DuPont de Nemours Inc (DD) — Q4 2018 Earnings Call Transcript

Thank you, Rochelle. Good morning, everyone. Thank you for joining us for DowDuPont’s fourth quarter 2018 earnings conference call. We're making this call available to investors and media via webcast. We've prepared slides to supplement our comments during this conference call. 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; Jim Fitterling, Jim Collins, and Marc Doyle, who are Chief Operating Officers for DowDuPont’s Materials Science, Agriculture, and Specialty divisions, respectively; and Lori Koch and Neal Sheorey, who will lead IR for the new DuPont and new Dow, respectively. Please read the forward-looking statement disclaimer contained in the earnings news release and slides. During our call, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K and each of Dow’s and DuPont’s Forms 10-K as well as Dow’s and Corteva’s Forms 10s and DowDuPont prospective supplement filed on November 16 of 2018, include detailed discussions of principal risks and uncertainties, which may cause such differences. Also, we'll comment on segment results on a divisional basis, so please take note of the divisional disclaimer in our earnings release and slides. Unless otherwise specified, all historical financial measures presented today for the full year 2018 are on a pro forma basis and all financials, where applicable, exclude significant items. We'll 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. With that, I'll turn the call over to Ed.

Thanks, Jen, and thanks, everyone, for joining us. Today we reported fourth quarter and full year results for 2018. And as we’ll discuss on this call, it was a good year on all counts, as we delivered innovative solutions to customers, exceeded our cost synergy target, and at the same time prepared to stand up three industry-leading world-class companies. In terms of our overarching performance for the full year, we grew adjusted EPS 21% on a pro forma basis to $4.11. We delivered a net sales increase of 8% with price improvement in all regions and volume growth in most regions. We also increased operating EBITDA by 13%. In two months, we plan to separate the new Dow followed shortly thereafter by the separation of Corteva from new DuPont. We made significant progress this year towards these important milestones, and I'd like to thank the team for all their hard work to make this happen. Now, let me recap the high points of the year we concluded. First, we delivered on the earnings objective we set for ourselves, strengthened by well-executed capacity additions and many new product launches, leading to overall local price improvement for each of the divisions and volume growth across the majority of our segments. Second, we raised our cost synergy target to $3.6 billion, which is 20% higher than our initial target, and we have delivered more than $1.8 billion in savings since the merger closed. Third, after completing our initial $4 billion share buyback program, we announced a new $3 billion share repurchase authorization and completed $1.4 billion of that in the fourth quarter. We have returned nearly $10 billion to shareholders since the merger closed and intend to complete another $1.6 billion share repurchase by the end of the quarter. And finally, we announced the future Boards including many new Directors. Across each Board, our Directors bring strong and highly relevant experience, insights, and key expertise to help our companies launch, grow, and deliver for all stakeholders. We also announced the three CEOs; each one is a talented leader with deep knowledge of their industry, has a track record of delivering value, and is highly focused on increasing shareholder returns. They also have a great team supporting them; successful, dedicated operators who know their respective businesses and end markets extremely well. As a result of the process we have been through in creating them, we are confident that each company will be well-positioned in its markets with appropriate capital structures and plans to invest capital and R&D in ways that will drive significant shareholder value creation now and into the future. I couldn't be more excited about where each one is headed. Howard will go over our fourth quarter results in more detail, so I'll point out a couple of things that we're keeping an eye on. We saw some short-term softening in the fourth quarter, including a steady drop in the price of oil and destocking in a few of our value chains that went beyond normal seasonality. Even in this environment, we were able to offset the headwinds to deliver flat sales year-over-year, which included 1% volume growth. We also delivered year-over-year adjusted EPS growth because of unique levers in our control such as cost synergies, new capacity additions, and product innovations. We believe our market share held up well, our execution was good, and our new products are resonating with customers. As we look at 2019, we are confident that the global economy will grow. However, there was more uncertainty than usual over the precise rate of growth we expect. We anticipate China to continue to grow this year, albeit at a slower pace, along with slowing activity in Europe. We expect modest growth in most other regions. Let me provide some context to our expectations starting with Materials Science. We have consistently been forecasting a period of margin compression in both the Polyurethanes and polyethylene chains due to capacity additions across the industry. These dynamics have turned out largely as we expected and Jim Fitterling will go into more detail about the trends we saw in the fourth quarter and start to the year. For Specialty Products, we see benefits in 2019 from global economic growth and from a highly differentiated market position, as Marc Doyle will explain. And in Agriculture, we expect to realize first-hit benefits from cost synergies and new products, offset by currency and higher unit cost as Jim Collins will outline. With that, let me turn it over to Howard.

