E I Du Pont De Nemours and Co (DD) Q2 2013 Earnings Conference Call July 23, 2013 9:00 AM ET
Carl Lukach - Vice President of Investor Relations
Ellen J. Kullman - Chairman and Chief Executive Officer
Nicholas Fanandakis - Executive Vice President and Chief Financial Officer
Don Carson - Susquehanna Financial
Jeff Zekauskas - JPMorgan
Robert Koort – Goldman Sachs
Vincent Andrews – Morgan Stanley
David Begleiter - Deutsche Bank
Laurence Alexander - Jefferies
John Roberts - UBS
Mike Ritzenthaler – Piper Jaffray
John McNulty – Credit Suisse
P.J. Juvekar - Citi
Chris Nocella - RBC Capital Markets
Kevin McCarthy – Bank of America Merrill Lynch
Mark Connelly – CLSA
Frank Mitsch – Wells Fargo
Good morning. My name is John and I will be your conference operator today. At this time I would like to welcome everyone to the DuPont quarterly investor call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions) In the interest of time, management requests that you limit yourself to one question and one follow-up question. And please pick up your handset to allow optimal sound quality. If you have additional questions, you may re-enter the queue.
Thank you. It is now my pleasure to turn the floor over to your host, Carl Lukach, Vice President of Investor Relations. Carl, you may begin the conference.
Thank you. Good morning everyone and welcome. Thank you for joining us to cover DuPont's second quarter 2013 performance and our announcements this morning of important senior leadership changes and that we are exploring strategic alternatives for our performance chemicals segment. With me are Ellen Kullman, Chair and CEO; and Nick Fanandakis, Executive Vice President and CFO.
The slides for today's presentations can be found on our website along with our news releases. Please note that we also posted a new document on our website this morning containing our second quarter’s segment performance and outlook commentary and slides. We normally present this information on the call, but by posting this document on our web we can use that time to review our other announcements and take your questions.
During the course of this conference call we will make forward-looking statements. I direct you to slide two for our disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although, they reflect our current expectations, these statements are not guarantees of future performance but involve a number of risks and assumptions. We urge you to review DuPont's SEC filings for a discussion of some of the factors that could cause actual results to differ materially. We will also refer to non-GAAP measures and request that you review the reconciliations to GAAP statements provided in our earnings release and on the website.
For today's agenda, Ellen will start with opening comments then Nick will review the second quarter financial performance and near term outlook. Ellen would then provide comments about the two additional steps DuPont announced today as we transform to a high growth, higher value company. Then we will have ample time for your questions. With that introduction it's now my pleasure to turn the call over to Ellen.
Great. Thank you, Carl, and good morning and thank you all for joining us. I am pleased to begin today by sharing highlights about how DuPont performed in the second quarter. DuPont reported $1.9 billion in segment operating earnings or $1.28 per share on revenues of $9.8 billion. The quarter came out largely as we expected three months ago except for the added impact that cold, wet weather in the U.S. and Europe had on some of our businesses. In agriculture, the second quarter marked the end to the Northern Hemisphere planting season which spans the first half of our calendar year and our Ag businesses posted industry leading results in seed and crop protection products.
While the weather caused us to incur more costs to service our customers this season and tempered our earnings growth a bit, our leading products in both of our Ag businesses performed at the top of their industries. We saw continued rapid adoption by farmers of our newest AcreMax and AQUAmax seed corn products. And we know see sales of Rynaxypyr insecticide approaching $900 million for the full year. And we are excited about what we see coming later this year in the Latin America growing season.
The second quarter also marked a turning point for our titanium dioxide business. While we incurred a $330 million or $0.27 per share year on year decline in the second quarter operating profit from peak levels last year, our business is rebounding in terms of sequential sales volumes and earnings. Our TiO2 sales volumes in the second quarter increased 12% over last year and 18% over the first quarter. And the increase was spread across all regions. We believe the industry inventory correction that began last year is now mostly over.
