Carl Lukach - VP, IR Ellen Kullman - Chairman and CEO Nick Fanandakis - EVP and CFO Jim Borel - EVP, Agriculture and Nutrition.
John Roberts - UBS Vincent Andrews - Morgan Stanley Don Carson - Susquehanna Financial Kevin McCarthy - Bank of America Bob Koort - Goldman Sachs P.J. Juvekar - Citigroup David Begleiter - Deutsche Bank Jeff Zekauskas - JPMorgan John McNulty - Credit Suisse Frank Mitch - Wells Fargo Securities.
Welcome to the DuPont Conference Call. My name is John and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Carl Lukach, Vice President of Investor Relations.
Carl, you may begin..
Good morning everyone and welcome. Thank you for joining us to cover DuPont’s Second Quarter 2014 Performance Conference Call. Joining me are Ellen Kullman, Chair and CEO; Nick Fanandakis, Executive Vice President and CFO and Jim Borel, Executive Vice President, responsible for our Agriculture and Nutrition and Health segments.
The slides for today’s presentation and corresponding segment commentary can be found on our Web site along with our news release. During the course of this conference call, we will make forward-looking statements and I direct you to Slide 2 for our disclaimers.
All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions.
We urge you to review DuPont’s SEC filings for a discussion of some of the factors that could cause actual results to differ materially. We will also refer to non-GAAP measures and request that you review the reconciliations to GAAP statements provided with our earnings news release and today’s slides posted on our Web site.
For today’s agenda, Nick will review our second quarter financial performance and 2014 outlook. I will provide a brief business segment highlights and Jim will provide insights into agriculture markets. We will conclude with Ellen’s comments followed by your questions. With that introduction, it’s now my pleasure to turn the call over to Nick.
Nick?.
Thank you, Carl. Turning now to Slide 3, we have the highlights for our second quarter. The quarter played out about as we expected in our June 26 preannouncement with operating earnings per share of $1.17, 9% lower than the prior year. Let’s turn now to Slide 4. I’ll cover the results for our reporting segments.
We entered the second quarter with solid momentum in our industrial facing business and delivered strong earnings growth in many segments. We did however experience lower operating earnings in our agricultural segment primarily due to lower volume in corn seeds. Jim will talk about this in greater detail in a few minutes.
We delivered exceptional quarterly results in our nutrition and health, safety and protection and industrial bioscience segments. Volume gains and margin improvement across these businesses delivered substantial operating earnings improvements and each of these segments improved their operating earnings margins 300 to 400 basis points in the quarter.
In our performance materials segment sales were up in our performance polymers business reflecting strength in auto markets. However this did not overcome the expected lower revenues in packing and industrial polymers due primarily to the planned made and shutdown at our Orange Texas ethylene unit.
This six year turnaround went mostly as planned and the unit is now operating at capacity. The duration of the scheduled outage was 58 days nearly two-thirds of the quarter. In performance chemicals lower prices for refrigerants resulted in lower segment operating earnings in the quarter.
And in agriculture the earnings were lower due to lower corn seed volumes impacted by shifts in plantings area and higher seed inventory right downs versus the prior year. Year-on-year variance in currency rates had a negligible impact in our segment results for this quarter.
We therefore are revising our previous estimate of $0.08 per share headwind for the year to about $0.04. Turning now to Slide 5, from a regional perspective developing Asia volumes were up 8% led by China where most businesses realized volume improvements during the quarter. The volume increases were partially offset by currency and price.
Developed EMEA benefited from solid demand in autos, construction and the favorable currency. Sales declines in the U.S. and Canada and developing EMEA were driven by the lower ag results. Additionally, the Orange Texas ethylene shutdown for performance materials negatively impacted sales in the U.S. and Canada as expected.
Sales in Latin America declined reflecting weaker industrial production compared to the prior year. Turning now to Slide 6, I will cover some additional variances in our operating earnings per share. You see that the largest variance on this slide is from exchange gains and losses or EG&L attributable to our currency hedging program.
Through this program we aim to protect the U.S. dollar value of our net monitory assets around the world from the effects of short-term swings in currency rates. Normally the program costs us about $0.03 per share per quarter.
In the second quarter of 2014 however we experienced increased currency rate volatility and higher cost principally in emerging markets. In addition, we had currency devaluation in the Ukraine which along with the cost of the program drove our actual net result to a $54 million loss.
By comparison, in the second quarter of last year we had several favorable currency settlements and other adjustments that resulted in an EG&L net gain of $19 million. Year-over-year we swung from a $19 million net gain to a $54 million net loss hence the $0.08 negative variance you see on the slide.
Turning to Slide 7, our free cash flow for the first half of 2014 compared to 2013 has improved by about $600 million. This is due primarily to the absence of tax payments related to the sale of performance coatings which occurred in the first half of 2013. Consistent with prior years we anticipate strong seasonal cash flow in the fourth quarter.
Net debt at June 30th reflects our normal seasonal flow and is up slightly from the prior year. As we indicated in April we started an ASR program in the first quarter and completed it in the second quarter, coupled with open market share purchases we have retired nearly 17 million shares in total this year.
As of June 30th we are more than half way towards our commitment to repurchase $2 billion in shares during 2014 and we intend to complete the remainder in the second half of the year. As we’ve said share repurchases are one way to return value to our shareholders and we use them to complement our strong dividends.
As we noted in our release this morning our Board authorized a $0.02 or 4% increase in our quarterly dividend to be paid to common shareholders of record on August 15, 2014 in September of 2014. As a result the third quarter dividend will be $0.47 per share. This is the third dividend increase in 27 months.
In total we have returned nearly $12 billion to our shareholders since 2009 in the form of dividends and share repurchases. Moving now to Slide 8, I will just reiterate that our redesign initiatives are underway and we will begin to deliver benefits this year, Ellen will go into more details on these initiatives.
