DuPont de Nemours Inc (DD) — Q1 2016 Earnings Call Transcript

Thank you, John. Good morning, everyone, and welcome. Thank you for joining us to cover DuPont’s first quarter 2016 performance. Joining me today 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 conference call, we will make forward-looking statements, and I direct you to slide one 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 this morning’s results, then Nick will review our first quarter financial performance and 2016 guidance. 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.

Thank you, Greg, and good morning, everyone. I would like to share my perspective on the first quarter, then I’ll update you on our progress on our three critical initiatives as well as our planned merger with Dow. Overall, I was pleased with how the business performed in the first quarter. Despite continued challenges in the macroeconomic environment, we delivered operating earnings of $1.26 per share even with last year’s quarter. Excluding $0.10 per share of negative currency, operating earnings rose 8%. Sales declined 2%, excluding currency reflecting the current environment. The weakening U.S. dollar gave us some relief. I don’t want to steal any thunder from Jim, but it’s worth saying a couple of things about Ag’s first quarter. Much of the quarter’s strength was due to Ag. Solid execution in Ag, our largest segment, enabled a strong start to the North American corn season. I’m also very pleased with our results in this Safrinha season as we delivered strong volume growth. Nick and Jim will comment more on all that in a moment. Looking beyond Ag, as I mentioned, most of our other segments performed well. One we’re calling out is Nutrition & Health, where we had broad-based volume growth and significant operating margin expansion. Let me give you a couple of examples of new products that contributed to our growth in Nutrition & Health. First, our new best-in-class protein isolated soy protein for dry-powdered beverages and second, our new long-life Greek yogurts in China. Probiotics increased sales by 30% as our productivity efforts have freed up capacity to respond to strong customer demand. I was pleased to see operating margins expand in four of our six segments, including progress with our global cost savings and restructuring plan. In some cases, most of our businesses exceeded our expectations for the quarter. We had a good start to the year. Yet planting is just beginning in the Northern Hemisphere, and at this point it’s too early to call the outlook for Ag in Europe. There are still a number of difficult macro variables, and we want to see how those factors play out. Now, let me give you an update on our progress with the three critical priorities I outlined when I became CEO. As a reminder, we said we were committed to shrinking our cost structure, improving our working capital performance, and reducing our capital expenditures. We strongly believe we need to improve our performance in all three areas as we want to benchmark against best-in-class companies in all of our businesses. The encouraging part is the quality of our leadership, including their desire to win, which has impressed me about DuPont from the start. The point of our global cost savings and restructuring plan is to strengthen the competitiveness of our business while reducing our cost by $1 billion on a run rate basis by year-end. Consistent with this target, we plan to show you a net year-over-year saving of $730 million for full-year 2016. We made good progress with this objective in the first quarter; in fact, we are exiting the quarter down about $135 million in operating cost mainly in SG&A. One area where we’ve taken significant action is corporate cost. Already year-over-year, we are down 44% on an operating earnings basis. I applaud the team for their hard work in getting us here. This quarter puts us well on our way toward a $200 million year-over-year reduction in corporate cost. Also, our global cost savings and restructuring plan is separate from and incremental to the cost synergies we expect to capture in connection with our planned merger with Dow.

Thank you, Ed. Let’s start with the details of the first quarter on Slide 3. Operating earnings of $1.26 per share were even with the prior year and up 8% year-over-year when adjusted for currency. Solid execution in a tough macro environment, particularly on cost savings and a strong start to the North American corn season in Ag, positively impacted the quarter. Excluding currency, consolidated net sales for the quarter declined 2%. Local pricing gains in Ag and industrial bioscience and volume growth in Nutrition & Health were more than offset by declines in most of the remaining segments. Currency continued to negatively impact sales by an additional four percentage points in the quarter. I would like to highlight where we’ve seen some positives from a regional perspective, particularly in our developing markets, which represented above 30% of our first quarter sales. In the quarter, sales in developing markets were up 5% year-over-year excluding currency. The volume growth was primarily driven by Agriculture and Nutrition & Health in Europe and Asia Pacific, principally China. Local pricing gains in Latin America and Europe were a result of mix enrichments and actions to offset currency primarily within Agriculture.

