DuPont de Nemours Inc (DD) — Q4 2017 Earnings Call Transcript

Thank you, Mitchell. Good morning, everyone. Thank you for joining us for our fourth quarter and full-year 2017 earnings conference call. DowDuPont is making this call available to investors and media via webcast. We have prepared slides to support our comments; these slides are posted on the Investor Relations section of DowDuPont's website and through the link to our webcast. Speaking on the call today are Ed Breen, Chief Executive Officer; Howard Ungerleider, Chief Financial Officer; and Andrew Liveris, Executive Chairman. Also with us in the room today for our Q&A session are Jim Fitterling, Jim Collins, and Marc Doyle, Chief Operating Officer for DowDuPont's Material Science, Agriculture, and Specialty Products Divisions, respectively and Neal Sheorey, Vice President of Investor Relations. Please read the forward-looking statement disclaimers contained in the news release and slides. In summary, it indicates that statements in the news release, presentation, and conference call that state the Company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under Federal Securities laws. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled Risk Factors in each of DuPont’s, Dow's, and DuPont's most recently quarterly report on Form 10-Q. Last, we will also refer to non-GAAP measures; a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website. I will now turn the call over to Ed.

Great. Thanks, Greg, and thanks everyone for joining this DowDuPont fourth quarter earnings call. I will start by covering the financial highlights, then provide an update on our three key strategic drivers: the merger, the synergies, and the spins. This past quarter marked the first full quarter of operations for DowDuPont, and as you saw, our teams delivered strong results. Turning to Slide 4, the fourth quarter highlights were: sales increased 13%; volume rose 6%, well ahead of global GDP; operating EBITDA grew 24%; and adjusted EPS increased 41%. We benefited from strong underlying demand for our products and leading positions in growing markets. All eight operating segments recorded quarterly sales growth, as did every geography. We delivered excellent operating EBITDA leverage. Operating EBITDA rose in nearly every segment on increased volume and price, cost synergies, lower pension and OPEB costs, and higher equity earnings. For the full-year, the trends were directionally similar. Pro forma sales, operating EBITDA, and adjusted EPS all grew by double-digit percentages. Now, I will share an update on the merger, synergies, and intended spins. Since our last earnings call, we completed the sale of certain Dow Brazil corn seed assets. This was the third and final key remedy divestiture required by regulators. In addition, we completed the realignment of our businesses. Management responsibility for the business is shifting from the material science division to the specialty products division now rests with the new leaders. With that work behind us, our focus now turns to the synergies and the intended spins. Our goal was to hit a run rate of $500 million in cost synergies by the end of 2017. We exceeded this goal. We executed projects with run rate savings of more than $800 million at the end of the year. In fact, about 75% of our synergy projects have now been launched. And as a result of that quick start, our realized savings in the fourth quarter were more than $200 million. Today we are pleased to announce that we have raised our cost synergy commitment to $3.3 billion, up 10% versus our original plan. The lion’s share of the increase reflects upside from procurement. Our procurement teams have worked across DowDuPont together, building contract-by-contract to identify savings opportunities and have been incentivized to deliver and lock in the highest possible savings. Here is how the new synergy commitment breaks down by division: we see $1.1 billion coming from AG, $1.235 billion from materials, and $965 million from specialty products. Finally, on Slide 5, I will update you on our timeline for the separations and intended spins. Based on our progress this past quarter, we identified ways to accelerate the spin timing. We no longer expect our spins to take up to 24 months from the merge date; rather, we now expect to complete the separations about 14 to 16 months from today. We anticipate materials science separating first by the end of the first quarter of 2019 and we expect agriculture and specialty products to separate shortly after that by June 1, 2019. The next steps, as you can see, include allocating assets and liabilities to each of the independent companies we are standing up in such a way that we achieve the desired credit ratings and can compete well with the peers in our respective industries. I'll keep you apprised of our efforts with this timeline on each of our earnings calls. In addition, you will be able to see our progress when we file the initial form 10s this fall when they go effective about six months later, subject to SEC approval, and when we launch our equity road shows before listing the securities. In summary, our businesses are performing well. The spins are anticipated to occur in only 14 to 16 months from today. Meanwhile, we are taking up our cost synergy number to $3.3 billion. We are excited about the opportunity ahead for our company and for our shareholders as we create these three companies, each focused on serving specific growth industries with more agility and lower cost structures. With more than $4 billion combined in cost and growth synergies, we feel very much in control of our future. Now, let me turn the call over to Howard to review our financial results in more detail.