Additionally as we said in late June we’re still on-track for our performance chemical separation in mid-2015 and our plan to moving ahead there. We currently expect to file SEC Form-10 in December of this year. Today we’re reaffirming our updated full year operating earnings per share outlook of $4 to $4.10 per share.
We anticipate a strong second half based on continued growth in global industrial demand resulting in operating earnings per share of $1.25 to $1.35 while the seasonal cut offs in our ag business are sometimes difficult to size between the third and fourth quarter.
We currently anticipate about 40% of our second half earnings will incur in the third quarter. On that note let me turn it over Carl.
Carl?.
I’d now like to provide some brief segment insights. As a reminder our slides with complete segment commentary are posted on the investor center Web site under Events & Presentations along with the other materials for today’s call.
Nutrition and health on Slide 9 recorded a strong second quarter building on momentum established in the third quarter of 2013. Sales were 7% higher primarily due to broad-based volume growth aided by improved product mix. We saw a strong recovery in enablers and sustained momentum for probiotics and cultures.
Volumes grew in all regions and we continue to grow in emerging markets. Operating earnings of 105 million, increased 72% from higher sales, lower raw material costs, productivity gains and the absence of one-time costs in the prior year. Operating margins for the quarter improved by over 400 basis points.
This was the fourth consecutive quarter of year-over-year operating margin improvement. In the third quarter, we expect modest sales growth with continued broad-based volume gains. Operating earnings are expected to be significantly higher due to increased sales, mix enrichment and continuing productivity actions.
We will continue to make strategic investments in research, application development and customer facing resources to drive future growth. Operating margins are expected to continue the trend of year-over-year improvement. In industrial biosciences on Slide 10 we continue to deliver strong results.
Operating earnings of 59 million were up 37% primarily driven by mix enrichment, improved margins associated with new products and volumes in biorefineries and bioactives. Favorable ethanol industry fundamentals are driving increased enzyme demand as ethanol margins are attractive and production is near capacity.
Enzyme volumes in the graying ethanol market are also being driven by the rollout of DuPont’s total performance system TPS, using novel enzymes and other functional bio-products designed to increase custom earnings through increased production rates, yield and efficiency.
Since introduction in late 2013 TPS has been adopted across a diverse set of ethanol production plants and further adoptions of our plant. We are implementing TPS as our standard offering for the industry with next-generation versions already in preparation for launch.
Bioactive sales in the quarter were also higher on strong demand for Axtra PHY in animal nutrition markets and strong enzyme demand. For the third quarter, we expect modest sales growth aided by continued enzyme demand for ethanol production and stronger sales of Sorona polymer.
Third quarter operating earnings are expected to be up substantially driven primarily by higher volumes and improved margins. For the first half segment operating earnings were up 37% and operating margins were up 440 basis points from the prior year.
When we created the nutrition and health and industrial biosciences segments through the Danisco acquisition we envisioned future top-line growth coupled with cost productivity and we are delivering.
The research and development and capital investments we made following the acquisition in key enzyme spaces and in probiotics capacity are yielding dividends now and we have additional growth runway in front of us.
In safety and protection on Slide 11 sales were up 1% on higher volumes in industrial markets improved Nomex and Kevlar demand was partially offset by lower revenues from Clean Technologies offerings as fewer sulfuric acid recovery plants were built.
Kevlar demand growth was driven by increased sales into law enforcement, transportation and wire and cable sectors while Nomex demand improved in energy solutions and thermal industrial applications. Regionally sales volume growth was most notable in Europe and Asia Pacific partially offset by lower prices.
Second quarter operating earnings increased 22% and operating earnings margins increased over 300 basis points. Segment operating earnings are benefiting from improved margins, increased demand from industrial markets and continued benefits from cost productivity initiatives coupled with improved plant operating results.
For the third quarter, we anticipate segment operating earnings will be up about 20% driven by higher margins and sustained operational productivity. In electronics and compunctions on slide 12, sales were essentially flat excluding the impact of lower metal price pass through.
Volume growth in most product lines led by gains in consumer electronics was offset by lower price due to metals, product mix and competitive pressures. Operating earnings declined 6 million as volume growth and productivity gains were more than offset by the absence of $20 million of OLED licensing income realized during the second quarter of 2013.
Excluding the impact of last year’s licensing income operating earnings increased 19%. Looking ahead to the third quarter, we continue to expect global photovoltaic module installations to be up for the year with mid-teen growth rates.
We expect a strong second half in photovoltaics driven by installations in China and good demand for our products in consumer electronics markets. Third quarter sales are expected to be slightly higher with operating earnings slightly lower due to a decrease in other income. In performance materials on Slide 13 we had another solid quarter.
Volume for engineering polymers grew 6% fueled by strong automotive demand in China, Europe and North America. Sales of our high performance engineered parts were up 10% due to improved demand in electronics, oil and gas and aerospace, and in consumer, construction, and food packaging markets our specialty resins volumes were stable.
As expected sales and earnings were below last year due to our scheduled ethylene outage and the sale of GLS/Vinyls, but the fundamentals driving our sustained business results remained intact. Operationally, we are well positioned for a strong second half following the successful restart of our ethylene unit.
In the third quarter, we anticipate sales revenue will be essentially flat versus the prior year as continued volume growth in performance polymers is offset by the impact of portfolio changes.
Despite a prior year $30 million benefit from a joint venture, we expect operating earnings will still be up modestly due to improved demand and strong execution. In performance chemicals on Slide 14, segment sales were down 8% due to a portfolio change and lower prices.
Slightly higher Ti02 volumes were more than offset by lower volumes in Chemicals and Fluoroproducts. Second quarter refrigerant prices for mobile and stationary applications were lower than expected and Ti02 prices were flat sequentially, but down about 3% on a year-over-year basis.