Turning now to new products, in the second quarter our DuPont community of scientists and product engineers introduced 465 new products or product applications, bringing the year-to-date total to just over 1000. These new products and applications form a healthy balance of new and replacement products and continued to represent the richness and diversity of our scientific capability. Markets benefiting from our innovative new products in the second quarter include animal nutrition, aerospace and automotive, textile and paper, filaments for cosmetics and new products for photovoltaic with improved environmental sustainability. Examples include the first thermoplastic automotive jounce bumper made from a modified grade of Hytrel, Nomex XF for lightweight fire resistant containers that reduce the risk of onboard fires in air cargo shipments and Axtra bacterial phytase enzymes for superior technical performance and economic benefit in animal nutrition.
With regard to business conditions in the markets we serve, we did see while modest, some signs in the second quarter of sequential demand improvement in industrial markets. Volumes in our performance chemicals, performance materials, safety and protection and electronics and communications segments were up 8% sequentially from the first quarter and 5% when seasonally adjusted, reflecting some improvement in demand from global automotive markets, US housing, military and general industrial markets.
Regionally, our best growth this quarter occurred in developing markets of Europe and Latin America, led by our agriculture businesses and in Avian across all of our business segments. In North America, our safety and protection and performance materials in agriculture segment benefited from the recovery in US housing, low cost ethane feed stocks and a strong Ag environment. In Europe, we continue to see slow growth environment, particularly in the automotive segment. However, sales in our agriculture and industrial biosciences segments were solid and volume in developing Europe was up 10%. Across Asia, we see strong demand for our agriculture products.
In developing Asia, while sales were down 5% in the second quarter, volumes were up 2% and included the steep decline in photovoltaic volumes versus the last year. Second quarter sales in China, excluding photovoltaics increased 4% due to the strong growth in packaging and automotive demand, coupled with improving demand for titanium dioxide. While macroeconomic uncertainty continues and demand levels are far from robust, we continue to expect gradual sequential improvement in the rate of growth and industrial production for markets that demand our products.
Nick will now explain in more detail our second quarter financial performance and our outlook for the rest of the year. Nick?
Thank you, Ellen. Good morning everyone. Let’s start with the details of the quarter on Slide 3, in line with the updated guidance we provided last month, operating earnings of $1.28 per share were down $0.22 versus $1.50 in the prior year. The decline primarily reflects lower performance chemicals operating earnings of about $0.27 per share, largely due to the decline in global TiO2 prices. Consolidated net sales of $9.8 billion decreased 1% versus the prior year. Volume increased 1% led by performance chemicals and safety and protection segments, which had volume growth of 6% and 5% respectively.
On a sequential basis, excluding agriculture and adjusting for seasonality, volumes were up 5% with increases in all regions of the world. We expect this momentum to continue as we head into the second half of the year, particularly in PV, automotive and construction markets. Local selling prices declined 1% primarily due to declining TiO2 prices, which were partially offset by value driven pricing in our agriculture and nutrition and health segments.
Currency also had a negative 1% impact on our top line as the dollar strengthened against most currencies, particularly the Japanese Yen. Let's turn to slide four for more information regarding the company's sales by geographic region. U.S. and Canada local selling prices increased 2% primarily due to value driven pricing in our agricultural segment. The 1% volume decrease in the region was primarily due to the effect of the cool, wet weather had on our Ag sales. However, for the first half of the year, local selling prices were up 3% and volume grew 1% in U.S. and Canada where demand for our Ag products drove this growth.
In fact our Ag sales grew 11% in this region in the first half. In Asia Pacific, higher volume in our TiO2 and Ag businesses was offset by lower volume in our electronics and communications businesses. The 6% decline in local selling prices we experienced in the region in the second quarter was primarily due to lower TiO2 prices as well as pass-through pricing in electronics and communications based on lower metal prices. In Europe, volume growth was primarily due to higher demand for TiO2 and Ag products. However, lower local selling prices were the result of lower TiO2 prices which more than offset Ag pricing gains.
