Gregory R. Friedman - Vice President-Investor Relations Edward D. Breen - Chairman & Chief Executive Officer Nicholas C. Fanandakis - Chief Financial Officer & Executive Vice President James C. Collins - Executive Vice President-Agriculture.

Jeffrey J. Zekauskas - JPMorgan Securities LLC Vincent Stephen Andrews - Morgan Stanley & Co. LLC Robert Andrew Koort - Goldman Sachs & Co. Jonas Oxgaard - Sanford C. Bernstein & Co. LLC David I. Begleiter - Deutsche Bank Securities, Inc. Stephen Byrne - Bank of America Merrill Lynch P.J. Juvekar - Citigroup Global Markets, Inc. (Broker) Frank J.

Mitsch - Wells Fargo Securities LLC John Roberts - UBS Securities LLC Daniel DiCicco - RBC Capital Markets LLC Sandy H. Klugman - Vertical Research Partners LLC.

Welcome to the DuPont second quarter 2016 conference call. My name is John and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I will now turn the call over to Greg Friedman, Vice President of Investor Relations. Greg, you may begin..

Thank you, John. Good morning and welcome. Thank you for joining us for our discussion of DuPont's second quarter 2016 performance. Here with me are Ed Breen, Chair and CEO; Nick Fanandakis, Executive Vice President and CFO; and Jim Collins, Executive Vice President, responsible for our Agriculture segment.

The slides for today's presentation and corresponding segment commentary can be found on our website, along with our news release. During the course of this conference call, we will make forward-looking statements, and I direct you to slides one and 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. We request that you review the reconciliations to GAAP statements provided with our earnings news release and today's slides, which are posted on our website.

Our agenda today will start with Ed providing his perspective on our performance. Then, Nick will review our second quarter financial performance and 2016 guidance. Third, Jim will discuss our Agriculture business. We will then take your questions. With that introduction, it's now my pleasure to turn the call over to Ed..

Thank you, Greg, and good morning, everyone. Today, I would like to give you my perspective on the second quarter and update you on our progress with our strategic plan, as well as our mergers with Dow. This was another solid quarter across the board. Our results indicate our plan is working.

We posted operating earnings per share of $1.24, a 14% increase from the prior year. Segment operating earnings increased 11%. Thanks to the disciplined execution, we also delivered improvements in several key metrics despite a difficult operating environment.

In fact, this was the second consecutive quarter of improvement in several of the metrics we watch most closely as indicators of fundamental long-term performance.

Highlights include organic sales growth, gross margin increased, operating cost declined, operating margins expanded across all reportable segments, and free cash flow and working capital improved. Let's start with sales. I am pleased about the improvement in our sales trend, given the challenging environment in which we are operating.

Sales rose 1%, excluding currency and portfolio changes, with Agriculture and Nutrition & Health leading the improvement. Ag did better than expected in a very challenging market, and N&H grew despite the currency pressure. Volumes grew in half of our businesses and volumes grew in total by 2%. We continue to drive cost savings across the company.

Our operating costs on a year-over-year basis declined by about $220 million. I'll speak more about our progress in this regard in a moment. Another highlight was the margin expansion this quarter. Gross margin for the company increased over 100 basis points.

We saw improvement across all of our reportable segments due to cost savings, mix enrichment from new products and technologies, and lower product costs. We delivered this performance in a difficult operating environment, as industrial production remains weak in North America, our largest market, and Ag markets remain challenging.

We expect Ag commodity prices will remain at the low end of our planning range until demand accelerates, crop area declines, or there is some type of disruption in global production. Given all of that, we feel good about our performance in the first half and the outlook we provided this morning.

That outlook assumes 50% growth in operating earnings per share in the third quarter. We are focused on executing well and continuing to improve our cost profile, capital expenditures, and working capital. I'll provide detail on each of these.

First, we set a goal at the beginning of the year to deliver $1 billion in cost savings on a run rate basis by year-end. Our operating cost savings totaled about $135 million in the first quarter and $220 million in the second quarter. This is consistent with our cost savings commitments.

One of the line items that we focus on is corporate costs, which declined 44% this quarter on an operating earnings basis. More important, a lean core allows us to accelerate decision-making, to stay closer to our customers, and to compete more effectively.

We have eliminated the matrix organization, given business leaders more accountability for their overhead, and removed layers to become more productive and effective. The pace of action around here has definitely picked up. Our second priority is more rigor around allocation of capital.

After a thorough analysis, we invested about $150 million in capital expenditures in the second quarter, or about $500 million year-to-date. We remain on track for CapEx to be $1.1 billion for the year, versus $1.4 billion last year, excluding Chemours.

Each of the projects we chose to fund this year are progressing as anticipated, giving us strong confidence in the returns we can expect. The third priority is improving our working capital performance. It is a topic of discussion in every review Nick and I have with our businesses and in each weekly staff meeting. And we are seeing results.