Thanks, Ed. Moving to slide 3 and a summary of our fourth quarter results, we closed the year with a solid financial performance for DowDuPont, utilizing the levers in our control to offset all of the margin compression we experienced in the quarter. We delivered earnings per share of $0.88, a 6% increase year-over-year. Earnings drivers in the quarter included cost synergies and local price gains. Our operating tax rate was also a tailwind of $0.02 per share; EBITDA was flat at $3.9 billion as these earnings tailwinds were offset by margin compression in Materials Science, lower equity earnings, and a currency impact of 2% on sales or $0.03 per share. Volume grew 1% with gains in Industrial Intermediates & Infrastructure, Nutrition & Health, Safety & Construction, and Ag. From a regional perspective, we achieved high single-digit volume growth in Asia-Pacific and Latin America which more than offset declines in the U.S. and Canada and EMEA. Local price also rose 1% with gains in Transportation & Advanced Polymers, Safety & Construction, Performance Materials & Coatings and Ag. Currency was a 2% headwind. We continue to exceed our cost synergy commitments with more than $500 million of savings achieved in the quarter. This brings our year-over-year cost synergy savings to $1.6 billion for 2018 above our increased target of $1.5 billion. Cash flow from operations in the quarter was $5.1 billion, up from $1.8 billion in the year-ago period. On an apples-to-apples basis after adjusting for the accounting and presentation change for the AR securitization program, our cash flow from operations increased year-over-year by $900 million. And we returned $2.3 billion of cash to our owners, which included $1.4 billion of share repurchases. Looking at our full year, DowDuPont delivered strong financial and operational performance as evidenced by several metrics. We achieved solid top and bottom line growth. We outperformed on every one of our increased synergy savings and run-rate targets. We generated $4.7 billion of cash from operations, which included discretionary pension contributions of more than $2 billion. We finalized the capital structures for each intended company achieving the targeted credit ratings for each; and we successfully completed debt offerings for new DuPont and new Dow of $12.7 billion and $2 billion respectively. We also completed a tender for $4.4 billion of heritage DuPont's debt as part of establishing Corteva's capital structure. And we made significant capital returns to shareholders which from merger close to the end of the fourth quarter totaled nearly $10 billion. Summing it up, the DowDuPont team responded to and offset the headwinds we faced staying focused on executing our new capacity start-ups and our product launches and advancing activities and our key milestones towards spin. Turning to our modeling guidance on slide 4. At the macro level, we continue to monitor macroeconomic and geopolitical developments, including ongoing trade negotiations and the pace of economic activity in China. In this environment, we remain focused on the actions in our control including capitalizing on our growth investments, capturing cost synergy savings, delivering productivity actions, and advancing on our spin milestones. We expect first quarter net sales to be in the range of $20 billion to $20.5 billion. Operating EBITDA is expected to be in the range of $4.2 billion to $4.4 billion. Additionally, net interest expense is expected to be up more than $100 million as a result of the new debt we took on in the fourth quarter to implement our capital structures and prepare for spin. And we also see currency headwinds year-over-year, which will impact EBITDA in the range of $150 million to $200 million. In the Agriculture division, first half sales are expected to be down low single-digits percent and we see operating EBITDA flat. Excluding currency, sales are expected to be up low single digits percent. It's always difficult to call the sales split between the first and the second quarter, and farmers are still finalizing their planting decisions. First quarter sales are expected to be down low-single-digits percent, but up low single-digit percent excluding currency. Operating EBITDA is expected to be down low-single-digits percent as synergy delivery and organic growth from new product sales are more than offset by currency pressures and increased input costs. In the Materials Science division, we expect continued strong consumer demand though at a moderately slower pace than in 2018. We expect operating EBITDA to be down low-20% as volume growth, cost synergies, and the benefit from the completion of our U.S. Gulf Coast investments will be more than offset by lower chain margin spreads that will continue into the first quarter, due to the averaging effect particularly on our polyethylene and isocyanates chains. The division is acting quickly on a series of actions to offset as much of these headwinds as possible, including cost and productivity actions, capitalizing on new capacity additions, and driving pricing improvements. As a result of all these actions, the division expects margins to stabilize and then improve as it moves into the middle of the year. The Specialty Products division expects gains in local price across most segments to be more than offset by currency, a portfolio headwind, and softer volumes resulting in low single-digit percent declines for the quarter. We expect organic revenue growth to be roughly flat with the prior year. We expect operating EBITDA to be down low single digits percent from raw material and currency headwinds as well as softer volumes more than offsetting cost synergies and strength in local price. Excluding currency and the portfolio, we expect operating EBITDA to be slightly up. More comments on our segment expectations for the first quarter can be found in the appendix. And with that, I'll turn it over to Jim Fitterling to discuss the Materials Science Division's fourth quarter and full year results.

