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E.I. DuPont de Nemours & Co. (NYSE:DD)

Q4 2008 Earnings Call

January 27, 2009 9:00 a.m. ET


Karen A. Fletcher – VP, IR Designate

Jeffrey L. Keefer –CFO

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Ellen J. Kullman – CEO


David Begleiter – Deutsche Bank

Peter Jacobs – Reagan MacKenzie

Frank Mitsch – BB&T

Chris Shaw – UBS

Sergey Vasnetsov – Barclays Capital

Mike Judd – Greenwich Consultants

Mark Gulley – Soleil Securities

Jeffrey Zekauskas – J.P. Morgan

Robert Koort – Goldman Sachs

Alexander Laurence - Jefferies

Kevin McCarthy – Banc of America


Please stand by. Your conference is about to begin.

Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the DuPont 2008 Fourth Quarter Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

In the interest of time, management requests that you limit yourself to one question and one follow-up question and please pick up your handset to allow optimal sound quality. If you have additional questions, you may re-enter the queue. To listen to the web cast, please go to Thank you.

It is now pleasure to turn the floor over to your host, Karen Fletcher, Vice President of Investor Relations. Madame, you may now begin your conference.

Karen A. Fletcher – VP, IR Designate

Thank you, Chris. Good morning and welcome. With me this morning are Ellen Kullman, CEO, Jeff Keefer, Chief Financial Officer, and Jim Borel, Group Vice President of DuPont's Production Ag businesses.

Before we begin, I'd like to remind you that we're web casting this call and you can access it through our website, We will be using slides today, which are posted on the website along with the news release that we issued earlier today.

I invite you to turn to slide 2. During the course of this conference call, we will make forward-looking statements. 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 please refer to the reconciliations to GAAP statements provided with our news release and on our website. Finally, we have also posted supplemental information on our website that we hope is helpful to your understanding of our company's performance.

Please note that in discussing segment performance, comments on results are before significant items and all references we make to earnings are on a pre-tax operating basis. In addition, all comparisons are on a previous year basis unless otherwise noted. We also provide considerable detail about segment performance on the DuPont IR website.

With that, I'll turn the call over to Ellen.

Ellen J. Kullman - President and Chief Executive Officer

Thanks Karen and good morning everyone.

I'd like to begin my remarks by connecting back to the investor call we had on December 4. At that time, we outlined an aggressive set of actions to keep us ahead of rapidly declining market conditions. We established cash as our primary objective and intensified our actions to drive for cash, productivity, and efficiency. We put in place ambitious metrics and rigorous monitoring and accountability requirements. I'm pleased with the rapid response and quantifiable results from our leadership and employees in these volatile times.

We ended the year with a strong balance sheet and delivered solid cash performance against our year-end goals.

Market conditions continue to be difficult. Many of our automotive OEM customers plants that we supply remain idle. Customer de-stocking across multiple industries has carried over into 2009. Consumer confidence is down, and our market environments remain very challenged with the exception of Ag.

Most of our businesses are seeing volume decline in the first quarter on par with what we experienced in the fourth quarter and when we revue the business segment, we'll share our best perspectives on continued volatile market condition.

This morning we will update you on our aggressive action to drive for cash. I want to emphasize that we are working from a position of strength. We know we cannot afford to be complacent. We are moving into 2009 with urgency and a disciplined focus on execution of the fundamentals.

We're also going to talk about opportunity, starting with Ag, where our outlook calls for continued growth. For the full year 2008 in our Ag & Nutrition segment sales grew 16% and earnings grew 24%. Ag market fundamentals remain strong. While some currency headwind is expected in 2009, we remain bullish about the growth opportunity for this segment.

Beyond Ag, demand for photovoltaic products and no-mix aramid fibers remain strong, we continue to steadily invest in our R&D pipeline laying groundwork for growth opportunities to come. This, along with our cost-productivity work, is positioning us well for the inevitable recovery in each one of our segments.

At this point, I'm going to turn the call over to Jeff to go through financials, and after the segment reviews, I'll share perspectives on the year ahead.

Jeffrey L. Keefer – EVP and CFO

Thanks Ellen and good morning everyone.

The business environment remains very challenging and uncertain. We have moved very rapidly to adjust to the new external conditions. We are focused on cash generation and what we can control - cost reduction, tight capital expenditure control, and working capital productivity.

Our actions have traction. We exceeded our fixed cost objectives for 2008, and accelerated our efforts in the fourth quarter as the economic reality changed dramatically. Our free cash flow was in line with expectations and net debt ended lower than out target. We enter 2009 with a strong balance sheet, excellent liquidity and a favorable cost of borrowing. Our actions and strong financial position will give us strength in 2009.