This quarter, Latin America was our highest growth region. Up 7% versus last year. There we saw a 12% higher volume reflecting strong Ag sales which was partially offset by 4% lower local selling prices reflecting lower TiO2 pricing. Now let's take a deeper look into the operating earnings for the second quarter. Slide five provides a segment operating earnings variance analysis. From this chart you can see clearly the large impact the performance chemicals segment had on our overall earnings compared to last year. You can also see the negative impact that the unseasonably cool, wet weather had on our nutrition and health and Ag segments.
Additionally, nutrition and health operating earnings were impacted from higher (inaudible) inventory prices, lower enablers product line volume, onetime cost associated with harmonizing systems and processes and growth investments in this sector. As you all know, the quarter largely represents the completion of the northern hemisphere planting season which spans the first half of our fiscal year. Our Ag segment had another tremendous first half with operating earnings growing about $175 million or 8%. These results reflect strong corn seed insecticide and fungicide sales in North America and Latin America. We expect this momentum to continue into the second half and for the full year we are anticipating our Ag segment to achieve double-digit earnings growth.
Our remaining businesses generally were impacted by sluggish demand in industrial markets during the second quarter on a year over year basis. However, as expected, volumes improved sequentially for many of these businesses in the second quarter versus the first.
On a seasonally adjusted basis, our electronics and communication volumes sequentially increased in the second quarter by 10% on fire PV installations in China. Safety and protection volumes sequentially grew more than 5%, benefiting from higher US demand in ballistics military protection and construction markets. Additionally, performance materials volume sequentially increased on higher demand in automotive and agricultural markets. We anticipate the demand in these markets to continue to improve as we move into the second half of this year.
Moving to slide 6, you can see the decline in segment operating earnings resulted in a $0.31 per share negative impact on our consolidated results. The $0.31 includes a negative $0.03 currency impact for the second quarter. At current exchange rates, we expect the third quarter currency impact also to be negative by about $0.02 per share and for the full year, we are now expecting a negative $0.12 to $0.14 currency impact. This is much higher than our previous outlook of negative $0.05 because the dollar has strengthened considerably during the year. As a result, we anticipate a $0.05 to $0.07 currency headwind in the second half of this year.
The two set benefit from lower corporate expenses that you see on slide 6 reflects this quarter's savings from our 2012 restructuring program. We are on plan to deliver the $300 million in savings that we targeted for 2013. Beyond our restructuring program, we continue to execute ongoing cost productivity initiatives throughout all of our businesses. We are well on our way to delivering our commitment of more than $300 million for the full year from these initiatives. In total, both of these initiatives will combine significantly -- contribute significantly to offsetting inflation and helping to fund our growth investments.
Now let's turn to the balance sheet in cash on slide 7. On a year-to-date basis, the $1.6 billion increase in the seasonal outflow versus last year was due to lower cash earnings and higher Ag working capital, partially offset by lower pension contributions. The higher Ag working capital was primarily due to the timing of customers and production grower compensation payments which were larger this year due to higher commodity prices. In the second quarter, we completed the $1 billion share repurchase program using a portion of the Performance Coatings divestiture proceeds. We are using the remainder of the Performance Coatings proceeds to strengthen our balance sheet and this is the primary reason our net debt decreased by $4.2 billion versus this time last year. This gives us the flexibility to execute against potentially compelling growth opportunities. Additionally, in April our Board declared a 5% increase to the quarterly dividend and just last month we paid our 435th consecutive quarterly dividend.
In summary, second quarter results were in line with our expectations with lower TiO2 prices being the primary costs for the earnings decrease on a year-over-year basis. These results also reflect strong Ag sales for the quarter and for the first half. Last, as we expected, volumes were up 5% sequentially on a seasonally adjusted basis with increases in all regions of the world, including improving TiO2 volumes.