Year-to-date, our free cash flow improved by about $1 billion, and the working capital improvement was more than $200 million of that. Another product of increased productivity and efficiency is freeing up capital to invest in R&D and growth. This is another priority for us. I'll give you a few examples.

To meet growers' needs better, we are introducing higher-performing products like Zorvec fungicide and Leptra corn hybrids. We're increasing capacity in faster-growing areas like Tyvek building wrap and medical packaging.

Our scientists today are utilizing the newest technologies like CRISPR-Cas gene editing to develop targeted applications to deliver enhanced solutions and greater choice for our customers. In fact, we introduced over 600 new products in the first half of 2016. These types of actions support growth for the long term.

Now, I'll give you an update on our merger progress. Just last week, the shareholders of DuPont and Dow voted overwhelmingly in favor of the transaction, providing further validation of the plan we are executing.

The vote represents a key milestone toward the combination of our two companies, and the intended spin-offs into three industry-leading companies. In addition to shareholder approval, the other key condition for closing the merger is obtaining antitrust approvals.

We are deep into the process of working with the regulators to secure approvals from countries where we do business. We continue to expect the close of the transaction later this year. At the same time, we continue the planning that will enable us to hit the ground running immediately after closing.

Together, Dow and DuPont have already identified synergies, division by division, to yield about 80% of our expected run rate savings. We have designed a top-level organizational structure, we have chosen the key metrics we will use for tracking synergy delivery, and we are ready to come out of the chute fast on realizing those synergies.

We plan to report our progress to the board on a consistent basis, because delivering the synergies is an important contributor to the value creation with this transaction. In sum, we delivered a strong first half of the year.

While we expect macro challenges to continue in the second half, we are well-equipped to deliver based on our execution and progress to date. I see and appreciate the hard work of our employees and keeping us on track during this time of significant change.

We will continue to remain focused on strengthening our businesses while advancing plans to create sustainable shareholder value through our planned merger with Dow. With that, let me now turn it over to Nick..

Thank you, Ed. Let's start with the details of the second quarter on slide 3. Operating earnings of $1.24 per share increased 14% versus prior year and grew 18% year-over-year when adjusted for currency. Continued strong execution on cost savings across all businesses, lower product costs and volume growth drove improvement in the quarter.

Consolidated net sales for the quarter of $7.1 billion reflected 2% volume growth due to increased demand in Agriculture, Performance Materials, and Nutrition & Health. Globally, volumes improved in all regions except for EMEA.

Local price, currency and portfolio in aggregate negatively impacted sales by 3%, resulting in total sales declining 1% year-over-year. Turning now to slide 4. The year-over-year improvement in segment results contributed $0.14 to the quarter despite a $0.05 headwind from currency.

The businesses continue to execute well in a challenging macro environment, particularly on cost savings, which drove margin improvement in each of our reportable segments. A net decrease in corporate expenses and interest contributed $0.04 to earnings in the quarter.

Corporate expenses on an operating earnings basis were 44% lower than prior year as a result of our 2016 cost savings program. A lower share count benefited the quarter by $0.04. In 2015, we completed a $2 billion accelerated share repurchase program using proceeds from the Chemours separation. We continue to see the full benefit of this program here.

A higher tax rate reduced earnings per share by $0.01 in the quarter due to our geographical mix of earnings. An increase in net after tax exchange losses subtracted $0.06 per share in the quarter. Now, let's turn to the second quarter operating earnings analysis on slide 5.

Segment operating earnings increased $166 million, with growth and margin expansion in each of the reportable segments. This improvement broadly reflected cost savings, lower product costs, and as Ed mentioned, volume growth in three of our segments. When adjusted for the impact of currency, segment operating earnings increased 16%.

Agricultural operating earnings increased $93 million year-over-year despite a $36 million negative impact of currency. Volume growth of 3% was driven by increased corn seed and insecticide demand, partially offset by lower soybean volumes. Operating margins in this segment improved 290 basis points in the quarter.

Jim will speak to Ag performance in greater detail later. Nutrition & Health results increased $30 million, which more than offset negative currency. Volume growth of 3% in the segment was led by demand in probiotics and specialty proteins.

Operating margins in this segment improved about 350 basis points and have now grown year-over-year for 12 consecutive quarters. Performance Materials operating earnings increased $24 million.

Volume growth of 4% was driven by increased demand in automotive markets, primarily in China and North America, as well as increased ethylene volumes due to a prior year unplanned outage. The price decline was driven by pressure for raw material pass-through and ethylene prices as average spot prices were down approximately 40% year-over-year.

Operating margins in this segment improved 180 basis points year-over-year. Industrial Biosciences improved operating margins by 350 basis points in the quarter, primarily on cost savings. Protection Solutions and Electronics & Communications each improved operating margins on cost savings and lower product costs in the quarter.

Further details on segment results can be found in the materials we posted on our website today. Turning now to the balance sheet and cash on slide 6. Negative free cash flow of $2 billion year-to-date reflects Agricultural's typical seasonal cash outflow in the first half. Our free cash flow improved about $1 billion year-over-year.