In refrigerants, demand for Opteon YF our new low GWP refrigerant for mobile air conditioning continues to grow. In 2014, we anticipate sales will double to reach approximately $100 million as automotive OEMs increase their rate of adoption of this new product.
In Ti02, volumes were up slightly from the prior year, marking six consecutive quarters of year-over-year volume growth. We believe our customer inventories are normal and producer levels remain essentially unchanged. For the third quarter, we expect performance chemicals’ operating earnings will be up moderately on improved volumes and margins.
In Agriculture on Slide 15, second quarter results finished in-line with the update we provided in late June. Supply-driven impacts on commodity prices led to reductions in corn planted area in the North America and Brazil Safrinha seasons.
Second quarter sales were essentially flat as higher seed prices and higher insecticide and soybean seed volumes were offset by lower corn seed and herbicide volumes. Operating earnings for the quarter were 11% lower as higher seed prices and lower seed input costs were more than offset by lower overall volumes and higher seed inventory write-downs.
As we turn to the second half, we expect sales to be modestly higher with operating earnings substantially higher for the Agriculture segment. Rynaxypyr is expected to continue to drive growth in insect control aided by new launches of Cyazypyr and Lumigen seed treatments, including Dermacor for use on soybeans in Brazil.
In seeds, we expect lower corn sales in Brazil’s summer season as growers continue to shift hectares from corn to soybeans. Corn seed price in Brazil is expected to be modestly lower reflecting the impact of fall armyworm resistance to the Herculex 1 trait.
Herculex combined with leading Pioneer germplasm continues to offer control of a broad spectrum of pests. We also expect early seed shipments for the 2015 Brazil Safrinha and northern hemisphere seasons to be similar to the prior year.
While the cutoff between third quarter and fourth quarter sales comes at an important time in the Latin America season, we expect the third quarter to result in a similar loss to last year followed by a stronger fourth quarter.
In addition, the third quarter comparison will be impacted by the absence of a $26 million equity re-measurement gain from the acquisition of Pannar which was recorded in the prior year. That concludes our segment commentary. Now, I will turn the call over to Jim who will add additional perspective on Agriculture.
Jim?.
Thanks, Carl. This morning I would like to provide some perspective on the environment we’re currently seeing in Agriculture and our expectations for the future. We understand the importance of timely communication with investors and continue to improve our forecasting as we navigate today’s dynamic agricultural markets.
Today, agriculture globally is in a period of transition following recent supply driven peaks and crop commodity prices and planted area following the droughts of 2011 and 2012. As stocks have begun to rebuild, we have seen prices decline for key commodities like corn, soybeans, and wheat.
On the demand side, we see encouraging signs as ethanol and livestock demand are recovering after declines driven by high feedstock cost. Our total planted area in the U.S. and globally remained near historical peaks. We are currently experiencing a shift in crop choice form corn to soybeans.
This shift began last summer in Latin America and continued through Brazil’s second season and this spring’s planting season in the Northern Hemisphere as global corn supplies have been rebuilt more quickly than in soybeans. And we expect this bias towards soybeans to continue in Latin America this summer.
At the same time we're transitioning our soybean seed product line in North America over the next few years as we introduce new T Series genetics and varieties containing the Roundup Ready 2 trait and we are building an emerging soybean business in Brazil.
This contributed to lower seed sales in our agriculture segment in 2014 as additional soybean volumes did not fully reflect the shift in acres. While the robust environment the past few years has been supportive of our growth our seed and crop protection businesses have also executed well.
From 2008 to 2013 we grew sales in our agriculture segment 12% on average per year well above our long-term trend line growth target and higher than the competition. During that timeframe we grew North America corn share by about 7 points and soybean share by about 10 points.
Launched several innovative new technologies including Rynaxypyr, AQUAmax and AcreMax and grew in key growth markets including Brazil, Eastern Europe, India and China. We improved operating margins by about 600 basis points while making investments in R&D, supply chain and our go-to-market strategy. And we continue to sharpen our investment focus.
These past and future investments position us well for continued growth. Despite the normal year-to-year abs and flows in grain ending stocks planted area and local product performance.
Our ability to continue to innovate will be the force that drives our growth over the long-term, our pipeline in agriculture it as strong as I’ve seen it in my 36 years at DuPont.
We have continued our growth in crop protection in the first half of this year and have additional run way for Rynaxypyr, Cyazypyr, Penthiopyrad and Picoxystrobin across a broad range of crops and markets. And we are extending the application of these technologies with Lumigen seed treatments.
In the second quarter, we recorded our first sales of Dermacor bringing growers in Brazil an important new seed treatment tool to manage resistance and control insects in soybeans.
In corn seed we are expanding our current AQUAmax and insect control offerings in North America and expect to launch DP4114 within the next few years pending regulatory approvals. I’m also pleased with the progress we’re making in decision services, our newest service Encirca yield nitrogen management is now available to growers across the U.S.
expanding on a successful pilot program. In 2015 we expect to launch Optimum Leptra and introductory volumes in Brazil pending regulatory approvals. Leptra will offer three modes of action to help farmers manage a broad spectrum of insects. And we continue to develop in advance new high yielding genetics around the world.
As we make the product transition in soybeans the pioneer brand remains the leading soybean brand in North America I’m pleased by what I see in customer deals this summer and in our pipeline with T Series genetics and new varieties with the Roundup Ready 2 Yield trait.
As we begin to look forward to the 2015 and 2016 seasons we’re keeping a close eye on agricultural markets, the USDA estimate corn yield will be a new record and as we near the end of the key pollination period for corn the crop overall is in good health.
Another strong harvest in North America if realized will continue pressure overall economics for corn and soybean farmers. We’re closely watching the development of the corn and soybean crops and the impact on commodity prices planted area, cropping intentions and grower sentiment.