Turning to slide 3, fourth quarter reported earnings per share was a loss of $0.70 including the finalized pre-tax restructuring charge of [$535] million or $0.42 a share. Excluding the significant item, earnings per share was a loss of $0.28 per share in line with our guidance.

Moving to slide 4 and recapping the regional sales results compared to prior year, worldwide sales of $5.8 billion were down 17% reflecting the impact of the global downturn and unfavorable currency, which more than offset pricing gains. Full year 2008 worldwide sales were $30.5 billion, an increase of 4%.

64% of sales were generated outside the United States. As we further diversified our geographic mix of businesses, emerging markets grew 13% in 2008 representing 29% of total sales up 2 percentage points versus last year. We are well positioned in the right markets with the right science-based products when the markets eventually recover.

Fourth quarter sales in the US were $1.9 billion down 15% reflecting 7% pricing gains and a 22% decline in volume. The volume decline reflects demand weakness and inventory de-stocking in many end markets. But notably, North American auto production was down about 28% and US housing starts were down about 35%.

While all segment volumes were down, Coatings & Color Technologies and the Performance Materials Platform were substantially down. All segments showed positive pricing performances as the Ag & Nutrition segment led in percent gains year over year.

Looking forward, first quarter business conditions remained challenging, reflecting about a 40% decline in auto builds and about a 30% decline in housing starts. On the positive side, first quarter will reflect a solid start to the North American production agriculture season, which Jim will discuss in a few minutes.

Europe sales of $1.7 billion were down 20%, 5% pricing gains were more than offset by 6% unfavorable currency and broad based volume decline of 19%. The volume decline reflects the downturn in the auto, electronics and industrial end markets in addition to timing differences in agricultural sales patterns. Looking ahead, we expect fourth quarter challenges to spill over into the first quarter into many end markets.

Asia sales of $1.2 billion were down 16% versus last year same period. Volume declines of 20% and 2% portfolio change more than offset pricing gains of 6%.

These results reflect softness in all end markets with the exception of Ag & Nutrition segment, which was up moderately. Electronic & Communication Technologies segment's regional performance was most affected by the downturn in Asian demand reflecting both the demand declines as well as inventory [dryout].

Our outlook assumes that the environment will continue to be challenging, with limited visibility, at least until the Lunar New Year.

Finally, Latin America sales of about $900 million were down 9%. Currency and volume headwinds more than offset 15% pricing gains. Sales were up for our Safety and Protection segment and our pricing momentum was strong in Ag and Nutrition.

However, the softness in auto end markets and seasonal patterns in crop protection markets more than offset the gains. The outlook will reflect currency headwinds and weekend markets excluding agriculture.

Turning to slide 5, while Karen and Jim will cover the segment fourth quarter summaries in a couple of minutes, I did want to highlight the successful year of the Ag and Nutrition segment.

For the full year 2008, the teams delivered sales of $7.9 billion, an increase of 16%. The segment now represents 26% of consolidated 2008 sales.

Looking now to fourth quarter earnings per share variance analysis versus prior year on chart 6, pricing gains delivered in each region and in each segment contributed $0.44 per share. For the quarter, we fell short of covering variable cost increases. But for the year, we ended 2008 ahead $0.05 per share. This success logs in the 5th consecutive year of our local pricing gains. We will continue our pricing discipline in 2009.

Moving to variable cost, excluding the impacts of currency and volume, net variable cost increased $0.48 per share in the quarter representing about a 15% increase in raw materials, energy and transportation costs, about as expected.

As we look back to 2008, we estimate the full year raw material, energy and transportation cost increase was about 14% representing, more that $2 billion in incremental costs. Given the huge run-up in these costs, significant resources were deployed to various cost reduction efforts in 2008. This delivered $400 million in savings during the year.

As noted on December 4, our outlook for 2009 anticipates the cost of raw materials, energy, and transportation, excluding the impact of currency and volume to decrease between 4% and 6% in 2009 with some potential upside possible.

If you peel that estimate back, we are expecting a moderate increase for Ag and Nutrition inputs, which partially offsets the larger decline expected for the remaining businesses.

For the first quarter, we anticipate our raw material cost to remain high despite falling prices in the marketplace. This reflects primarily higher costs still remaining in our inventories and to a lesser extent, purchasing patterns, contracts and products [mix shift] towards the Ag and Nutrition seasonally strong sales.