Thanks, Ed. Moving to Slide 6 and a summary of our fourth quarter results. As Ed mentioned, we closed the year with strong financial performance, achieving double-digit top and bottom-line growth. Drivers of the EPS increase include strong business results, quick actions to capture cost synergies, contributions from new capacity additions, improved equity earnings, and a benefit from lower pension and OPEB costs with approximately two-thirds of these costs in the Specialty Products segment. Our double-digit sales increase was driven by broad-based volume growth in all operating segments and geographies and price gains in all geographies. Volume grew 6% on strong consumer demand across all of our key end markets. From a geography perspective, we saw particular strength in EMEA driven by the continued ramp-up of Sadara and in Asia Pacific also due to the contributions from Sadara as well as strong demand for Electronics & Imaging. Local prices rose 5% as we drove pricing initiatives in all geographies in response to higher raw material costs and tighter supply-demand fundamentals. Equity earnings increased led by improved results from Sadara and increased earnings from Hemlock Semiconductor. And as Ed mentioned, we delivered great early progress on our cost synergies through to the bottom line. These gains translated to operating EBITDA of $3.9 billion in the quarter. Cash flow from operations in the quarter was $4.2 billion driven by increased cash earnings and AG seasonal cash inflow partly offset by contributions to the pension plan. And we have returned nearly $2 billion of cash to our owners, which included $1 billion of share repurchases. Turning to the drivers of our tax rate as well as our 2018 guidance in light of U.S. tax reform. This quarter's operating tax rate was 18%, which was lower than our model and guidance primarily due to our geographic mix of earnings and benefits from changes in the tax rate in certain foreign jurisdictions. We also recognized a net tax benefit of $1.1 billion resulting from the new tax legislation. This benefit is based on two pieces. The first is a gain of $2.7 billion, which was primarily driven by the re-measurement of our deferred tax assets and liabilities. This net benefit was principally due to the purchase accounting step-up as a result of the merger, which was partially offset by a $1.6 billion charge for our foreign unrepatriated earnings. Looking ahead, we expect the U.S. tax reform to lower our 2018 tax rate by 1 to 2 percentage points to a range of 20% to 23%. Now, turning to our segment results, starting with AG on Slide 7. In a tough AG market, our business grew delivering gains in the quarter and for the full year. In the fourth quarter, operating EBITDA more than doubled to $224 million, primarily driven by cost synergies, volume increases, and a net portfolio gain. Sales growth was realized in both seed and crop protection. Seed volume and price rose on earlier Brazil Safrinha deliveries, doubling of corn sales in Argentina driven by the penetration of Leptra corn hybrids and growth in the European sunflower and corn seed business. Crop protection volume increased, driven primarily by the continued penetration of new products such as Vessarya fungicide and increased demand from Optinyte nitrogen stabilizers. Volume growth was offset by pricing declines driven by generic pricing pressure, specifically in Latin America and Asia Pacific. Looking ahead for AG, we anticipate full-year sales to increase in the mid-single-digit percent range and operating EBITDA to increase in the high teens percentage range. For the year, we expect to deliver top and bottom-line growth driven by new product introductions and cost synergy deliveries. We estimate first-half sales and operating EBITDA to be about equal to last year, which is in line with the estimated corn area planted in North America in 2018 and reflective of the challenging price environment. We anticipate about 45% of the first-half results landing in the first quarter and 55% in the second quarter. We also anticipate a ramp in our cost synergy realization in the second half and expect our new product introductions to be fully ramped and contributing to growth in the latter half of the year.