If the current supply dynamics persist and corn planted area remains under pressure it will temper short-term growth rates for the agricultural segment particularly in our seed business.
However I’m confident the fundamentals for a long-term sustainable demand growth remained intact, influenced by trends in population, rising incomes and desire for improved diet.
We remain committed to continued investment in agriculture and also confident in the competitiveness of our seed and crop protection businesses and in our ability to achieve our long-term sales growth and operating margin targets in agriculture. Now let me turn it over to Ellen for her closing thoughts..
Great, thank you Jim and good morning everyone.
Nick, Carl and Jim highlighted our segment quarterly performance so let me focus on our key second half and long-term strategic objective which are central to the significant transition we’re driving to become the next generation DuPont, a company with a focused and robust portfolio centered on high potential commercial opportunities where DuPont science and technology can create step change solutions and deliver significant value to customers and shareholders.
As you know we have been solidly on this path since 2009 and we’ve been taking large steps forward to transform DuPont. We sold our coatings business last year and improved several non-strategic businesses from our portfolio all in line with our plan to create a higher value company for shareholders.
Last October we also announced our decision to separate our performance chemicals segment multiple work streams are completing the significant work to establish legal entities around the word to carve out financials and to develop and install standalone IT systems.
Most importantly we’re finalizing the right organizational and leadership teams to ensure we maintain and build upon the premier global positions we have developed in both Titanium Dioxide and Chemicals and Fluoroproducts markets.
Overall, we remain on schedule for a mid-2015 separation which will create two industry-leading companies with distinct value creation strategies.
For DuPont the separation is a catalyst that will further unlock the value of our strategy to build and strengthen world-leading positions in Agriculture and Nutrition, Bio-Based Industrial and Advanced Materials by further leveraging our integrated science capability on a simplified leaner operating model.
Less than four weeks ago, we also highlighted the broad related redesign of the Company’s operating structure.
This work will align our operating models with the Company’s more focused post in portfolio and deliver significant improvements in the way we work yielding better return on invested capital, speed and decision making, improved service to customers to name a few of the planned outcomes.
Businesses are leveraging this work stream to drive changes that improve their competitiveness as well. This reset of the operating model is a central plank of our transformation ensuring that the DuPont of 2015 and beyond deliver further growth and value with a simplified streamline support structure and a smaller cost base.
There is no doubt that following the performance chemicals separation, DuPont will be a different company in many ways and we’re taking the key steps forward now to be ready. We have transitioned from the planning phase to the execution phase of our redesign and now expect to deliver initial benefits starting in the second half of this year.
As I have said previously we believe that as we implement these changes, we will identify further savings opportunities and we expect to incur future charges under this initiative.
As a reminder, the redesign scope we have defined to-date is expected to generate savings in core DuPont from about $625 million and we forecasted elimination of an additional $375 million of cost to be realized at the time of the performance chemicals separation in mid-2015.
In total, we expect to achieve about two-thirds of the billion dollar annual savings on a run rate basis by the end of 2015 with the remainder by 2019 all from a 2013 base line. It’s important to note that this program is distinct and separate from past productivity initiatives.
Our current redesign initiative is broader than just our global supply chain. It’s centered on optimizing our corporate business and asset infrastructure. But the redesign certainly includes removing residual costs associated with the separation of performance chemicals. The scope is far more expensive. All business segments and functions are included.
For example, we’ve identified opportunities to streamline our asset base in multiple segments without reducing our capacity to meet end used demand. We are taking advantage of opportunities to consolidate production capacity into fewer sites which really is the pillars to maintain our service and growth capability while reducing costs.
We are realigning and rationalizing staffing in many corporate functions to take advantage of centering opportunities that create greater leverage while enhancing productivity. In our manufacturing operations, we’re focused on reducing plant overheads and fixed cost to enhance our competiveness throughout our global footprint.
These are just some of the steps we’re implementing in the redesign to generation savings and enhance our productivity. Bottom-line, we will be a stronger, more agile, growth enabled company as a result of this initiative.
We are capturing value from Danisco and continuing to look for more acquisition opportunities aligned with our strategic priorities. As we look ahead to the separation of our performance chemicals segment and an impact on our balance sheet, we are actively engaged in evaluating acquisition ideas that would augment our organic growth plans.
These programs in concert with sound execution plans make me confident to deliver on our second half commitments in the short-term and position DuPont for higher growth in the long-term. We will reduce complexity and improve our speed and agility as we advance our strategy and become the new DuPont.
A higher growth, higher value company that brings the strength of our science to bear on some of the world’s most pressing challenges..
Okay, thank you, Ellen. Let’s now open up the lines to your questions..
Question:.
and:.
Thank you. We will now begin the question-and-answer session. All lines have been placed on mute to prevent any background noise. (Operator Instructions) In the interest of time management requests that you limit yourself to one question and one follow-up question and please pickup your handset to allow optimal sound quality.
If you have additional questions you may reenter the queue. And our first question is from John Roberts from UBS..
Hello John..
Can you hear me?.
Can you hear me?.
Yes, hi John..
Thanks.
Ellen, you had an investor last week suggest that DuPont needs to simplify further and you are already taking a good cut at it here separating technology-intensive from non What other dimensions can we think about simplification on?.
Thanks.
Ellen, you had an investor last week suggest that DuPont needs to simplify further and you are already taking a good cut at it here separating technology-intensive from non What other dimensions can we think about simplification on?.
I think john we’ve taken a tremendous step, a very large step towards the new DuPont with the separation of the coatings business the separation of the performance chemicals business.
And then with that really taking a look at all aspect of the support to our businesses our line is our businesses that how we create value both top-line and bottom-line all the rest of us are here from a government standpoint with management or to support them so the operating model really hasn’t been recast in a while.