Let's now look forward to the second half. Today, we reaffirmed our full year outlook of about $3.85 per share. As such, we expect operating earnings to be about $1 per share in the second half or about 60% increase over the prior year. The second half outlook includes the additional currency headwind of $0.05 to $0.07. On a seasonally adjusted basis, we expect the sequential volume growth that we saw in the second quarter to carry into the second half of the year, particularly in PV, automotive, military protection, construction and other industrial end use markets. Additionally, we anticipate volume growth in a year-over-year basis to improve, albeit often easier comp. One item that I would like to highlight for you is that we expect the second half earnings to be about 40:60 split between the third and fourth quarters. The reason for the split is largely due to the quarterly split in our Ag segment as well as the sequential improvement in demand we expect for our industrial products which I just discussed.
For the second half overall, we anticipate a smaller seasonal loss in our Ag segment with low to mid-teens sales growth offsetting the negative impact of currency and continued strategic growth investments. However, in the third quarter we anticipate a substantially larger seasonal loss as sales growth will be tempered by reduced corn hectares in Brazil summer season, higher input costs growth investments. On the flip side, we expect earnings to turn positive in the fourth quarter on strong growth in Brazil safrinha corn sales, a strong start to the 2014 North American season and lower input cost from this year's summer production.
In closing, our current market environment is a dynamic one. All of our businesses are staying close to their customers to adapt the changing demand signals and continue to serve their needs. Additionally, our businesses are taking actions to drive productivity in a variety of ways including reducing expenditures and tightly managing their cash. We are also shifting resources as new opportunities are identified. DuPont's leadership remains confident in our business plans and or ability to execute against those plans. With that let me turn it back over to Ellen.
Great. Thank you, Nick. In summary, our second quarter results were largely as we expected with strong Ag performance offset by the cyclical decline in performance chemicals. Looking forward, with the titanium dioxide market recovering, we end anticipating a gradual improvement in demand from industrial markets combined with a strong second half in agriculture in the southern hemisphere. We expect second half operating earnings to be about 60% greater than last year.
Turning to slide eight. Let me share with you now the next steps in the transformation of the DuPont to a higher growth, higher value company. Our alignment of senior leadership responsibility and our exploration of strategic alternatives for our performance chemicals segment. Both steps are fully aligned with our strategic plan to increase the value of DuPont. You will remember that we made important portfolio enhancements in the last two years as part of our plan. These include the $7 billion acquisition of Danisco and our $5 billion sales of performance coatings. Also, we redesigned our cost structure in a way that deliver $2 billion in cumulative savings over the past four years.
On slide nine, a key component of our plan is integrated science. That is our ability to integrate and deploy our advanced scientific capability in biology, chemistry and material, in ways that create innovative solutions for customers, competitive advantage and growth for our company, and value for our shareholders. DuPont has an unmatched set of strong capabilities in foundational science. But an additional differentiator is our unique ability to work beyond the boundaries of a single discipline and find novel, innovative solutions at the intersection. Receiving nearly 1000 patents a year demonstrates my point.
While we have capable competitor in individual scientific disciplines, DuPont's breadth of science is uniquely relevant to where customer demand is heading now in many markets. Simply stated, we are advantaged like no other company to deliver value to our customers and shareholders. On slide ten, the question then becomes, where should we prioritize to deploy our integrated science strategy. We have chosen to leverage our science across three related attractive spaces. These are Ag and nutrition, bio-based industrial and advanced materials. Each of these offers up the opportunity to continue to build a high margin, higher growth company.
With our global scale, market access, broad customer base, and scientific capability, DuPont is uniquely positioned to bring a steady flow of innovative new products to these markets ahead of competition. The application development capability and market access of our advanced material businesses, along with the value-chain relationship and feed stock knowledge of our Ag and Nutrition and Health businesses, offer advantages for DuPont that no other company has. This is where we pull together the true power of our unique integrated science offering across all our businesses.
At our Investor Day on May 2nd, I outlined three strategic priorities we're pursuing at DuPont. First, to extend our leadership in the high value, science-driven segments of the agriculture to food value chain and to leverage the linkages across these segments. Second, to strengthen and grow our leading position as a provider of differentiated, high value, advanced materials through science based solutions. And third to build on our leading position in industrial biotechnology where we can create transformational bio-based businesses in areas like biofuel and biomaterials. Disciplined execution against these three priorities will transform DuPont to a higher growth, higher value company as we address the world population driven challenges of food, fuel and protection of people and the environment.