The improvement is primarily due to lower working capital, lower corporate expenses, and lower CapEx in the second quarter. Working capital improved by more than $200 million in the quarter against tough economic conditions within Ag markets.

Our capital expenditures decreased by about $200 million or 28% versus the prior year when you exclude Chemours. The absence of Chemours contributed $200 million of the overall improvement in free cash flow.

In regards to share repurchases, we now believe it is unlikely that we will complete all of the remaining $2 billion stock buyback by the end of 2016. The amount and timing of repurchases is dependent upon trading windows and daily trading volumes.

We plan to enter the market as soon as our trading window opens, which is shortly after this earnings announcement. On slide 7, the company now expects full year 2016 operating earnings to be in the range of $3.15 to $3.20 per share, an increase of $0.10 per share from the low end of our previous range.

The estimated negative currency impact for the full year 2016 is now expected to be $0.15 per share. We continue to expect a benefit of $0.64 per share from the 2016 global cost savings and restructuring plan, and a headwind from higher base tax rate in 2016 of about $0.10 per share.

Third quarter operating earnings per share are expected to be 50% higher than the prior year. As we noted in our first quarter call, the second half for Ag is expected to bring added pressure from economic conditions in Latin America and a route-to-market change in the southern part of the U.S.

In addition, industrial demand in oil and gas markets remained challenging. Excluding currency, we continue to expect sales to be about even with the prior year. Including currency, sales are expected to be down low-single-digits percent versus prior year.

We would expect operating earnings per share growth of 19% to 21% when adjusted for currency, primarily driven by the full-year benefit of cost savings. Now, let's turn to slide 8, our 2016 global cost savings and restructuring plan, which is expected to deliver $1 billion in savings on a run rate basis by year-end 2016.

This translates to approximately $730 million of net savings in 2016 versus the prior year. In the second quarter, our operating costs, which include SG&A, R&D, and other operating charges, declined about $220 million on an operating earnings basis. This represents a 12% decline in cost year-over-year.

On an operating earnings basis, SG&A costs declined about $160 million or 13%, primarily related to the G&A costs. Our corporate costs decreased 44%. The actions we outlined in December 2015 continue to generate results, and we remain on track to deliver a $200 million decrease in corporate expenses in 2016, improving to about 1.3% of sales.

With that, I'll turn it over to Jim to provide us an overview of the results for agriculture.

Jim?.

Thanks, Nick. Today, I'll take you through our view on market conditions, our financial performance and update you on our three priorities for Ag. Agriculture markets continue to face challenges. As farmers endure tough economic conditions, seed and crop protection suppliers have elevated inventories and credit remains tight.

We recognized that the Ag market was entering a challenging period back in 2014, and at that time, began taking actions to enable us to maintain our competitiveness. Fast forward 24 months, and our strong results in the first half of the year demonstrate the benefits of those disciplined actions.

And because Ag is a seasonal business, I'll focus my comments on the first half performance. Our sales in the first half were 2% lower, as higher prices and corn volume gains more than offset by currency, lower soybean, and crop protection volume and portfolio changes.

In seeds, a stronger mix of Pioneer's newest corn hybrids resulted in higher net corn price globally, which was led by North America. Additionally, we grew corn seed volume with uplift from Leptra, our newest technology, which has enabled a multiple point share gain in the competitive Brazilian Safrinha market.

Also a positive for our Pioneer business was our continued penetration in the digital Ag space. Interest in our Encirca services remained high, as growers began to plan for the 2017 season. To date, our Encirca offerings were delivered on over 2 million acres, more than doubling last year's footprint.

Now, moving to our crop protection business, we were again able to fully offset the currency headwinds we faced in Brazil through increased local pricing, which helped to minimize the negative impact of lower volumes due to insect-resistant soy, weather conditions and higher inventories.

From an earnings perspective for the first half, I was pleased that operating earnings for the segment increased 3%, driven by higher local price and product mix, lower product costs, and cost savings. Excluding currency, our operating earnings increased 9%. Now as we move to the second half of the year, the focus turns to Latin America.

In seeds, we expect growth in our corn business in Brazil, driven by the summer launch of our Leptra technology, offset by lower soybean volumes. Within our business, a portion of our sales will shift from the third quarter to the fourth quarter, as we expand on our direct selling model in Brazil, which is a fine tuning of our route-to-market.

On the crop protection side, current market sentiment indicates stronger demand in the fourth quarter than in the third, driven by delayed purchasing decisions due to commodity prices and credit availability. Taking into consideration these dynamics, we expect sales to decline in the high single digits in the third quarter.

For earnings, we expect the third quarter to be down in the high 20% range as cost savings are more than offset by Leptra launch costs. When comparing our results in the quarter to the prior year, recall that last year we had two large earnings benefits totaling $48 million, associated with asset sales and an adjustment to product costs.

We can now anticipate sales for the full year to be comparable to last year, and operating earnings to rise by the high-single-digits percent, as increased local prices and cost savings are partially offset by currency. Excluding currency, we expect operating earnings to increase by low-teens percent.