And so we’re basically questioning and understanding every part of it and how it supports the company that DuPont will be post spin and so it’s simplification of decision making it is clarity on those rights and accountability and it’s all to drive top-line growth the innovation pipeline that time delivering the marketplace.
I mean we’ve made a lot of steps in the individual business you see the performance in a nation IB and S&P and I think it’s a continuation on that.
So we're very much driving that direction I’m really excited about how the organization is stepping up and see this as a real opportunity and I think that you all be pleased with the results that come from that..
And then as a follow-up, Nick, during the quarter, you got asked a question at a conference about the potential for a Reverse Morris Trust for Performance Chemicals.
It seems actually clearly on the path for a straight spin here, but I didn't know if you wanted to clarify your earlier response?.
And then as a follow-up, Nick, during the quarter, you got asked a question at a conference about the potential for a Reverse Morris Trust for Performance Chemicals.
It seems actually clearly on the path for a straight spin here, but I didn't know if you wanted to clarify your earlier response?.
Well I’m not sure I’ll stay with my earlier response we are on the path for a spin which is what I said we’re continuing down that path, we’ve always said that we would, if there was value creation greater than the spend path that we are on that we would explore any of those other value creation opportunities but the path we are on is a spin right now..
Okay. Thank you..
Okay. Thank you..
Our next question is from Vincent Andrews from Morgan Stanley..
Thanks very much. There were a lot of good commentary on 3Q on your expectations, but I just would like a little more clarification on why 4Q is going to be up so much year over year.
I see you have big expectations in Agriculture for Cyazypyr and Dermacor, but what are the other drivers in 4Q that we should make sure we have modeled right?.
Thanks very much. There were a lot of good commentary on 3Q on your expectations, but I just would like a little more clarification on why 4Q is going to be up so much year over year.
I see you have big expectations in Agriculture for Cyazypyr and Dermacor, but what are the other drivers in 4Q that we should make sure we have modeled right?.
Well first why don’t Jim what don’t you touch on the ag second half and you’re viewing that and reconsidering on the other businesses..
Okay. First of all fourth quarter has continue to become more profitable overtime based on the growth of our crop protection business in Latin America particularly and then also the seeds businesses globally. Our growth in second half in ag is going to be led by crop protection you mention Cyazypyr and Dermacor in Brazil those are exciting.
Last year’s insect business was strong benefited by heavy infestations of Helicoverpa we’re positioned well with supply as the market have similar outbreaks this year. So crop protection is set for a strong second half.
We’re expecting lower seed volumes in Brazil summer season based on an expectation of lower planted area and as we have mentioned before modestly lower seeds pricing based on the fall armyworm resistance that we’re seeing.
We're expecting fourth quarter seed shipments for the 2015 Brazil safrinha and Northern Hemisphere seasons to be similar to last year. So all of that combined is what gives us confidence around a strong second half..
Yes and I think if you look across the company continued improvement in industrial production across global market automotive demand remains strong led by China and North America that certainly helps our performance polymers business, PV is also are growing and it looks like they’re going to come-in in mid-teens supporting our Electronics & Communication growth the momentum we’ve seen from industrial biosciences nutrition and health is continuing and as we enter the second half those segments are going to continue to perform there.
And remember the first half results were impacted by the ethylene shutdown, low refrigerant prices, things like that that will not factored in the second half and then Fresh Start is going to add all the redesign is going to add some opportunity because while I see cost start coming out through the third and into the fourth.
So when you put all that together that’s why we have the outlooks that we talked about for the third and fourth quarter..
Okay.
And just as a follow-up on the ag piece, the Cyazypyr and Dermacor in 4Q, is that sort of a normal level of demand or is there some type of channel trade loading that is going to take place there?.
Okay.
And just as a follow-up on the ag piece, the Cyazypyr and Dermacor in 4Q, is that sort of a normal level of demand or is there some type of channel trade loading that is going to take place there?.
That’s a normal in a both launches, so they’re really just entering the market so most of that will be used in season as it is moving out. The Dermacor, we expect to be put on seeds. It will get planted in the season that we’re going into.
Cyazypyr, we’d expect to be used because the season extends into the early part of the next year and I don’t know if every out it will be used in the fourth quarter, but yes it’s for an active season..
Okay, thanks very much..
Okay, thanks very much..
The next question is from Don Carson from Susquehanna Financial..
Jim, I want to go back to some of your comments on ag because I know corn seed is about half of the segment sales and also corn is an important end market for Crop Protection as well.
So as you noted, as growers shift to soy in reaction to lower corn prices, what are the implications for Pioneer seed volumes and pricing growth next year and overall growth in ag earnings, which you mentioned will be below trend? And are there any offsetting margin benefits? Clearly, you will be paying growers a lot less this year to produce seed that you will be selling next year?.
Jim, I want to go back to some of your comments on ag because I know corn seed is about half of the segment sales and also corn is an important end market for Crop Protection as well.
So as you noted, as growers shift to soy in reaction to lower corn prices, what are the implications for Pioneer seed volumes and pricing growth next year and overall growth in ag earnings, which you mentioned will be below trend? And are there any offsetting margin benefits? Clearly, you will be paying growers a lot less this year to produce seed that you will be selling next year?.
Yes thanks, Don. First of all, it’s too early to I think to try to predict or give guidance for next year as you know there are a lot of different variables that you mentioned a few of them. Certainly, if current market environment persists shift in acres towards soybeans, that can temper volume in the short-term in the seed business.
But as you mentioned, we’ll get the benefit of lower input costs or cost of goods. Crop Protection continues to have strong growth trends. Corn is one market but to be honest much bigger business in specialty crops around the world.
But that’s all if that persists, so it’s probably important to remember that we’re coming off a really strong crop last year and what looks like it could be a strong crop this year, but the crop isn’t harvested yet.
And now you go back two years, we were coming off a couple of years of drought and record high prices, so these things can change pretty marketed. So I think we need to get a little farther down the roads and see what this crop really ends to be before we’re going to have more visibility around the outlook for next year..