Thanks, Howard. Moving to slide 5. Materials Science delivered solid results to close out the year despite some short-term market headwinds. On the demand side, we saw softness in select end markets related to durable goods such as appliances and autos, which drove some above-normal destocking. Outside of this, demand was relatively strong. And on the margin side, we faced some discrete pressures in the quarter, particularly in isocyanates and polyethylene. We pivoted to counter these headwinds with multiple actions in our control, including cost synergy savings, disciplined price volume management, feedstock flexibility, and capitalizing on our recent capacity expansions. Here are some division highlights. We again captured demand growth across the majority of our core businesses. We achieved high-single-digit volume growth in Polyurethanes and Industrial Solutions and our Packaging & Specialty Plastics business grew volume by 4%. We delivered high single-digit EBITDA growth in Consumer Solutions where we drove pricing actions and adjusted our product mix to focus on higher-margin business. We brought online our new High Melt Index elastomers train and completed the bimodal polyethylene debottleneck by the end of the quarter. CapEx for the quarter was $890 million, bringing Dow's full-year CapEx to $2.5 billion. And the Sadara joint venture successfully completed its creditors’ reliability test on the first attempt. The fourth quarter presented us with some discrete challenges. Brent crude oil started the quarter at more than $80 per barrel and then steadily dropped throughout the quarter, finishing the year in a low $50 per barrel range, a drop of more than 35%. In addition to that, we saw a 40% compression in the naphtha to ethane spread driven by the oil price drop as well as weak gasoline demand and higher U.S. natural gas prices due to cold winter weather. These trends compressed our feedstock advantage not just in the Americas, but also for our main joint ventures, and you see that in the nearly $240 million impact, which is split about evenly across our core business and our equity earnings. While we were not immune to this trend, our results demonstrated resilience because of the factors that we've consistently highlighted: feedstock flexibility, full chain integration, cost-out actions, and strong operating discipline. I'll now take a closer look at the performance of each business on slide 6. Performance Materials & Coatings achieved operating EBITDA growth of 5% as price gains in all regions and benefits from cost synergies more than offset volume declines. Consumer Solutions faced a sequential moderation in siloxanes prices, primarily in Asia Pacific following an 18-month run-up in prices that peaked in the third quarter. In response, the business drove proactive measures to improve its product mix in the quarter, resulting in volume declines. However, price, margin, and bottom-line earnings all rose. In Coatings and Performance Monomers, the business expanded operating EBITDA margin in coatings as raw material costs fell. However, Performance Monomers' sales and EBITDA declined due to an extended turnaround in the quarter which is now complete and impacted results by approximately $20 million. Industrial Intermediates & Infrastructure operating EBITDA declined by 18%, primarily driven by a contraction in isocyanates that impacted core business results, particularly in Polyurethanes, as well as some softening in appliance and automotive end markets. The contraction in isocyanate spreads, along with a 25% margin compression in MEG also led to a year-over-year reduction in equity earnings. These headwinds more than offset demand growth and benefits from cost synergies. Sales gains in both Polyurethanes and Chlor-Alkali and Vinyl and Industrial Solutions were led by robust volume growth due to increased supply from Sadara. In the Polyurethanes chain, the moderation in isocyanates prices that we've forecasted for some time accelerated in the quarter with MDI prices dropping about 40% year-over-year. In our view, the fly-up margins that we captured over the past year completely unwound over the course of the fourth quarter, notably in Asia Pacific and Europe, where we have the largest merchant isocyanate exposure. Moving to Packaging & Specialty Plastics, operating EBITDA declined 13% in the quarter. Cost synergies, increased supply from growth projects, and lower commissioning and start-up costs were more than offset by reduced equity earnings and the margin contraction across polyethylene products. The 40% compression in the naphtha to ethane spread, coupled with polyethylene price declines aligned with what we forecasted for polyethylene margins for some time. Given the demand remained solid, our view is that polyethylene margins will stabilize in the first half of the year, potentially with some volatility in feedstock costs, depending on how new cracker start-ups are eventually balanced by new NGL fractionation capacity. It is worth noting that we did not face a demand issue in Packaging & Specialty Plastics in the quarter. We grew volume on higher demand across most regions and new capacity from Sadara and the U.S. Gulf Coast. Demand growth was led by our industrial and consumer packaging and flexible food and specialty packaging markets. The business also achieved volume gains in elastomers and Wire & Cable applications. Taking a broader look at the full year, Materials Science delivered an exceptional year financially and operationally. We achieved double-digit sales and operating EBITDA growth with gains in every operating segment. We brought online three new facilities: a next-gen NORDEL metallocene EPDM plant, a new world-scale proprietary tubular low-density polyethylene facility, and a new High Melt Index elastomers train. We also completed the capacity expansion of our bi-modal gas phase polyethylene unit in St. Charles, Louisiana. These were the final units of our wave one U.S. Gulf Coast investments. Product from each unit is now in the market and we have performed at/or above design rates on each one. CapEx for the Dow tower in 2018 was $2.5 billion compared to $3.3 billion in 2017 and below our D&A level. In addition, Sadara successfully passed the critical creditors’ reliability test and we consistently outperformed on our synergy commitments, driving towards a leaner cost structure. Looking ahead, at this early stage in 2019, we're seeing a stabilization in our key products spreads and demand remains robust. We see the first half of the year as a time to focus on stabilizing prices in order to rebuild margins as we move into the middle of the year. Team Dow remains focused on the task at hand controlling what we can control, harnessing our growth projects, driving innovation and we're taking proactive measures to mitigate near-term headwinds, including deferring certain spending to adjust to the current macros and spreads, and continuing to address our cost synergy and stranded cost actions, and therefore progressing our spin milestone to deliver a successful separation and spin in two months' time. I'll now turn it over to Marc to cover Specialty Products.