Recall that full year results will also be impacted by the shift of a portion of our fourth quarter 2016 seed sales into first quarter 2017.

This shift is a result of enhancements we are making to our Pioneer business as we transition to an agency-based route-to-market in the southern United States, similar to the advantaged approach we have in the Midwest.

I will close with an update on the three priorities for Ag, namely delivering on our cost reduction and earnings plans, ensuring a solid return on investment for our innovation portfolio and working with diligence on the merger with Dow.

At the halfway point in the year, we are on track with our cost savings commitments and are delivering bottom line results that are ahead of our initial plan. The second half will present some challenges, but we are confident in our ability to deliver on our full year commitments.

I continue to evaluate our innovation portfolio, and I am pleased with the strength of our pipeline, as evidenced by the favorable market reception to our best-in-class Zorvec fungicide and the fast ramp of Leptra technology in Brazil.

As mentioned, we expect Leptra to comprise more than 1/3 of our product portfolio during the summer season and one of the fastest new product introductions in Pioneer history. These two successful new product introductions are evidence that despite the current challenging conditions, farmers continue to recognize the value of our technology.

But finally, we continue to advance our plans for successful integration of two healthy, innovative and highly complementary Ag companies.

We are committed to delivering the $1.3 billion of cost synergies, and we expect the complementary combination of our respective R&D organizations to lead to a combined innovation growth above and beyond our respective current strong innovation pathways.

We had a good start to what has been a very active year in agriculture, and we are excited about the progress that we're making. And I'm confident that the team is focused on the right deliverables and will continue to execute in the second half. Now, I'll turn it back to Greg..

Thanks, Jim. We'll now open the line for questions. John, please provide instructions to enter the queue..

Thank you. We will now begin the question-and-answer session. And our first question comes from Jeff Zekauskas from JPMorgan..

Hi. Good morning..

Good morning, Jeff..

Hi. One, the goal of putting Dow and DuPont together right now is to gather cost synergies and then split the company into three pieces.

Because that's the operating plan, is the probability of M&A activity in 2017 that significantly low?.

It's – Jeff, this is Ed. It's – any M&A activity will most likely be low. However, technically, we are allowed to buy and sell businesses during that timeframe. The chances of us I think doing it of anything of any size are pretty minimal..

Okay. Secondly, interest rates have really come down quite a lot. How does that affect the pension liabilities of DuPont or the combined DuPont/Dow entity? And will it change your funding requirements over a multi-year period..

Hey, Jeff. It's Nick. So, let's just talk magnitude, so you can get a sense of the impact it might have..

Okay..

This last earnings cycle here, when it just came out, we talked about the re-measurement we had to do because of the restructuring that was completed. The interest rates dropped 73 basis points. The 73 basis point reduction had over $2 billion of impact on the unfunded pension liability.

So, you can see its dramatic swings, and those swings obviously can go either way, up or down. As interest rates start to increase, you'll see those unfunded liabilities drop rather dramatically as well.

And everything I'm talking to you about is from an accounting standpoint, not necessarily from a cash funding standpoint and that would be handled through the Pension Protection Act, and that's done over a different smoothing of interest rates over a longer period of time with a MAP-21 process that's used there.

So, it's not as dramatic an impact in any one year because of those interest rate changes, as you would see from an accounting standpoint.

We will obviously be looking at the funding, and we obviously fund the pension plan to whatever is required from us in any given year and that will be done obviously as we go forward with the merger and the spins as well..

Okay. Great. Thank you so much..

Thank you. And our next question comes from Vincent Andrews from Morgan Stanley..

Thanks. Good morning, everyone. A question on Ag. Just as you look in the second half, I recognize the credit issues that are down there, but you've got the new Leptra hybrids and the local corn prices in Brazil in particular are quite attractive, plus the FX rates are favorable to the farmer.

So, is it really credit that has you most concerned? And as you switch to the agency model, will you have to be issuing more credit? Or how are you really thinking about the second half down there?.

Yeah. This is Jim. We're looking at that market from a number of different angles. Credit is one area that we constantly take a look at. We feel like we're not seeing any kind of bad debt rates that are above anything that we would normally see. But we're constantly watching it.

What's really happening is because of the lack of credit out there, growers are delaying a lot of their purchase decisions. And you sort of see that in our guidance for the second half. As we talk about a much lighter third quarter and then a much stronger fourth quarter, it's part of that shift that's going on.

We mentioned a little bit of the shift that we're seeing as a result of some fine-tuning of that route-to-market model, and we already have operations in Brazil that are connected to that more direct route. So, this is not a real big change for us. It's a subtle change; could be $0.01 or so.

And then, we had some business that was primarily in the third quarter in the past that really landed into the second quarter. About $0.03 of the total here was because of that. And that was mostly in Asia. We had insecticide volumes and corn volumes. So, you're right on momentum. We're going to carry some strong momentum with Leptra going forward.