And just to follow-up on soya, since you don't have as much RR2 as the rest of the market, did you lose share this year and are you at risk of losing share as growers do shift to soy next year?.
And just to follow-up on soya, since you don't have as much RR2 as the rest of the market, did you lose share this year and are you at risk of losing share as growers do shift to soy next year?.
It’s too early to try to predict or comment on share based on, let’s see where final acres come out and let the dust settle as we normally do. But that said, as we talked about we’re in a transition both of introducing the T series and the Round of 2 and that, that will take the next couple of years to get that in place.
So, it’s too early to comment on share but we feel very confident about our overall competitiveness in soya and expect that overtime we’ll reestablish the strong leadership position that we’ve had. We are still the largest -- Pioneer is still the largest soybean brand in North America..
Okay, thank you..
Okay, thank you..
Our next question is from Kevin McCarthy from Bank of America..
Yes, good morning.
Jim, with corn commodity futures well below $4 a bushel, would you comment on what impact, if any, you would expect that to have on prospective corn seed pricing in North America? Or put differently, is there a level below which you think prices would be impacted?.
Yes, good morning.
Jim, with corn commodity futures well below $4 a bushel, would you comment on what impact, if any, you would expect that to have on prospective corn seed pricing in North America? Or put differently, is there a level below which you think prices would be impacted?.
Good question. A couple of things to remember, first of all as we have talked overtime, we price for value and as we come out with new hybrids and new trade combinations that deliver more yield and more value to the farmer even 375 a bushel, that’s still -- if you can give them extra bushels that’s still more value.
So there is still this pricing opportunities for innovation even at the prices being lower than they have been over the last several years. The other thing to remember is we’ve got a lot of new technologies that we’ve launched over the last few years that still working its way into our lineup.
So a fair bid of the price that we’re expecting to get in ’15 is going to from mix as the penetration of that those products go into the portfolio. So there are couple of reasons why we’re -- we’re still confident that there is pricing opportunities that will realize next year..
As a follow-up if I may on a different subject. Slide 5 indicates that your sales in developed EMEA increased 5% while developing EMEA declined 5%.
Kind of a counterintuitive disparity there, I was wondering if you could explain why that might be the case or some of the key drivers?.
As a follow-up if I may on a different subject. Slide 5 indicates that your sales in developed EMEA increased 5% while developing EMEA declined 5%.
Kind of a counterintuitive disparity there, I was wondering if you could explain why that might be the case or some of the key drivers?.
Yes, certainly, currency was a positive factor in developed Europe. I think it was about 4%. Performance polymers, things like that had double flow, double digits sales increases. Crop Protection, protection technologies kind of mid-teens growth, and N&H and IB both had higher single growth, so we had good growth in developed Europe.
Ag outside of crop was a drag on that. Ukraine certainly had an impact there. But there was a difference between positive currency impact in developed Europe and negative currency impact in developing Europe that created some of that dichotomy there..
Thank you..
Thank you..
Our next question is from Bob Koort from Goldman Sachs..
Thank you. Good morning..
Thank you. Good morning..
Good morning Bob..
Ellen I'm curious on the PC spin. Obviously, the refrigerants and Ti02 businesses aren't as robust as they might become in future periods.
Is there any flexibility around your timing there to maybe defer or delay that to get a bigger profit number so you might be able to apply a little bit more debt and bring more cash back to the parent company?.
Ellen I'm curious on the PC spin. Obviously, the refrigerants and Ti02 businesses aren't as robust as they might become in future periods.
Is there any flexibility around your timing there to maybe defer or delay that to get a bigger profit number so you might be able to apply a little bit more debt and bring more cash back to the parent company?.
Obviously that something that we continue to watch and understand but Nick wants to talk about the aspects of that..
So Bob when you look at that obviously it’s impossible to time anything exactly at the pick so you go through the spin we're pushing and driving for closure in the mid 2015 time period.
When we go through the decisions on the debt structure and the debt load in the dividend load things a lot of that is going to determine based on the projections as well where the entities are going to be going so will be downing that into the thinking around that low that’s put on those entities and then obviously as the value then is created in the market as they continue to come back out of the cycle that they’re stabilized in right now the shareholders get the benefit of that value as those increases occur..
And let me tell you modeling and pay doesn’t show a big dislocation between what the original comp values were and where we are today, we continue to look at it. But we do believe that we can get this done mid next year it is the time line I think it’s going to be better for both companies going forward..
And can you update us on the 200,000 expansion at Altamira, when that might come on and if that could be an appreciable benefit to your margin?.
And can you update us on the 200,000 expansion at Altamira, when that might come on and if that could be an appreciable benefit to your margin?.
Time line on that is end of 2015 for start up and we are talking late 2015 fourth quarter..
Okay. Thanks..
Okay. Thanks..
Our next question is from P.J. Juvekar from Citi..
Yes, hi, good morning. Jim, a question for you, in Roundup Ready 2 soybeans, this year, you have a limited launch with only 13 new hybrids.
How quickly can you ramp up there and what is happening to Roundup Ready 1 seed pricing in the meantime?.
Yes, hi, good morning. Jim, a question for you, in Roundup Ready 2 soybeans, this year, you have a limited launch with only 13 new hybrids.
How quickly can you ramp up there and what is happening to Roundup Ready 1 seed pricing in the meantime?.
First of all the ramp up based on performance what we’re seeing in framers field this summer look good that’s going to be driven based on that we have strongly performing Roundup varieties already out there, it will take a few years as it rolls through as we continue to ramp up..
And a question for Ellen, overall, your top line was flat in the quarter and the top line is growing maybe only 2% or 3% the last 2.5 years.
So was the redesign driven by slower top line growth that you need cost cutting in order to improve earnings?.