Thanks, Jim. Specialty Products reported strong results despite a challenging macro environment, particularly in automotive and consumer electronics markets. We managed to achieve organic revenue growth and solid earnings improvement. Our leadership in diverse and attractive markets stems from strong customer relationships and value-added innovation, along with a strong focus on productivity that allows us to outperform the industry in any market conditions. This quarter, our probiotics portfolio continued to show double-digit growth. We are close to completing our capacity expansion and expect to have the new volume available by the end of the quarter. Moreover, our Nutrition & Health sales in the Asia Pacific market continued to grow by double digits. Our Tyvek business remains robust in the high-growth industrial and medical applications sector. Other areas of strength include semiconductors, which benefit from their wide-ranging applications, and life protection through our Kevlar materials in our Nomex business, where we are capitalizing on the rapidly expanding aerospace industry and sustained demand for protective garments. We recorded a 2% organic revenue increase overall, with Safety & Construction at the forefront, achieving 6% organic sales growth. We also saw strong organic growth of 4% in Nutrition & Health and 3% in Transportation & Advanced Polymers. Operating EBITDA for the division grew by double digits across all segments, driven by cost synergies, higher local prices, a customer settlement in our Hemlock joint venture, and increased volumes that more than compensated for rising raw material costs. We maintain a disciplined approach to pricing, resulting in an overall price improvement of 2% across nearly all segments. This pricing discipline helps us mitigate raw material costs and ensures we capture the value our products provide to customers. In the Electronics & Imaging segment, organic sales dipped by 1%. We sustained solid growth in our Semiconductor Technologies business through new customer acquisitions and growth in 3D NAND in Asia. However, continued weaknesses in the photovoltaics sector and reduced smartphone sales impacted our interconnect solutions business. Operating EBITDA rose by 8%, driven by increased equity earnings, an asset sale gain, cost synergies, and higher volumes, partially offset by lower local prices. Excluding income from equity affiliates, operating EBITDA increased by 9%. Looking ahead, we expect equity income for this segment to decline due to a decrease in customer settlements, which is projected to contribute between $175 million and $200 million this year, reflecting a year-over-year drop of $210 million to $240 million. In Nutrition & Biosciences, organic sales increased by 1%, bolstered by strong volume gains of 4% in Nutrition & Health. Probiotics experienced significant growth with sales up over 20% this quarter. We are also expanding our presence in Asia, where sales rose by more than 10%. Meanwhile, within Industrial Biosciences, volumes fell by 3%, largely due to slowdowns in energy markets in the U.S. and Canada as a result of oil prices affecting both our microbial control and biorefineries segments. The segment's operating EBITDA grew by 4%, driven by cost synergies and portfolio benefits that were partially offset by rising raw material costs. Safety & Construction saw organic sales rise by 6%, led by widespread growth in industrial, aerospace, and personal protection markets, though this was somewhat offset by weaknesses in the U.S. residential construction sector. Our pricing strength is steadily improving. In this quarter, we achieved 3% growth across all product lines, which resulted from targeted efforts to drive value and leverage pricing across our offerings. Operating EBITDA for the quarter increased by 20%, driven by cost synergies, strong local pricing, and higher volumes, with some offset from increased raw material costs. Transportation & Advanced Polymers achieved solid growth in both revenue and profits, despite facing challenging market conditions that caused a 5% drop in volume. The automotive and electronics markets, particularly in Europe and Asia-Pacific, experienced declines due to inventory destocking. Nonetheless, even amidst a tough macro climate, we managed to sustain significant pricing strength with an 8% improvement in the quarter. Operating EBITDA grew by 7%, supported by local price increases and cost synergies, partially offset by rising raw material costs and reduced volumes. In summary, I am pleased with our portfolio's performance this year, which led to a full-year organic sales growth of 5% and an operating EBITDA growth of 18%, or 12% when excluding the effects of non-operating pension OPEB expenses. This resulted in an operating leverage exceeding our medium-term target of 1.5x and raised our adjusted operating EBITDA margins to above 28%. Looking beyond the first quarter, we see continued strength in most of our end markets, including semiconductor, aerospace, Health & Nutrition, and industrial & infrastructure. We expect to regain volume in specific markets that experienced destocking in late 2018 and early 2019. The strength of our innovative customer-driven initiatives, along with contributions from capacity expansions and a sustained focus on productivity, will allow us to continue driving operating leverage and improved returns. For the full year, we anticipate sales to be roughly flat on an as-reported basis, influenced by portfolio and currency challenges. However, on an organic basis, as we move past the near-term softness observed in the first quarter of 2019, we expect our sales growth for the remainder of the year to align with the lower end of our medium-term targets established during our Investor Event in November, achieving full-year organic growth of about 2% to 3%. We forecast operating EBITDA for the year to be slightly down on an as-reported basis, but excluding anticipated declines in equity affiliate income and negative currency effects, we expect 2019 operating EBITDA growth of 3% to 5%, propelled by cost synergies, strong local pricing, and volume growth, albeit partially offset by raw material challenges. Additional details on our 2019 outlook can be found in the appendix. Now, I will turn it over to Jim to discuss Agriculture.