We anticipate year over year raw material cost declines will begin to be realized by the second quarter. Rest assured we will use all the purchasing power we have, and this, combined with our variable cost reduction efforts at our plant sites, is expected to deliver $400 million in benefits during 2009.

Volume decline was $0.55 per share head wind. It reflects the 20% decline in sales volumes as previously covered.

Our outlook anticipates volumes, excluding Ag and Nutrition, to be down to at least fourth quarter levels as we expect inventory de-stocking and weak demand to spill over into the first quarter.

The headwind related [Deloque passage] utilization was $0.21 per share or about a $230 million charge. This is not increased spending. These are fixed manufacturing costs normally reflected in inventory that are expense as production rates drop.

This ensures our inventory values are not inflated.

As a reminder, we idled over 100 of our facilities' production lines in the fourth quarter to aggressively manage inventory and cash. All other was a charge of $0.05 per share, primarily reflecting the absence of proceeds from non-core asset sales in the fourth quarter of 2007 offset by a $0.02 gain from pharmaceutical earnings.

We expect pharmaceutical earnings to be about flat for 2009.

Fixed cost was a net gain of $0.02 per share in the quarter. The cost improvement worked to better align spending with demand is built upon the foundation of our productivity efforts put into place over the last several years.

This puts us in a much better position to deliver on our goals. In the fourth quarter, we exceeded our goal to have 4,000 contractors off role by year-end.

Our fourth quarter SGNA expense is down 7% versus the same period last year with general and administrative expense down over 20%.

We continue to highly differentiate our R&D spend. For the fourth quarter, Ag and Nutrition, Safety and Protection and Applied Biosciences investment in R&D increased, while the other platforms declined versus the same period last year.

Total company spend is down 4%. In total for the fourth quarter, we delivered about $120 million in benefits from our fixed costs reduction programs with full year benefits of about $420 million surpassing our goal of $400 million.

As described on December 4, we are taking aggressive action to deliver $730 million in cost reduction programs in 2009. $130 million benefit from restructuring and $600 in productivity benefit.

The non-cash charge associated with the pension re-measurement is expected to be at the low end of the previously stated range of $0.40 - $0.50 per share.

The 2009 anticipated pension global cash contributions remains at about $300 million.

On the preliminary balance sheet, the change in other liabilities primarily reflects the result from the year-end plan re-measurement.

The tax effect for the quarter exceeded our forecast ending at $0.09 per share benefit versus the same period last year.

The benefit primarily results from geographic mix and one-time tax benefits. The benefit from geographic mix includes the effect of pre-tax losses and high tax rate jurisdictions which had a cumulative tax benefit.

Our tax rate assumption for 2009 continues to be about 26% versus full year 2008-based rate of 20.4%.

Finally, exchange losses amounted to a $0.07 charge versus last year same period and also exceeded our forecast thereby offsetting the tax benefit.

Turning now to cash and debt on slide 7, we generated $2.1 billion of free cash flow in the fourth quarter of 2008 and $1.01 billion of free cash flow for the year, which includes $2 billion re-invested in the company via the capital expenditures.

We paid $1.5 million in dividend payments and ended the year net debt at $5.9 billion, which is $9.6 billion in debt [that of] $3.7 billion of cash and short-term investments.

Our balance sheet remains strong. We closed 2008 with minimal commercial paperwork…Our balance sheet remains strong. We closed 2008 with minimal commercial paper outstanding. Our borrowing rates – both long and short-term debt continued to be low. Turning to slide 8 and summarizing: 2009 is going to be a very challenging year. We expect weak economic conditions and continued volatility throughout the year. We are lowering our full-year guidance to a range of $2 to $2.50 per share and setting first quarter guidance at a range of $0.50 to $0.70 per share.

Lower guidance is based on our expectation of continued weak market conditions across the fraud base of end markets excluding agriculture. Our 2009 cash priorities continue to be a $1 billion reduction in working capital, capital expenditure of spend rate of $1.6 billion in maintaining our dividend and strong balance sheet. Our free cash flow target continues to be about $2.5 billion.

I will conclude by reinforcing our focuses on cash generation and working on the factors we can control: cost reduction, working capital productivity, and tight control of capital expenditures. We are committed to deliver gains in our Ag & Nutrition segment. We have confidence in delivering against our goals because of the momentum we built in 2008. Our actions ensure we will be even stronger when the environment improves. Now I’ll turn it over to Jim for Ag segment updates, Jim.