The summer launch has gone really well. Clearly, one of the largest ramp-ups in our Pioneer history down there. And a few of the comps actually will look pretty good, too, in the fourth quarter compared to last year, when you think about what happened to that insect control market. So, that explains how that sort of lines out..

And as just a follow-up, in the U.S., for next year, it looks like the crop people keep revising their yield forecasts higher. You referenced there's plenty of seed inventory around already.

Did you – from a seed production perspective, did you sort of curtail your production plans for next year? So, do you think inventory of seed going into next year – if yields stay where they're expected to go, do you think the inventory situation is going to be better or worse in 2017?.

We already had a pretty aggressive inventory plan going into 2016. As we said before, we started making adjustments in our operating plan a year and a half or almost two years ago, seeing this real tough commodity price market coming at us and knowing that we had to get out ahead of that to manage inventory.

So, yeah, we did take some adjustments as we went into this season, and we're taking a real hard look at that as we go forward. You know that the crop that went in the ground and the seed production that we have in the ground looks really, really good right now. Yields look good. Market conditions look great.

So, even though we dialed it back, we could still see a little upward pressure there on overall inventories..

Thank you. And our next question comes from Bob Koort from Goldman Sachs..

Thanks. Maybe continuing on with Jim, if I could. Jim, I was curious on plans for Intacta in South America. I know you've got a license in Brazil, but you're also moving forward with the Dermacor product.

So, are those mutually exclusive or are they additive? And then, also, could you talk more about what led to some of your soybean volume decline?.

Yeah. So, you're right. We just recently announced the Intacta license and the ability to introduce that product into the Brazilian market. The way I, first of all, look at it is I think about that technology opposite the discussions that we're having with Dow and the opportunity with Contesta. (34:02) Today, Intacta is commercialized.

It's available to us. It allows us to practice in that technology. And then, we remain excited about what that future looks like as well. So, we don't see those two technologies as competing. We see that, over time, there's an opportunity. It allows us to offer many more choices in the marketplace for our customers.

When you look at seed treatment, Dermacor, we see that as a complementary offering when we compare it and combine it with the Intacta and the rest of our varieties that we sell into that market.

So, on soybean share/volumes, clearly, our volumes in Latin America were impacted by the lack of technology that we had available to us and this license helps us solve that. And in North America, we've been going through a pretty dramatic conversion of our base varieties. You'll recognize the T Series launch that we've talked a lot about.

We're approaching now this season, about 80% of our lineup has been converted over to T Series. And we use the new breeding techniques, this advanced yield platform that we have with Pioneer. So, it's just a conversion. We're excited about the momentum that we're carrying going forward.

And now that we've got this full technology lineup, we'll see how things shape up 2017 and beyond..

And if I might ask on corn, you had a quite commendable result there. You actually got some pricing, which seems pretty impressive given what's happened in the commodity markets. So, now, we've got corn even lower.

Do you worry you'll compromise the ability to get price going into next year? Is it possible, like, back in the pre-biotech days, you could actually have new hybrids come out without a price lift? Or how do you sort of size up the market in light of this even more crimped farmer income situation?.

Yeah. Thanks for acknowledging the performance in the first half. You're right. A lot of that price came from mix, and it's a tribute to the new technology that we had out there in the marketplace, especially in corn, in North America that really led the way. So, when we think about pricing going forward, it clearly is a value equation.

We price for value. We price for the genetic mix that we have out there. When you look forward to 2017, it's a little early right now to really be speculating on what that market looks like. I think you're right. We've got a crop in the ground that looks really darn good, and it will put some downward pressure on corn commodity prices.

And so when we think about our price launch here later this year, we take two or three factors into the equation. First, the technology lineup we have. Second, the mix and the geographic lineup. And then, third, the economic conditions that our customers are facing, and we'll price accordingly to the value that we're delivering..

Thank you. Our next question comes from Jonas Oxgaard from Bernstein..

Good morning..

Good morning, Jonas..

So, actually, continue talking a bit about the soybeans in North America. I – your main competitor also reported reduced soybean volumes.

And I guess what I'm wondering is, so if you guys didn't sell soybeans, they didn't sell soybeans, who sold the soybeans?.

Well, again, it's a little early to speculate until we, kind of, see final yields and final data that comes in. This was a really competitive environment that was out there this year. And so, we're evaluating that. You think about the year-over-year acre numbers that we saw the USDA recently published USDA acres.

I think you're seeing some of those volumes consistent with those acre numbers. So, overall, we'll see how it shakes out. But my view might also be that local, regional and some of the retail brands also had pretty strong performance this past year, so....

Okay. And a follow-up, if you don't mind, on the crop protection side. So, in Q1, you had an 18% drop in crop protection due to the closure of La Porte. La Porte is still closed, as far as I know.

So, where did all this volume come from?.

Yes. So, as we look at the second half of the year, a couple of things going on with La Porte. Last year, we sold Lannate out of inventory that we had carried over after the site closed. So, we were really working off of inventory that we had.