Thanks, Marc. Turning to slide 9. Here are the highlights for the Agriculture division. Fourth-quarter sales increased 1% while organic sales rose 9%. Operating EBITDA grew 4%, meeting our guidance of $2.7 billion and operating margins expanded by 30 basis points. Our 9% growth in organic sales was driven by a solid combination of higher local price and volume gains. The local price gains were consistent across both Seed and Crop Protection and were led by Asia Pacific and Latin America. We worked hard to offset 5 points from currency pressures, primarily from the Brazilian real. Volume increased 4%, driven by gains in Crop Protection from new product sales and an early start to the safrinha selling season in Latin America. Partly offsetting the organic sales growth was portfolio reductions of 3%. The portfolio change was a result of the Brazil seeds remedy that we executed in last year's fourth quarter to complete the merger. Our Crop Protection business led the way with 10% organic sales growth from new product sales. Crop Protection volumes grew 5%, driven by strong sales of Vessarya, the leading treatment for Asian soybean rust in Brazil; Pyraxalt, a novel insecticide for rice brown plant hopper control in Asia Pacific; and Enlist Herbicides. These gains more than offset declines in U.S. and Canada on higher channel inventories and fall-applied chemistry. Local price rose 5% as we responded to continued currency pressure, which in the fourth quarter was 4% primarily in Latin America. Seed organic sales increased 8%. Price increased 5% in a competitive market. Volumes improved by 3% including early safrinha sales in Latin America of PowerCore Ultra and PowerCore Enlist and expected market share gains in soy and corn. Corn seeds sales volumes also grew in U.S. and Canada due to the timing of shipments. The remedy loss in Brazil reduced seed sales by six percentage points. The Ag segment operating EBITDA increased 4% to $233 million. The improvement reflected sales gains and synergies, partly offset by higher unit costs, investments to support new product launches, and higher commissions to support higher sales. The higher unit rates reflected higher seed costs and higher raw materials in Crop Protection as well as rising freight and warehousing expenses. We also recorded approximately $14 million in one-time benefits including a product line sale. Both periods had nearly $60 million in licensing and collaboration agreements. So turning to the operational highlights on slide 10. We've made meaningful progress against our five priorities to deliver shareholder value. In 2018, we delivered operating EBITDA of $2.7 billion, up 4% in a tough market. We raised the Ag division synergy targets and in the third and fourth quarters began to see proof points that we are recovering our share in the Brazil corn market from the remedy. In addition, we launched a strong set of new product launches in Crop Protection that are delivering top and bottom line growth. The highlight for the year clearly was receiving Chinese regulatory approval for two key traits, ENLIST E3 for soybeans and Qrome for corn. We are extremely excited about both approvals which have been in the queue for quite some time and are a great demonstration of the strength of our innovation capability. ENLIST E3, the most advanced wheat control trait technology for soybeans is the larger opportunity of the two. We expect that Enlist E3 commercial sales will begin in 2019, although the exact timing will vary by country. In the second half of 2019, we will continue to invest in the commercial sales effort. Robust ramp-up plans and extensive seed production will ensure that ENLIST E3 soybeans are broadly available to farmers in 2020. Qrome, on the other hand, already has been introduced on a limited basis in the Western Corn Belt, but likewise we'll be ramping up production in this year. In other words, we are actively laying the groundwork this year for a full commercial launch of ENLIST E3 and Qrome next year. We also have begun reaching out to our strategic business partners about out-licensing Qrome, ENLIST, and E3 in the future. In fact, we have already completed initial licensing agreements with several key players. Today we have provided guidance for the first half which incorporates the Northern Hemisphere selling season. Based on what we're hearing from our customers and due to our unique direct-to-farmer route-to-market, we've also estimated the split between the two quarters. First half sales are expected to decline by low single digits percent. Excluding currency, we expect first half sales to rise by low single digits. We expect currency to be a headwind for the half, led by the euro and the Brazilian real, compared to a tailwind from currency in a prior year period. Organic sales growth is expected to be driven by new product launches, partly offset by higher channel inventories and some reduction in first-year sales associated with implementing our multichannel multi-brand strategy, as we move customers to different products and brands. First half operating EBITDA is expected to be flat, as gains from organic sales and cost synergies are offset by higher unit costs. Higher unit costs are driven by new product launches, whose margins will improve as they reach economies of scale. Royalties and higher ingredient costs out of China, which we will lap mid-year in 2019. The first quarter is expected to see a sales decline in the low single digits percent. Excluding currency, we expect a sales increase of low single digits percent. We expect first-quarter sales to be negatively impacted by timing, including an early start to the safrinha season in the fourth quarter and delayed planting decisions pushing sales into the second quarter. From a planted area perspective, we expect to shift from soybeans to be neutral to our results. While some soybean acres are expected to shift to corn, much is expected to shift to cotton and wheat. First quarter operating EBITDA is projected to decline by the low single digits percent. EBITDA drivers are similar to the first half. In closing, we're excited about the progress we are making and look forward to giving you further updates on what to expect from us as we get closer to spin. I'll now turn it over to Lori to open the Q&A.