And a question for Ellen, overall, your top line was flat in the quarter and the top line is growing maybe only 2% or 3% the last 2.5 years.
So was the redesign driven by slower top line growth that you need cost cutting in order to improve earnings?.
Yes so, obviously you’ve seen improvement in our top-line in several other segments ag certainly is lot have been discussing it’s not going to be a little lower growth in the previous performance.
If you take a look at the productivity that we continue to drive if there two enable operating leverage and hence gives us the ability to make sure that we’re returning appropriately to our shareholder I mean in the timeframe where externals are changing you just got to use every labor you have, it’s an opportunity to reset the model it’s an opportunity to start in a very thoughtful way in terms of how do you create that top-line momentum I’m very happy with the pipelines we have if you look at ag and both pioneer and crop protection, if you look at protection technology, if you look at nutrition I mean I’m really happy with the pipelines we have I think we’re starting to see results of lot of these efforts and when continue to understand that we’re on the transformation path to create a higher growth higher value company and I think we're making a lot of progress here I mean the merchant markets and what we're seeing time for penetration.
So we continue to drive all aspects of the business in order to create value..
Very helpful, thank you..
Very helpful, thank you..
Next question is from David Begleiter from Deutsche Bank. .
Thank you, good morning. Ellen, on the redesign, you mentioned you've identified further opportunities for savings.
How should we think about that in terms of timing and the amount? Will that be during or after the current plan and could it be as large as the current plan?.
Thank you, good morning. Ellen, on the redesign, you mentioned you've identified further opportunities for savings.
How should we think about that in terms of timing and the amount? Will that be during or after the current plan and could it be as large as the current plan?.
I don’t think it will so it’s hard to know what they think when I don’t know what I don’t know right Dave I mean so we continue to, every month we continue to make progress every month as we understand what our opportunities are we’re not waiting because as we roll this out we’re learning and understanding things and we’re let just say intersections are that need to be stream line and driving them.
So you might here hopefully by the end of the year and we have an update on it I’m hopeful that it will be larger than what we’re seeing today but I’m not going to be shy it’s going to be obviously north of $1 billion and we’re going to go after it very rigorously in a disciplined process. So I don’t want to kind of conjunct about what it could be.
I am going to bring it out to you as we understand it and let you understand how it’s going to create real value for DuPont..
Understood and just on Performance Materials, could you size again the size -- the impact of the ethylene outage? Was it roughly $50 million? And also what is the underlying growth of this business, your view over the next two to three years on a top-line volume basis?.
Understood and just on Performance Materials, could you size again the size -- the impact of the ethylene outage? Was it roughly $50 million? And also what is the underlying growth of this business, your view over the next two to three years on a top-line volume basis?.
The outage itself which was 58 days in length, it was sort of on the longer side than what we expected so that did impact the top line by a few percent in the second quarter. Obviously, we were preferred for it so that we could keep our firm customers going through that. Size ballpark it’s about what you had said.
I think that’s going forward though, what I am seeing is driving growth from an application development standpoint and driving it from the standpoint of new product, new applications emerging markets. You’ve seen how well the Performance Polymers business is doing in automotive in the Europe and Asia.
Food and other packaging is going well, we are in the midst of a transition there and I think that we continue to see this -- the top-line target we have for that segment is 3% to 5% and I think that’s eminently achievable..
Thank you..
Thank you..
Our next question is from Jeff Zekauskas from JPMorgan..
Hi, good morning. My first question is for Nick.
In 2014, is working capital changes net going to be a use of funds or a source of funds and by how much, if you can tell?.
Hi, good morning. My first question is for Nick.
In 2014, is working capital changes net going to be a use of funds or a source of funds and by how much, if you can tell?.
Earlier on we said that cash flow from operations was going to be returning to the more normalized levels and we were projecting around $3 billion. Jeff, we’re still on track to be in that same ballpark right around that $3 billion mark from a cash flow from operations.
The key variable there is obviously going to be within the ag business and the yearend collections there and the market conditions that would allow for what extend to that yearend collection would be versus payments, deferred payments later..
Alright. And then my second question is for Ellen. Agricultural volumes are obviously lower than one would have expected and if corn yields continue to be relatively good, volumes will probably be again lower than one would have expected next year.
If that does turn out to be the case, do you think that your capital expenditures for Agriculture, as you've planned them, will decrease in any material way and do you think that you might take a look at the agricultural cost structure in order to make it more efficient under those demand conditions?.
Alright. And then my second question is for Ellen. Agricultural volumes are obviously lower than one would have expected and if corn yields continue to be relatively good, volumes will probably be again lower than one would have expected next year.
If that does turn out to be the case, do you think that your capital expenditures for Agriculture, as you've planned them, will decrease in any material way and do you think that you might take a look at the agricultural cost structure in order to make it more efficient under those demand conditions?.
Yes, I think if you take a look at the restructuring charge that we announced in the second quarter, you will see an ag component on that, so obviously we comprehended the trend and are taking steps, not going to wait on it. Any kind of distribution of capital, we rigorously scrub based on market conditions and productivity.
I am very proud of the team at Pioneer and what they have done from a productivity standpoint to get more out of their existing assets. I think the investments that we made in Latin America are servicing us very well and I think regardless of what’s happening there now, I am hopeful we will still like the Ukrainian assets overtime.
It continues to be an important part of the world from an agricultural standpoint. So these are decisions that we make based on the opportunity and the reality of the marketplace. Jim I don’t know what you want to add to that..
I think that’s a good summary. The key thing also is the long-term fundamentals under the market and the long-term potential of the businesses in ag.
Crop Protection is continuing to perform well and so the volume question of seed is one component, over the next years, unknown around where acres would go, but the big picture is still for a lot of growth..
Thanks very much..
Thanks very much..
The next question is from John McNulty from Credit Suisse..