Looking ahead, the business continues to advance the next tranches of growth. Our Nordel EPDM facility is mechanically complete and well into commissioning activities. In fact, the unit just recently produced its first prime material and will spend the remainder of the first quarter ramping to race and qualifying product with customers, reaching full start-up by the end of the first quarter. Additionally, our new low-density polyethylene unit is also mechanically complete and we expect it to be started up by the end of our first quarter. Moving to specialty products on Slide 9, Electronics & Imaging achieved operating EBITDA of $367 million, up from pro forma operating EBITDA of $331 million. Volume growth and cost synergies more than offset hurricane-related costs, negative impacts from portfolio, and higher raw material costs. Growth in the segment was driven by double-digit volume gains in consumer electronics, industrial, and semiconductor end-markets. Nutrition and biosciences reported operating EBITDA of $352 million, up from pro forma operating EBITDA of $309 million primarily driven by a portfolio of benefit cost synergies and volume growth. Volume gains were led by increased demand for bioactives, continued growth in probiotics, demand for microbial control solutions, energy markets, and growth in pharmaceuticals. Transportation and advanced polymers operating EBITDA increased to $365 million, up from pro forma operating EBITDA of $276 million. Benefits from volume gains, improved local prices and cost synergies more than offset higher raw material costs, double-digit sales growth was led by strong demand from the automotive, electrical, and industrial markets. Safety and construction achieved operating EBITDA of $285 million, up from pro forma operating EBITDA of $227 million, on broad-based volume growth including solid demand across industrial markets, construction, and medical packaging. Looking ahead to the full-year for this segment, we see continued strong market demand, namely from semiconductor, nutrition, construction, and automotive markets. We plan to continue to add capacity in higher growth areas where we offer compelling customer benefits.

Thank you, Howard. On Slide 13, I want to start by acknowledging the incredible progress our teams and our Board have together achieved in just five short months. We are already demonstrating the value creation potential of this historic merger and spin transaction. Here are the headlines since closing the merger on September 1. We realigned the portfolio, further positioning intended spins for long-term competitive advantage and sustainable growth, with unanimous Board approval, just 12 days after the merger closed. All remedy actions required to close the merger were completed on target. Our Board announced a dividend and buyback plan, and we initially began returning cash to our owners with nearly $2 billion returned in the fourth quarter alone. We rapidly made progress to get to our cost synergy commitment. As Ed and Howard mentioned, we exited the quarter ahead of our run rate commitment and are already seeing cost reductions hit the bottom line, and our confidence led us to increase our synergy commitment now to $3.3 billion. On the spin timing, we announced today an accelerated timeline to unlock three world-class companies, with material science spinning first, followed shortly after by the separation of agriculture and specialty products. Last but not least, we remain squarely focused on operational discipline, commercial excellence, and our business management delivering double-digit top and bottom-line growth this year. In sum, it was a breakthrough year for DowDuPont and our stakeholders, one where we delivered on all of our financial, strategic, and operational commitments.

Thank you, Andrew. With that, let’s move on to your questions. First, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Rachelle, would you please provide the Q&A instructions?

Hey. Good morning. Ed and Andrew, on the synergies, do you believe there is further upside potential on the cost synergies and any further update or confidence on realizing the growth synergies over the next couple of years?

Yes, this is Ed. On the synergy front, look, I feel really good about where we got here with the extra $300 million. Look, we are still going to be looking over the next six, seven months for any other synergies we have, and I will see where we end up. I don’t want to pre-comment on that. But I will say two things. Our procurement teams are still working very hard, and they are not through everything yet, but they did hit the bigger items first, so just to give you a little perspective. And there is an awful lot of work going on with Marc Doyle and his team on the SpecCo side simply because so many end-market businesses came together with Dow and DuPont. So we are still taking a really hard look there. That would be the opportunities, we are still testing as we go down the road. But I will tell you, just to the second part of your question, we have really moved more to the growth synergy focus now. Marc on the SpecCo side has all the teams now getting together now that we are managed as one business from both the Dow side integrated in with the DuPont side, and we are really working through a whole list of great action items there for growth. So, I think you’re just going to see a lot more opportunities in SpecCo than we simply would have had before when we realigned the whole portfolio. And my gut is, David, by the time of the next earnings call, we will be talking a lot more specifics with you about where we see our biggest growth opportunities from putting these businesses together. And, of course, we have talked on the AG side. There is a huge amount of opportunity there just because of the different channels to market that we have, and Jim Collins and the teams have already made extensive work into that because those teams have been together for over a year now talking about these types of things. So again, we will talk more about that next quarter. But that’s where the excitement inside the company will now turn to once we lock down of what is the final cost synergy number; let’s really just get focused now on the growth side of that.