Thank you, Jim. 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. Rochelle please provide the Q&A instruction.

Yes. Good morning. Thank you. A question on Dow chemical, in polyethylene it seems like the industry had destocking occur in 4Q as oil prices came down. So where are converted inventories today and then on to provisional inventories. I guess the last number we saw from ACC was a 4.9 billion pounds of provisional inventory which was quite high. So, did the industry not slow down plans? And where do Dow's inventory stand? Thank you.

Hi, P.J. This is Jim. As the quarter progressed, we noticed a slowdown in oil prices towards the end of the year, and the last couple of weeks of December were quite calm in terms of export markets. This situation contributed to the increase in U.S. inventory numbers. We are beginning to see some changes in the first quarter, with pricing movements in January and February. We experienced growth in these months. The majority of new capacity came online in the latter half of 2018, and looking ahead to 2019, not much new capacity is expected. Therefore, I anticipate operating rates will improve by 200 to 300 basis points throughout the year. However, we need to restore some margins in this quarter. The increase in inventory at the end of the year was primarily driven by sentiment. After the Chinese New Year, I expect demand to rise, which will help rebuild volumes and margins. Our volume in Packaging and Specialty Plastics grew by 4%. At the DowDuPont level, we continued to see strong demand in China, with a 10% increase.

Thank you. Good morning, everyone. Jim could you expand a bit on the E3 soybean. What does broadly available mean? How many millions of acres are you targeting in 2020 and 2021? And what type of costs will be associated with the launch and presumably maintaining still selling the other secondary herbicide tolerant trait? And do you envision the potential ever to stack those 2 traits together? Thanks.

Thanks for the question, Vincent. We're really excited about those two approvals after a long wait. We are ramping up production for those traits this year. In 2019, the commercial launch will be quite limited based on our available quantities and materials. We anticipate having a few million units or acres of both ENLIST and Qrome from our previous work. As we move into 2020, we could see as much as 10% of our soybean lineup in North America utilizing Enlist, complemented by our other offerings. On the Crop Protection side, we have significant experience with the Enlist Duo combination. We are applying it on corn and cotton, and growers already have a good understanding of the treatment costs per acre. The demand is high, and we're eager to ramp this up as quickly as possible.

Thanks very much. I think that three months ago you thought that cash flow from operations in the fourth quarter would be about $7.5 billion. And I think it came in at roughly $5 billion. What was the difference between your expectation and what actually took place? And how did cash flows from operations look in the first quarter?

Yes, this is Howard. Good morning. Let me begin with the fourth quarter compared to the same quarter last year. Cash from operations for the quarter was $5.1 billion, which is an increase from $1.8 billion on a reported basis. However, with the change in AR securitization accounting taken into account, cash from operations in Q4 increased by $900 million, or over 20%. Regarding your point about the full-year figure, I want to clarify a few calculations. Merger-related costs totaled about $3 billion for the year. Pension contributions were also around $3 billion, with more than $2.2 billion of that being voluntary as we prepared the capital structures of the three companies. The surprising change compared to the third quarter was mainly in working capital, specifically inventory, which was about $1 billion higher in the fourth quarter. There were three equally balanced factors for this increase. First, organic growth in Ag sales, which Jim Collins mentioned, led to a strong performance in the fourth quarter compared to last year, contributing about a third of the increase. Secondly, we successfully passed the CRT at Sadara, as Jim Fitterling discussed, which resulted in a build-up of inventory. We exceeded our expectations in this regard, as we did not anticipate passing it on the first attempt. Lastly, there was some selective destocking mentioned by Ed in several chains. Overall, this accounted for a delta that was about $1.1 billion higher than expected.