Thanks Nick. Overall, agricultural markets are playing out pretty much as we expected with farmers facing challenging economic conditions and seed and crop protection suppliers having plenty of inventory globally. So we’re not seeing anything significantly different in market conditions from what we shared with you earlier this year, but even in this difficult environment, we remain focused on executing on the variables that are within our control, and I think our first quarter performance clearly illustrates that. I'm focused on three very clear priorities. First, delivering on our 2016 cost savings and operating earnings commitments, and our results for the quarter indicate we’re firmly on track to do that. Secondly, I’ve been personally spending significant time reviewing our R&D programs with our research team to ensure we’re delivering on our exciting pipeline of new genetics, biotech traits, and crop protection products on schedule. Lastly, from our announced merger with Dow, our teams are working with great urgency to create a world-leading production Ag business, and we’re developing detailed plans to capture the $1.3 billion of cost synergies. Even though this is challenging work, you can feel the excitement of the teams. In addition to these three priorities, I also spend my time minimizing distractions, ensuring our teams keep their focus on delivering results for our stakeholders during this exciting time of change. As I mentioned, our results in the first quarter demonstrated strong execution in challenging market conditions. Results were better than we expected, primarily due to higher corn area in North America. Earlier timing of shipments to customers is consistent with the strong start we had in the fourth quarter of 2015, and stronger sunflower sales in Europe based on the performance of our newest products. Currency, while still a significant headwind compared to last year, was better than we anticipated. What I’m proudest of is we were able to deliver 2% higher prices across the segment even in this highly competitive market environment. In seeds, a stronger mix of Pioneer’s newest corn hybrids resulted in higher net corn price globally and most importantly in North America. In crop protection, we took decisive pricing actions to mitigate a stronger U.S. dollar in Latin America and Eastern Europe, and in fact, local pricing actions fully offset the impact of currency in Latin America. Now in addition to local pricing gains, corn seed volumes were higher than the prior year from sales in North America consistent with the recent USDA reports indicating higher expected corn acres this year and in Brazil’s Safrinha season. Our increases in corn and sunflower volume were more than offset by lower insecticide sales in Latin America and in sales to other third parties. Additional offsets included the impact from the shutdown of the LaPorte manufacturing facility and lower soybean volumes. Now most of the decline in insecticide volumes can be tied to Brazil’s low pest pressure, high industry inventories, and the impact of insect-protected soybean varieties. Now turning to our pipeline, as planned, we made our first sales of Zorvec fungicide for disease control in Korea, Australia, and China in the first quarter. We expect Zorvec to be very competitive in the $2 billion market for blight and downy mildew control, offering potato, grape, and vegetable growers consistent, long-lasting control with a favorable environmental profile. We successfully launched Leptra, insect-protected corn hybrids in Brazil in the Safrinha season, and initial indications of performance are good. Leptra’s strong value proposition allows us to recapture price in that market. Strong customer interest and an aggressive seed production plan have us well-positioned to ramp up Leptra to as much as a third of our volume in the upcoming summer season, in one of the fastest technology introductions in Pioneer history. In North America soybeans, we are currently introducing varieties with Roundup Ready 2 Xtend technology in a very limited launch. While we didn’t plan for large volumes, this will allow our sales reps and customers to test the performance of these soybeans as we prepare for our full launch in 2017, pending regulatory approvals. In addition to all of that, we had a really exciting announcement this past week. We announced our intention to commercialize our first corn hybrids developed through the application of CRISPR-Cas advanced breeding technology within five years. While this is a first step, our initial CRISPR-Cas offering allows us to lay a solid foundation for success for future products developed with this important innovation in plant breeding. We now anticipate results for the full year to be a little stronger than what we shared with you in January, primarily due to the recent weakening of the dollar against many global currencies, including the real, and from higher corn planted area. This will be partially offset by the shift of a portion of our fourth quarter seed sales to first quarter 2017. This is a result of the enhancements we are making to our Pioneer business as we transition to an agency-based route to market approach in the Southern U.S., similar to the Advantage approach we take in the Midwest. Additionally, we’ll have some unplanned costs as a result of our recent decision regarding the LaPorte insecticide unit from the write-off and disposal of in-process inventory and to dismantle the facility. We had a good start to the year, we have a lot going on in agriculture, and I’m very excited about the progress. I’m confident the team is focused on delivering on our commitments, preparing for the merger, and advancing our pipeline. Now, I’ll turn it back to Greg.