When you then compare that to the second half of this year, we've essentially replaced our methanol volumes from – by sourcing from third parties. And then, overall, that market is down a little bit. So, the methanol year-over-year is actually about awash. Where the crop protection insect upside is coming from is really in Asia-Pacific.

We saw the lead edge of that here in second quarter with the early onset of the monsoon and some favorable markets there. And then, we continue to drive the volumes of Cyazypyr with those launches. And then, our new fungicide Zorvec was also launched in Asia-Pacific, and all of those things really add up to those volumes in the second half..

Our next question comes from David Begleiter from Deutsche Bank..

Thank you. Good morning.

Ed, the success you've had in the cost savings year-to-date, did that increase your confidence in realizing the cost savings that the combined Dow/DuPont are perhaps exceeding that $3 billion target?.

Yeah. I mean, look, we're off to a very good start six months into it. In fact, we're very far through the billion-dollar cost reduction on a run rate basis that we talked about for us this year. So, yeah, we're feeling very good about it. I wouldn't say my confidence is higher because of what we did this year.

My confidence in the $3 billion of synergies on the Dow/DuPont merger are more because we now are digging line-by-line into all the detail. And as we mentioned earlier, we've identified 80% to 85% literally line-by-line of where the cost reductions are coming from to get us to at least the $3 billion.

So, we do have the teams shooting higher than $3 billion. I don't want to target that number yet and get that out there. I think it's a little bit early, but we are targeting higher than that.

My personal opinion, having done this many times before, is that once the purchasing teams can really dig into the detail and they can't do everything yet because we're not merged and that's one area you're not allowed to overlap on any contracts.

But when they're allowed, with a $37 billion spend between Dow and DuPont, I'm used to seeing numbers on savings that are more significant than the numbers that we have highlighted to you so far. So, I'm viewing this $37 billion pot of opportunity as an area where we can get some upside to the plan.

And it would be awful nice to get it there because that's not head count related, and we can really lock that in for a few years. So, I'm highly confident we're going to have at least the three.

As I highlighted, this will really, in my opinion, be one of the most important things that we will do with the MergeCo board, as it really is a big part of the value creation, at least, initially when we put these companies together. So, I'm feeling very bullish about it. And clearly, we will accomplish what we told you we'll do this year.

Remember, the $730 million on a net basis we're going to save this year, I think you can see is lining up very nicely.

I would highlight to you that our comp in the third quarter on the savings is tougher because we had a reversal of our bonus variable pay last year because of the performance of the company last year that was fairly significant, and then we also had a decent restructuring in the third quarter last year which reduced our cost.

So, when you net it out, you'll see that the comp gets a little bit harder. But still, we're going to be saving at a billion dollar run rate exiting the year to get you to $730 million that you'll actually see in the P&L numbers this year..

Very good. Ed, just one more thing.

When you look at the potential combination, the ultimate three-way separation, any further thoughts on the optimal structure of the new companies? Is this three-company structure right now the best approach? Could it be four or five companies? Any further thoughts on the ultimate separation of Dow/DuPont?.

Yes – no, look, I would just say, David, that, look, obviously, this is the agreement that we came to think it's very good the way we have it structured.

If Dow and DuPont and Andrew and I or any of us, we think there's something more optimal to do with the mix of businesses, we certainly can look at that in MergeCo., and that would require a 2/3 vote of the MergeCo. board to make a change like that. But we'll always look at things if something could create better long-term value for shareholders.

But the path we're all on is the path we're on and headed down right now..

Thank you. Our next question comes from Steve Byrne from Bank of America..

Yes. Thank you. Ed, I was wondering what your view is on this next stage of antitrust review.

What country or regulatory agency are you most concerned about either requiring potentially the most concessions or maybe just the uncertainty and timing of it all that may drag it out? Where are you the most concerned?.

Well, I mean, there's four large markets that really matter significantly here. China, Brazil, and I say countries but one's a region, the EU and the U.S. So, that's the four big regulatory ones. Dow and DuPont are already in deep conversation with all the relevant agencies in those jurisdictions. So, we're not beginning. We're getting deep into it.

You might have saw the other day. I think it came out that there might be some remedies. We always went into this saying we would be ready on remedies, if that were needed. So, we're hoping that that helps out the timeline. So, having said that, I'm not naive. This is a huge merger.

Although we are going to split into three, but it is a huge merger and I'm sure it's going to get a thorough review. But looking at the timeline, I still think we're on a timeline by the end of the calendar year to accomplish this..

And then, one for you, Jim.

As you think about the impact of lower crop commodity prices on demand for crop chemicals, are you more concerned that it could just lead to less demand, more discretionary use of crop chemicals or a shift down in – to more generics? And do you think you can offset some of that with your approach to offering financing to growers and attracting both seed and chemical purchases at the same time?.

Yeah. Steve, you're right, it's always a possibility in a difficult market like we're facing now and that we're heading into that as a grower prioritizes the spend. Clearly, the focus on seed and to get my equipment and my land rented. get all of my inputs and fertilizer paid for, that crop protection spend is usually the last dollar spent.