Thank you. Good morning. Ed could you walk down the world from an activity standpoint in January and February. Is destocking completed? Where is it the worst in terms of slowdown? And specifically in China, were you expecting the New Year plant shutdowns to be the usual or maybe longer than expected given that tariff and trade uncertainty? Thank you.

Yes, thanks David. This is Ed. Let me give you a little color on it. The softness we saw as we move through the fourth quarter from a geography standpoint was mainly China, and secondarily, a little softening in Europe, the rest of the world kind of holding up exactly where it had been. And you break that down kind of by end market, we saw softness clearly in auto and we saw it in consumer electronics, but mostly on the smartphone side and a bit additional softening on U.S. residential, which didn't surprise us. Actually, not all three of those were overly surprising based on forecast and other companies' comments. So, that was where it was at. I would say a high portion of what we're seeing right now to your question is a destocking activity going on. It's hard to peg exactly when you flushed that through the system, but I would say it's probably going through the first quarter and somewhere into the second quarter, you kind of work your way through that and you get back to normalized level. So, as you look at the forecast by the way on the DuPont side that's kind of what we teed up a lighter first half of the year. Second half of the year about where we expect with deleverage to the bottom line on our growth rate. Very similar to what we said at the guidance at the November investor meeting, but a little bit more muted in that first quarter and into the second quarter based on the destocking. And maybe just one overall comment also. If you look at – all of the DuPont end markets, I would say when you break that down to percentage, about 75% of the portfolio did exactly what it did all year. And then, the soft areas I just mentioned were maybe 25% of the portfolio where we're seeing that destocking take place. And again, that will correct itself over the next few months.

Great. Thank you. It seems there are a few moving parts within specialty with certain end markets trending fairly well and others showing at least some degree of weakness. Can you just parse out the key growth trends specifically for Nutrition & Biosciences and maybe just head on anything on E&I and S&C. And just whether or not any near-term cautiousness would you characterize that as driven by China trade tariffs versus something else you're seeing in that end-market? Thank you.

Yeah, Chris. This is Marc. Let me take that one. I mean, high level N&B we're seeing strength in most of the segments. The food and beverage market continues to be solid for us. Probiotics obviously continues to be a star driving growth in Asia in general and that includes Asia specialty food ingredients, our systems offerings are continuing to gain position there. The area of weakness is more on the Industrial Biosciences side, and this is really connected to we think temporary factors including U.S. residential construction. We have a lot of sales in the Sorona product into the corporate market and that was impacted. And then the sort of dynamics in the oil and gas industry have an effect on our microbial control business and so those are the two areas that we're tracking and expecting to see some improvement. In terms of the other segments you mentioned, I mean, E&I is kind of a continuation of what we've been saying for the last couple of quarters, which is photovoltaics has continued to be a tough space. Although volumes are coming back, we're still suffering a lot of pricing pressure there. We are expecting that to improve through 2019. And semi continues to be a bright spot for us. Consumer electronics market was down in the fourth quarter as we mentioned from smartphones. But we're expecting again, a recovery in the second half of this year. And Safety & Construction you asked about, I just say, across the board a lot of strength in the end markets there and that's a really bright spot for us through 2019. U.S. residential construction is less than 20% of the Safety & Construction space. That's the only soft spot for us right now in S&C.

Yeah. Thanks for taking my question. Jim in MatCo, it seems like there's a lot of levers that you're looking to pull to try to shore up things. I guess, as we look through the year and you get a little bit past this destock phase. I mean, look the first quarter numbers looked pretty difficult. Can we get to a period where you're down high-single digits for the year in that business with all the levers that you're pulling? And maybe can you walk us through some of those levers that you do have at your disposal now?

Good morning, John. So, I'd say a couple of things. On the core business, we were down about $120 million in the quarter. The things that we're trying to do right now, obviously, pricing has stabilized, starting to improve on plastics and I'm seeing signs of that on PMDI as well. And so that will help us as we build through the quarter. Second quarter and third quarter typically the strongest demand quarters, so we'll build into that. So, we're going to have to see kind of a mirror image on the first half of the year to what happened in the backhand of 2018. But that's what we're driving towards. As I mentioned on the broadcast, we're off on CapEx so we finished the year at $2.5 billion of CapEx and I think we're going to stay at those kind of levels on CapEx, so that helps our cash. As we continue to separate out the three divisions, that's going to obviously help some of the cost burn and help us get the stranded cost out through the year as well. And then we're going to defer some spending. It won't be anything that will damage plant reliability. We'll still continue to do maintenance and those kinds of things, but we’ll defer some discretionary spending that we don't need to do right now into the latter half of the year or even into 2020, depending on how long the macro continues.