The two steps we announced this morning emanate from these priorities. The realignment of senior management responsibilities will accelerate deployment of our integrated science strategy across a wide range of materials markets today. We’re elevating Jim Collins who is currently President of our Industrial Biosciences business, by adding to his current Industrial Biosciences responsibilities, our performance polymers business and our packaging and industrial polymers business. Under Jim's leadership, Industrial Bioscience has already forged important and expanding scientific and operational synergies with our Agriculture and Nutrition & Health businesses. Now, I'm challenging Jim to accelerate the integration of our leading industrial biopolymers technology across all of our advanced materials businesses. This will be a highly visible integrated science at work.
For example in polymers, our renewable polymer portfolio delivers about $100 million in revenue today. And that number will continue to grow steadily in the future. Of our $4 billion portfolio of engineered polymers, half of that could be renewably sourced in coming years. Integrating renewable technology technologies into our existing polymer products and market positions presents a tremendous competitively advantaged growth opportunity for us and one that we want to invest in and accelerate. It also exemplifies the potential of the new DuPont to deliver what our markets are increasingly demanding.
Next, we're pleased to have Matt Trerotola rejoin DuPont as Senior Vice President with responsibility for our Protection Technologies, building innovation and sustainable solutions businesses. Matt will accelerate our growth plans for some of DuPont's strongest branded products like Tyvek, Nomex and Kevlar and will be accelerating the introduction of new technologies and looking for ways to leverage our science capabilities across other DuPont businesses. Matt’s priorities will be to accelerate our growth plans and intensify our focus and discipline in a way that delivers result that meet or exceed the revenue growth and margin target we shared with you eight weeks ago at Investor Day.
Let me share with you now insight into our decision to explore strategic alternatives for our Performance Chemical segment. This segment includes DuPont’s titanium technologies and DuPont chemicals and Fluoroproducts. 2012 revenues from the segment were $7.2 billion and [Ti02] was $1.8 billion. These businesses have strong market positions, differentiated products and technologies, attractive global customer basis and they generate high cash flow. They are however the most cyclical and sometimes volatile businesses in DuPont's portfolio.
As I explained at our investor day in May, we’ve been actively studying this dichotomy for some time now and recently concluded that we should take the formal step of announcing the process of exploring alternatives. By being transparent in our thinking, will enable us to engage with participants in these industries and value chains and explore options. Two primary considerations govern our decision to explore strategic alternatives. First, we have limited ability to create new growth opportunities with these businesses by integrating our science across their markets, customers and products. Second, the attractive financial strength and cash generating capability of these businesses must be continuously weighed against their higher volatility, cyclicality, and lower growth profile as is clearly visible this year. By exploring strategic alternatives, we can determine what options will best drive future opportunities for these businesses and potentially enable our shareholders to realize higher value from these businesses.
Because of the scale of this segment and the amount of internal and external work that must go through in this analysis, we're deploying what's best to make our process public. We're evaluating a number of alternatives to generate more. We have not reached a decision yet and have work to do but we will not prolong the process. I want to emphasize that these are strong, healthy businesses and our decision on whether or not to proceed will be guided solely by what presents the greatest value creation now and in the future for our shareholders, consistent with our mission to increase the value of DuPont.
These announcements are another important step forward in the transformation of DuPont, especially in the context of our long history in these businesses. But DuPont has always embraced change. As a science company driven by innovation, we're always looking around the next corner. We have consistently demonstrated that we're committed to the disciplined execution of our strategy and we will continue to manage the business actively as we transform DuPont into a higher growth, higher value company for our shareholders.
So Carl, I'll now turn it back to you.
Okay, thanks, Ellen. John, we're ready to go to questions from our callers.
Earnings Call Part 2:
- Basic Materials Industry