So, we've got a lot of experience with that. At the same time, productivity is the name of the game. And even in a tough market like this, growers will invest in a crop to drive as many bushels off of those acres as they possibly can. So, that's clearly a balance there.

And we like the lineup of products that we have out there in the market and we price them right to deliver the right kind of value for that. And we're always looking for other ways to deliver those type of products, whether it's through seed treatment and other key routes. So, we've been here before.

We know how to operate in these markets, and we've got a good team that's heavily focused on it. Eyes wide open, we're looking forward here to make sure that we're taking the steps right now today to continue to be competitive going into that 2017 market..

Our next question comes from P.J. Juvekar from Citigroup..

Yes. Hi, good morning. A question on R&D. In the first half, your R&D costs dropped by $125 million to $850 million.

So, what do you think should be the run rate R&D expense for DuPont standalone and then maybe some comments on R&D synergies with DuPont/Dow or Dow/DuPont?.

Look, the standalone – and probably, this has historically been the number on R&D for, gosh, the last ten years whether you look at it as a percentage of sales or just a dollar basis. Look, we're running it and sort of annualizing your number. We're running around $1.7 billion in total spend, and that feels about appropriate.

The two years before that, it was just – as you've mentioned, it was slightly higher, but the run rate historically has been kind of running right around that on a percentage of sales basis very similar also. But once we do the merge, our anticipation is there's very little of our cost cutting.

It's only going to be where there's really overlap on identical things in the R&D area. We obviously want a hefty R&D. We especially want it in the Ag business. We want to be one of the top spenders, if not the top spender in R&D in Ag.

But we'll move some of that around to some other new product areas that we can work on instead of duplicating some efforts with Dow. I think probably that will be just great for the farm community and our farmers and our customers, there'll be more choice for them over the ensuing years, if we get that right..

Thank you. And on seed pricing, can you talk about pricing regionally? Maybe talk a little bit about U.S. versus Latin America. And how much of the FX impact in Latin America were you able to recover through pricing? Thank you..

So, on the seed side, as I mentioned earlier, a big part of our price increases came from mix and it was tied to the lineup of new genetics that we had out in the marketplace. The majority of our crop protection price increases were aggressive actions that we took specifically to offset the negative impacts of currency in Latin America.

So, as I said earlier in the opening comments, this is the second quarter in a row where we've been able to fully offset the impact of the currency because we have it out there ahead of it. And then, again, we talked about pricing before. Overall, we take a holistic look at price. Some of it is mix and technology.

And a lot of it has to do with the value that that product delivers, and we differentially price our products in core markets almost down to the zip code level, so you see a lot of differences in the way we position.

The final aspect of price for us globally that has been very positive in Latin America has been the launch of our new technology with Leptra. We had a good view of it in the se premia (50:41) season. This ramp-up in the summer season is probably one of the largest ramp-ups in our history and where we're going to feel the benefits of that as well..

Our next question comes from Frank Mitsch from Wells Fargo Securities..

Good morning, gentlemen, and nice results..

Thanks, Frank..

What are the chances that this is the last DuPont conference call in DuPont's current configuration?.

My gut is there's one more..

It'll be close, I think.

Don't you think?.

Well, I hope..

Fair enough. Hey, a bigger picture question, Ed. You mentioned early on that you were pleased with the performance of the company and the sales figure, although down 1%. It kind of caught me a little bit cold, I guess. But I understand that it is a difficult macro environment. You also mentioned that volumes were up in all regions except for Europe.

Can you expand upon what are you seeing from a pace of business perspective around the world and what the expectation is?.

Yeah. Frank, one of the reasons I made the comment on sales – I sure hate to brag about a sales number that's around zero, but – and I'm not. We always want to strive to do better. But just to give a little backdrop, the reason it feels better is we were plus 1% organically. For the whole company, we were plus 2% on a volume basis.

And the quarters before that, four or five quarters before that, organically, we were kind of running a negative 2%. So, we've seen a shift of about 3%, which is not insignificant. So, that's really, I think, the key change there.

But I think to the bigger backdrop of what you just said, I mean, the global economy is – industrial production globally is growing 1%, and that's even down a little bit from last year. GDP has been lower because of Brexit, maybe, with Europe, so that's kind of running around 2% to 2.5%.

So, we're kind of not running out of line any differently than anyone else. And probably, you were accurate on your points on a worldwide basis. Our volume was up in North America, it was up in Latin America, it was up in Asia and it was down some in Europe. So, again, that was an improvement from where we had been running also.

We're not planning on this environment changing. We're planning our rest of 2016 and 2017 to be just kind of how the world is right now. And so, we'll make smart decisions. And if things do improve for us, all the better for us, but we're not going to plan that way..

Our next question comes from John Roberts from UBS..

Thank you.

Ed, what's the timetable for announcing the full board of Dow/DuPont?.

