-capital turn metrics year-over-year.

Net debt increased in the first half over our ending 2016 balance, reflecting the $2 billion debt offering we completed in May to fund the pension contribution as well as our normal seasonal shifts in cash, primarily due to Agriculture.

Before I turn it over to Jim, I wanted to comment on guidance for the remainder of 2017. Given our expected merger closing with Dow in August, it would not be appropriate for us to give guidance for DuPont on a stand-alone basis. As DowDuPont, there will be a number of adjustments to segment results, such as synergy capture, purchase accounting, alignment of accounting practice, impact of remedies and the anticipated integration of Dow and DuPont businesses within certain segments. In line with SEC requirements, we will file historical pro forma financial information for DowDuPont subsequent to merger close. As part of the slides for today's presentation, we have included key market commentary for the remainder of 2017 for each of our segments.

With that, I'll turn it over to Jim to provide an overview of the results for Agriculture. Jim?

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James C. Collins, E. I. du Pont de Nemours and Company - EVP of Agriculture Business Segment [5]

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Great. Thanks, Nick. While the Ag markets in 2017 continued to be challenged, our results reflect our ability to deliver value for our customers and growth for our shareholders.

In the second quarter, Ag segment sales grew 7%, with crop protection sales up 10% and seed sales up 6%. Volume improved by 8% and was driven by a 16% increase in our crop protection business and a 6% increase in our seed business. The volume gains in crop protection were realized through increased insecticide and fungicide sales, with each generating growth in the double digits.

Volume improvement in our seed business was driven by the benefit from the Southern U.S. route-to-market change and higher soybean sales in North America due to the increase in planting acres.

Price was down 1%, reflecting competitive pressure in crop protection markets in Latin America and Asia. Now in the quarter, operating earnings increased 11% as top line growth and cost productivity were partially offset by higher soybean royalty costs.

Now in the first half, which represents the majority of the northern hemisphere planting season, Ag segment sales increased 5%, with volume up 5% and price up 1%. Portfolio changes negatively impacted sales by 1%. Crop protection sales were up 7%, and seed sales rose 5% in the half.

Our operating earnings grew 12%, which translates to about 175 basis point improvement in operating margins. Strong volume growth in the first half was driven by the timing benefit in our seed business, including the Southern U.S. route-to-market change; increases in insecticides and fungicide sales; soybean seeds in North America and sunflower and...


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