Thank you, good morning. There has been some talk about aggressive seed prices discounting in the U.S. this season. Could you address those concerns and how you are addressing that issue?

Yes, great. Thanks for that question. We know those comments are out there. As we said back in January, we just weren’t seeing much change in market conditions from where we launched back in August or September. So we've had our pricing cards out there for a number of months. So when I look at pricing, I think of it in that area in three specific ways. First is card price and that’s the year-over-year same technology, same market card pricing, and as we said back in January, our card pricing is generally flat year-over-year. The second impact in our numbers would be due to mix, and we’re seeing strong demand in our order book for our newest technology. About 50% of our lineup in North America is from genetics that we’ve put in the market in the last two years. So as growers have a chance to look at that two consecutive years in our yield trials, they really jumped on that. So we’re seeing a nice lift in overall mix. And then last would be in the discounting area, and so these discounts come in a number of different areas, whether it's early or early buy discounts or cash discounts. Overall, I would say we’re seeing maybe a slightly elevated level of discounts, but nothing really out of the ordinary that you might expect. Folks took advantage of some of the programs that we had out there. I would also remind you that our direct sales model in North America gives us great visibility of our products and our pricing, especially at that net price levels. So we see almost on a real-time basis purchases and what is going on there. So overall, what this speaks to is a strong focus by our organization and an execution intensity in really driving the plan that we put out there back in August and September.

Yes, when you look at the performance materials business, ethylene obviously had an impact because spot prices were so much lower, David, as you know, on a year-over-year basis like 50% down. But if you would take that out, the automotive segment was up slightly in Asia, almost a point, Europe up 1.7%, North America was kind of flattish in auto sales, but we did see fairly good demand outside of the ethylene impact that you saw within that segment.

Hi, good morning. Ed, it sounded like you are optimistic about the working capital for the year and agriculture is coming in pretty much the way you thought it was. So do you have a working capital target, how much do you think things will be better year-over-year either inclusive of the titanium dioxide separation or without it?

We just introduced our working capital program in the first quarter, so we just got those launched. We were studying in detail in the fourth quarter what we thought the opportunity was. And over the medium term, I think we said last time, the opportunity looks like it’s a good $1 billion to $1.3 billion somewhere in that range, what I call more best-in-class performance. So we have a big opportunity there; mostly it’s the biggest piece in inventory, so we’re very, very focused there. And you know we are going to have some headwind this year, as I mentioned in my prepared remarks, because of severance costs and all that. So again, that’s for the benefit of the company going forward, but this won’t happen just this year. We clearly will have traction this year. I think if you saw in the first quarter, we had slight improvement already in working capital and generated an additional $300 million of free cash flow this year over last year also because CapEx was lower by 14% year-over-year. So we’re starting to get really good focus. Nick and I had operating reviews with every business over the last week, and working capital was a big part of the conversation with the teams. So I feel confident we will build momentum as the year goes.

Thank you. Follow-up for Jim on Ag. Jim, crop protection was down 18% in sales year-over-year in Q1. How do you expect that to unfold over the year? And as you look at the year as a whole, are you expecting corn seed share to be up in North America, or are you just being up in line with the increased market acreage?