Yes, thanks for taking my question.
With regard to the M&A outlook, can you give us your thoughts, Ellen, as to how we should be thinking about the pipeline, whether it is a target-rich environment? And then also given that you are in the process of getting out of the Performance Chems business, do you see on ability to make acquisitions while that is still kind of in the work in process or is it something realistically it would muddy the water too much and you'd rather just get out of that business first before really kind of initiating any major M&A?.
Yes, thanks for taking my question.
With regard to the M&A outlook, can you give us your thoughts, Ellen, as to how we should be thinking about the pipeline, whether it is a target-rich environment? And then also given that you are in the process of getting out of the Performance Chems business, do you see on ability to make acquisitions while that is still kind of in the work in process or is it something realistically it would muddy the water too much and you'd rather just get out of that business first before really kind of initiating any major M&A?.
Yes, so our M&A process continues, right. We are continuing to look in Ag and Nutrition, Industrial Biosciences and Advanced Material where there is commercial logic, where there is strategic rationale. Does it align with our priorities, our growth and what does it enable.
You have often heard me talked about the fact that acquisitions have to create momentum, not bulk and add to that science portfolio and/or the penetration portfolio for instance in emergent market. It takes awhile for any deal to get completed. These aren’t things that happened quickly. So we haven’t stopped our activity there.
I thing we could take a midsized one and integrated today I mean sign, pay is integrated today I think it would be very tough for us but I think as we come into the spring we’re going to have that opportunity so that’s why we’re continuing to look and understand where there could be real value created..
Great. And then just a quick question with regard to the cost-cutting program.
Are there specific business segments that should see a larger benefit and maybe bigger margin lift as we think about modeling them out over the next year or two?.
Great. And then just a quick question with regard to the cost-cutting program.
Are there specific business segments that should see a larger benefit and maybe bigger margin lift as we think about modeling them out over the next year or two?.
No, I think it’s pretty much what you’re going to see since a lot of it is in to support functions to the businesses that you’re going to see which is going to be pretty across the board. There is going to be specific actions that we’ve asked the businesses to consider.
The 8K which is out today depicts the restructuring by segments so that will help you. But for instance consolidation of production and hence creating lower cost in higher operating margin is something we’re constantly looking and doing.
So I think you can see what the 8K says from the standpoint of the corporation or the corporate cost that’s pretty much across the board..
John I think we have time for one last question..
Frank Mitch from Wells Fargo..
Love the way you save the best for last, thank you so much. Also, Carl, wanted to thank you, a very informative call. You forced me to Google GWP, so I now know what that stands for.
So thank you for that as well?.
Love the way you save the best for last, thank you so much. Also, Carl, wanted to thank you, a very informative call. You forced me to Google GWP, so I now know what that stands for.
So thank you for that as well?.
With that we’re making a smarter plan..
Absolutely, absolutely. A couple of follow-ups.
Just coming back to the European question, the dichotomy between Western and Eastern, what percent is ag of your Western European business and what percent of your Eastern European business is ag roughly?.
Absolutely, absolutely. A couple of follow-ups.
Just coming back to the European question, the dichotomy between Western and Eastern, what percent is ag of your Western European business and what percent of your Eastern European business is ag roughly?.
Okay, now you are taxing my -- let's see, Nick, can you come up with that pretty quickly I think it’s higher obviously ag is much higher in Eastern Europe than Western Europe because there is not much of industrial base there. But we’ll have the IR team connect with you and see if they can get you more information there Frank..
Alright, great. I thought that that probably was the case and was part of it. And Jim, while we have you, Crop Protection obviously seems to be doing well, new products, etc. How should we think about the one to three-year growth rate for the Crop Protection side of the house? And I guess lastly, precision ag has been generating a lot of press.
Where does DuPont stand in that area? What can we expect from DuPont in that area over the next couple years?.
Alright, great. I thought that that probably was the case and was part of it. And Jim, while we have you, Crop Protection obviously seems to be doing well, new products, etc. How should we think about the one to three-year growth rate for the Crop Protection side of the house? And I guess lastly, precision ag has been generating a lot of press.
Where does DuPont stand in that area? What can we expect from DuPont in that area over the next couple years?.
First of all on the crop protection side we are expecting continued growth there they have been growing a point or two ahead of the market over the last number of years we expect that continue based on the new products and the expanded market. So growth will continue based on that in crop protection.
In terms of the services and Encirca is we’re really pleased with launch so far where we’ve been an industry leader in many ways around decision services for the last 10 plus years in terms of mapping deals for the 12 million harvest acres map 8 million as planted but the launch of it there is a new brand and Encirca is going well.
We've had a very positive grower response to Encirca View and Encirca Premium, which is in partnership with DTN. There is over 1000 weather stations in our proprietary network with new collaborations with I guess eight land-grant universities.
We talked about a goal earlier of 500,000 seed based variable rate seeding prescriptions and we excided that and as we mentioned today we’ve launched the Encirca Yield Nitrogen management module now in July so that’s out there. So good farmer acceptance, good success so far everything is going very well..
Thank you..
Thank you..
Thanks Frank. I just want to take an opportunity to close the call by thanking you offer your questions and reiterating our IR team is ready if any additional questions for those of you who might have not been able to get in the queue.
I hope from this call you understand that for the short term we’re well positioned for strong second half and for the long-term we are actively and successfully creating value DuPont shareholders and that’s we deliver disciplined program that’s making the portfolio stronger and more focused and driving our readiness to compete as a new DuPont in 2015 and beyond.
On the pick and separation effort and the redesign of the operating model are two more large steps forward. We have a clear focused plan in placed in our actively executing to get these priorities and we look forward to talking to you again in three months with our third quarter results. So thank you all..
Thank you. Ladies and gentlemen that conclude today’s call. Thank you for participating. You may all disconnect at this time..