Hey, good morning PJ, it's Jim. Yes, specifically in the fourth quarter we mentioned some price pressure primarily from generics, and that's really coming out of Latin America and mostly aimed at the fungicide portfolio. Some of the generic derivatives that we sold, we sold both straight and several mixtures in that marketplace. And some of those straight molecules came under a little bit of stress. So when I think about pricing pressure and some leakage, as you suggested, into North America, we are really not seeing as much on the chemistry side as we are likely to feel in the seed side due to the pretty aggressive competitive pressure out there. It's a really tough market for growers with commodity prices trending where they are. We are expecting, as Howard said in his comments, that it's going to be a tough fill here as we start out the year.

Yes, let me hit the cost synergy and maybe turn it over to Howard on the cash piece. Remember, there are run rate synergies and then the synergies captured within the period. So we are on a very significant ramp, as we said we did over $200 million in synergies that we captured in the quarter, but we actually exited at an $800 million run rate. Now remember, when we track all of our synergies is when we accomplished the task and is done, and then what will happen, Jeff, is some of these take six, seven, eight months to kick in. I will just give you two examples, I think just they are easy to understand, but I could give you 20 of them. We are doing a lot of rooftop consolidation, and by the way, even more announced SpecCo than we are planning because everything is coming together. And by the time we get out of leases or maybe sell one of the properties, consolidate into either a Dow or DuPont location, some of these projects, we are tracking them and then how long they are going to take, but they take some months. And by the way, another easy one that happens to be a fairly decent number for us is on the current track manufacturing side, we are making a lot of moves on the contract manufacturing side, but we have contracts in place that could be another four, five, six months before it ends with a contractor and we make our move. So again, we are tracking every one of them in detail, but that's why you will see as we exit even this next calendar year, 2018. You will see a very high run rate or ramp at the end of 2018, but of course you won't see that same number actually hit and fall within the year. And so we will give you both numbers both times, but you will by the time we get to 2019 most of this is kicking in and we will be on the tail end of it. Literally, as I said, 75% of the projects are already launched, so we are really in the thick of it right now and you just got to give it some months in many of these cases to actually kick into place. And don’t forget one of the other big delays and we have already taken a bunch of these actions is on the AG side also where it takes a planting season to actually realize the savings. So a lot of Jim Collins' bigger moves like the seed production consolidation from third parties internally to an old heritage DuPont product facility, you won’t see until you get into the next year. But again, we will keep you posted on what actions we have taken and then try to give you a lot of clarity around in-period versus run rate.

Hey. Good morning. I guess I have one question relating to your balance sheet. If you're successful in consummating all the deals that you might be contemplating now, what might your balance sheet look like just before you start the spinoffs with material?

So Peter, this is Howard. I'll take a stab at the question. I mean, what we are working on now is really setting up these three separate publicly traded companies all for growth - all with more focus, and the ability to move faster. We are pretty clear on target credit metrics and credit profiles that we are working on. The Materials Science should look like Dow in the fourth quarter of 2015. The AG Company should look like DuPont in the fourth quarter of 2015, and we have set investment grade for the Specialty division. So we are setting up pretty strong investment grade companies that will all be focused on growth, and obviously, I think Ed mentioned it in his prepared remarks, but we are working on the assets and liabilities, pensions, cash, and debt. And so that's the work that we have in front of us and you will be hearing more as the timeline slide in the deck shows, you will be hearing more as we get through the next several quarters through the end of 2018.