Hi, thanks, this is Ian on for Steve. Wanted to follow up on the outlook in material and in Dow and Corteva and appreciate you aren’t giving guidance for these segments today. I think some investors might be a little confused about the first half and one quarter outlook taking into account there should be significant synergies in both these businesses. So, any color you can provide on the bridge, how we should think about full-year EBITDA for those segments will be helpful. Thank you.

Yes, on Materials Science what I would say is we continue to see the businesses grow at about 1.5 times GDP, so that from a demand standpoint, I do not see a demand problem. Most of the pressures that we felt towards the end of the year were really oil price and spread compression pressures on top of the negative sentiment that was developing through the fourth quarter. And so obviously we're turning the corner on that right now and trying to rebuild that. And I think it'll take us through the first quarter and into the second quarter to get that built back. Having said that, the new capacity that's coming on in our industry this year is not all that much. Most of the new capacity, the biggest amount came on in 2018. So at these rates, it looks like operating rates are going to continue to increase throughout the year. And then obviously not trying to predict oil price, but oil price hit the low 50s in terms of dollars per barrel. So if we see any strengthening in the oil price that will be helpful throughout the year.

And Ian, this is Jim Collins for Corteva. It's really a similar situation for the first quarter and the first half with three core messages. You're right, we experienced good sales growth and synergies, but these are being countered by significant currency headwinds. You'll notice in the outlook that there will be over $300 million impact on our top line, primarily due to the Brazilian real, but we've also encountered increased euro exposure in the first half, along with some effects from Eastern European countries. Additionally, there is some timing involved; some revenue has shifted earlier into the safrinha season, which moved into the fourth quarter. Also, the market facilitation program payments from the USDA's collaboration with the Trump administration have provided some growers with cash at the end of the quarter, prompting them to make some purchases early. Consequently, we observed early North American volumes. The third offset is related to the cost of goods; we are seeing rising raw material costs from shipments from China due to their environmental reforms. Moreover, as we enhance the adoption of some new products, our royalty rates are increasing slightly. That outlines the situation for the first half. We're not focusing on the full year at this time, but we'll provide more details later. Generally, we expect to see an increase in EBITDA for the year, and we will discuss that further as the full year progresses.

Good morning, guys.

Good morning, Jonas.

One of the bright spots in last year was the pricing in transportation was up just quarter after quarter after quarter. But in your guidance for the year, you say or it looks like you expect overall pricing to be about flat, but – and you talked about transportation being offset by electronics. But electronics was only down about 1%. So, are you expecting the transportation price gains to seize, or how should we think about this?

Yeah. Hi, Jonas, this is Marc. I'll take that one. No. We're expecting to continue to see some pricing this year roll through in transportation and advanced polymers based on continued tightness in the nylon chain. And our performance continues to be strong there in terms of both finding new applications for high temperature and specialty nylons, and we expect the industry is going to continue to kind of operate at about the same levels as 2018. So I think we'll see some more pricing. We do have some price pressure in E&I that came through in the fourth quarter, associated with photovoltaics largely. And as you said, it doesn't offset the pricing gains in the other segments. And so net-net, there's some benefits there that will probably continue through 2019.

Thanks for taking my question, guys. Good morning. I just wanted to review my assessment of the guidance. It looks like on first blush the Q1 operating EBITDA maybe in the $4.5 billion to $5 billion range. I know it's difficult to guide explicitly. And then the full year looks like could be down a little bit. I guess, is that right? Or you're expecting year-on-year growth in both full year Q1 – or sorry, Q1 and full year EBITDA? Thanks.

Yeah. Arun, maybe we can talk it offline. We don't give an exact number. I would say when you look at the slide operating EBITDA we're guiding down low-teens percent, but it's really three different stories, right. It something that Jim Collins discussed around Corteva around stronger second quarter versus first quarter because of the seed shift with the commodity prices. Fitterling already covered the MatCo piece around building margin back. So the first quarter is probably going to look more like a mirror image of Q4 although with a little bit of the averaging effect, because we entered December at a low margin point of the quarter, so that's how we entered January, and we're rebuilding back. I mean Jim talked about the three and three polyethylene in January and February and then already some announcements out on isocyanates. And then I'll let either Ed or Marc talk about SpecCo if you want to give any more color on that?

Yes. I believe the SpecCo will experience the lightest first quarter, and we may see some ongoing destocking carry into the second quarter. However, we expect to see normal trends return in the second half of the year, leading to a growth rate in EBITDA and leverage as discussed at Investor Day, targeting at least 1.5 times on the leverage side. We will recover from this. Our conversations with channel partners indicate that destocking is indeed occurring, particularly with auto sales, which showed significant weakness. In China, auto builds decreased by 18% while car sales fell by 13%. This data suggests that destocking is underway, which is actually positive once we move past it.

Thank you everyone for joining our call. We appreciate your interest in DowDuPont. For your reference, a copy of our transcript should be posted on DowDuPont's website later today. This concludes our call.