Well, let’s talk about the crop protection first. You are right, you did see some pretty significant declines in volume in the first quarter that was mostly tied to the insecticide business and a bulk of that in Brazil. We’re still chasing two consecutive years of low pest pressure there. We’re feeling the impact of insect-protected varieties of soybeans that are in that market. Overall, I would say channel inventories are still pretty elevated based on the previous two years. Our insecticide business as well as crop protection is feeling the impact of the LaPorte shutdown that we had. Most of that is related to Vydate. We’ve essentially replaced most of the sales we have been selling in previous years through third parties, but it’s just been really tough to find quality sources of raw materials. You are seeing some of that year-over-year. As we get into the second half of the year, we continue to drive the launches of Cyazypyr around the world. If I separate Brazil, Rynaxypyr sales growth has grown volumes every year since its launch and we expect to see good inroads. I would say our crop protection business in North America started off pretty strong here this year, looking at the on-the-ground sales versus our out-the-door business. We feel really good about our penetration there. It’s still early in the season to talk about full-year, we still have a lot to go. When I think about corn share now, again it’s a little early to call share. I agree with you; no doubt we’re seeing volume increases in North America consistent with that USDA report of 94 million acres. We’re seeing volume growth based on our new technology, and our teams are going to stay really focused. But like I said, it’s way too early to talk about seed share. As of today, we’re about 30% planted in North America. That is elevated; normally we would be around 16% for this time of the year. Again, you saw some of that volume increase flow through in our first quarter, but we will see how things shake out around share for the full year.

Hi guys, congrats. Nicely done.

Thank you.

Good morning gentlemen. Given the nice results, Nick, I’m guessing that takes the sting out of the Brady ruling for you.

That’s only a rumor, Frank.

Well look, a bunch of angles, it depends by business. Some of the businesses look like growth is going to be very nice in the year and some product introductions in the second half of the year. Let me just start by overall saying to you, we’re still counting on the year being relatively flat from a volume perspective or an organic standpoint as we move forward. So if we had a minus two in the first quarter, just some slight improvement kind of in the second half of the year, and then it really depends by business as you look at what it is whether it’s Nutrition & Health. Obviously good; we’re seeing really broad-based growth there. By the way, the probiotics area is really hot with 30% growth, and we’re actually getting more product out the door and more efficiency in our facility. So that’s a good sign; it should continue, not just this year, but into the future. And then on the Industrial Biosciences side, we’re still counting on growth for the year in that business. We have launches in a bunch of other businesses like Leptra and other products. So we’re feeling good as we look at the pipeline that we will actually pick up a little bit more here and be running more flat on a revenue line basis. I’m not planning or looking at anything past that. I want the company to plan around that; I don’t think it’s overly conservative. But if we plan around it, we’ll make some smart decisions as we see upside later in the year more than better.

Thank you. Ed, do you still expect to be able to achieve a split into three businesses within 18 to 24 months of the merger's close? And then you have made comments in the past that the corporate overhead of the three separate entities would not be higher than that at the parent. I’m wondering if that’s still your expectation?

Yes, we’re definitely planning the 18 to 24 month period. We’ve had a lot of teams going that are already doing some of the work to help us out on that timeline. As I think we mentioned before, we’ve already started the financial carve-out work, so we’ll get way ahead on that part of the schedule. So yes, the timing in the 18 to 24 months we’re very comfortable. Then obviously we would all like to pull that in if we can, but that’s the timeline rolling now, and we’ll keep working that as we go forward. Our plan is with the reductions we’ve done here; our plan would be, and by the way I did this in my prior life, we’re going to keep the overhead percent of sales down where we’re getting them to with the reductions of both companies are making as we speak. So to me, a more world-class percent, the corporate overhead is approaching 1% of sales, and we’re, as I think Nick is mentioning, we’re down to 1.3% of sales with the actions we’ve taken. So we’re kind of getting in that zip code, and that’s where we plan to be with each of the companies.

Thanks, Jim. We will now open the lines for the questions. John, if you could please provide the instructions.

Thank you, good morning.

Yes, great, thanks for that question.