Yeah, it will be announced before the merger, for sure. I'm hoping not too far here down the road. We're pretty far along at both ends on who those candidates will be. We're just working on a couple still. And hopefully, not too far from now, we'll get it out..

And then, you gave volume growth by region and you gave it by segment, but we don't get the matrix. The 1% volume growth in North America, at least directionally, could you parse that apart a little bit for us? I assume Performance Materials was up a lot against the outage a year ago.

Was that largely offset by the Protection Solutions segment, given that oil and gas weakness and military would have largely been in the U.S.?.

it was up about 3 percentage points. Performance Materials, as you said, was a big part of it because of the unplanned outage and the comp that was being looked at there. And we also saw volume increases in Industrial Biosciences, about 3%. So, those are the ones that contributed very positively.

And as you pointed out, Protection Solutions continues to be dealing with the rather depressed oil and gas segment, and that obviously is impacting some of their volumes..

And military..

And military as well, yeah..

Thank you. Our next question....

And electronics also is one where we're seeing, on the consumer electronic side, probably I think as everyone else has been reporting for the last three to four months, softness on that end of the market. And we think that picks up slightly in the second half.

Originally, we are planning a bigger lift, but we've kind of dialed that back a little, thinking we'll just see a slight lift as we go into the holiday season..

Our next question comes from Arun Viswanathan from RBC Capital Markets..

Hi. This is Dan DiCicco on for Arun. Thank you for taking my question. Just wondering if you guys could talk about your outlook for ethylene prices in the back half of the year. We've seen spot kind of come up recently.

Do you guys think this is sustainable? And then, what happens kind of following the heavy maintenance season here as we have crackers restart and then some new capacity comes on?.

When you look at our ethylene play or our presence there, it's relatively small, right? We're about 2% of the total U.S. capacity. When you look at how our product is handled, about half of our ethylene is consumed internally. And then, of the other half, half of that is on a long-term contract and then that last 25% is sold in the external market.

So, relatively small in the external market. More specifically around your question of where do we see some of that spot market going, we see the quarter three continued decline somewhere in the mid- to upper-teens from a percent basis and pretty flat from in quarter four..

Okay. Great. Thanks.

And then, just as a follow-up, excluding autos, are you guys seeing any strength out of any particular end markets or regions that you guys would like to highlight? I know you mentioned some previously, but is there anything else you guys might be looking at?.

Well, I mean, we saw strength, as you mentioned, in Asia, but specifically in China is where we saw a tremendous amount of the strength as well as North America. Those would be the two key auto markets where we saw a lot of the volume increase being driven from..

And we're up to our last question..

Our final question comes from Sandy Klugman from Vertical Research Partners..

Good morning. Ed, you've highlighted in the past the $1 billion opportunity in working capital, but noted that this would take more time to achieve than other productivity initiatives.

Could you provide an update on where the company currently stands relative to your longer-term working capital targets?.

Yeah. Sandy, we just launched that program just about a quarter – I guess the middle of the first quarter. We didn't start that with everything else we had going on for a few months. And I actually feel good about it, the traction we have. So, half way through the year, our free cash flow is about a billion dollars better year-over-year than last year.

So, that was a nice improvement. But what was nice we got some initial traction out of the chute on working capital, about $200 million of that billion-dollar improvement in cash was from working capital. Almost all of the working capital improvement was on the inventory side and in the receivable side because of what Jim Collins talked about on Ag.

My gut is it's just going to be harder to move the needle as quick, although we have programs. We're working on it. But – so having said that, I think getting $200 million kind of almost one quarter into the program on our billion-dollar opportunity was pretty darn good.

And again, over the intermediate period, I do think we're entitled to about $1 billion, maybe a little bit more of opportunity. But I will tell you, Nick and I, as I said in my prepared remarks, we talk about this in every operating review meeting with the presidents. We all have very detailed programs now.

It's just like anything else, when you focus on it and spend time on it, you will get it fixed. So it was nice to see the initial traction, you know, so far..

Okay. Great. Thank you. And then, a follow-up on the cost-saving opportunities in Ag. Beyond the $1 billion, I think there were some additional opportunities highlighted from the potential for the Ag business to migrate to an existing SAP platform rather than establishing a new platform. I was wondering if there were any updated thoughts on this area.

And if so, what type of upside potential do you see..

Yeah. We haven't scoped the full upside potential but it's down the road, and we're just not spending time on that. To give you the overview, we're waiting on a more integrated system until we get to the spin stage. What we've got to do in the interim is come up with a high level layer that makes all the systems talk to each other.

Jim Collins and the team are going to make sure obviously that's happening in Ag, that will happen in the specialty company. Dow will obviously stay with their SAP system and layer on our Performance Materials business onto that fairly easily.

But what we will then do when we get closer to spin is really start to work – actually, DuPont had spent a lot of time on the latest SAP system and start an integration process then. And that's where we will get G&A savings when we get to that point.

But that is clearly going to wait until we get through the synergy work with MergeCo and then we'll launch into that..

Thank you for joining the call today, and we very much appreciate your interest in DuPont..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..