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Thanks, Jeff. Turning to slide 9, our Ag & Nutrition sales for the quarter declined 2% to $1.2 billion and we incurred a seasonal pretax loss of $164 million. For the full year 2008, however, even in light of global economic conditions and unfavorable currency impact later in the year, the performance delivered by our Ag segment was remarkable. We met our goal of delivering $8 billion in segment sales and, as committed, we delivered over 20% earnings growth for the year. I'm going to break this segment down starting first with crop protection products. Sales were down modestly in the quarter, primarily due to lower herbicide volumes. Despite favorable local pricing, earnings also declined substantially due to lower volume, higher raw material and energy costs, and the absence of a gain from an asset sale in the fourth quarter of 2007.

Let me share more specifics about the crop protection of products volume, however. In the U.S., there was a drop-off in pre-season purchases as growers delayed ordering inputs and finalizing planning decisions to the volatile commodity markets. Similarly, our European distributors remained cautious and delayed some of their purchases until the first quarter 2009.

Fungicide and insecticide supplies were tight, which also tempered volume. In Latin America, volume declines due to severe drought in Argentina and substantially lower herbicide sales were partially offset by … pricing. So, that gives you a picture for the last quarter for crop protection, but in the context of the full year 2008, crop protection products had a banner year with record sales, including Rynaxapyr sales of over $50 million.

That, along with more favorable variable margins and productivity improvements in fixed costs and working capital, drove substantially increased earnings and strong cash flow from operations. Moving to seeds, fourth quarter sales increased 11%, led by a local pricing in Brazil and North America and by volume growth driven by increased shipments in the southern U.S. This was partially offset by lower unit sales in Latin America and Europe. Let me be clear on Latin America. We had another impressive season of performance. Fundamentally, unit sales were down because plant acres were down. In addition, some Brazil corn sales did Shift to Q3 but that was partially offset by increased soy sales in Q4. Overall, we’re confident that we have gained both soy and corn market-share in Brazil. In fact, 2008 is going to be the sixth consecutive year of share gains for both corn and soy beans in Brazil.

We also expect to have gained corn market share in Argentina and in the important high-value northwest market in Mexico. For the full year 2008, seed sales and earnings both we up significantly. Gross profit increased in all regions. We met the $4 billion sales mark, led by strong local pricing and global volume growth, along with some help from currency.

We’re winning, along with our customers, as we delivered record revenue and earnings, while also investing record amounts in R&D, field sales operations and production capacity. Now let me turn to 2009. Since planning intentions and the timing of the season are as fluid as extreme rates in commodity prices, we’ll be closely monitoring agricultural economics and customer plans, as well as competitive actions, but even with that, let me reaffirm our North America seed price and market share commitment. We will gain share and we will increase net price by solid double digits.

We have this momentum in Europe as well, where we expect corn market-share gains in both emerging and mature markets. Turning to the overall Ag & Nutrition segment, despite substantial currency headwinds, we expect to deliver sales and earnings growth for the first half of 2009 that keeps us on track to deliver 15% compound annual earnings growth from 2007 to 2010, Karen.

Karen A. Fletcher - VP, IR Designate

Thanks, Jim. Please turn to slide 10, Codings and Color Technology segment sales of $1.3 billion were down 21%. The pretax loss of $65 million reflects local lower volumes, including charges for low-capacity utilization and rising raw material costs that were not fully offset by higher US dollar selling prices. Titanium dioxide sales and earnings declined substantially, driven by a substantial volume decline in all but a few emerging markets. This reflects the global flow-down and pronounced global supply chain destocking in November and December. Demand was essentially flat in Eastern and Central Europe and India. Global volume continues to be pressured by very weak demand for architectural codings and plastic markets, but was in part offset by sequential and year-over-year higher local selling prices. We are holding market share.

In addition, we seem to let their customers increase their share of Titanium dioxide purchases from DuPont, as we represent a stable, committed supplier to the codings, plastics, and paper industry. Coding sales and earnings also declined substantially, due to an unprecedented volume decline in motor vehicle sales, resulting in lower paint sales to the OEM.

Just to put things in perspective, North America motor vehicle production was down 28% versus prior year quarter, and western European motor vehicle production was down 27%. Re-finished paint products volume dropped significantly, driven by supply chain destocking, particularly in North America. The stronger US dollar and higher raw material costs more than offset higher local selling prices. Looking ahead to the first quarter for coding and color technologies, we expect all markets to remain weak, global motor vehicle production levels to drop lower sequentially, global demand for Titanium Dioxide products to moderately increase sequentially, reflecting coding seasons in the Northern Hemisphere, and higher demand for refinished paint products of inventory levels have moderated. As a result, we expect substantially lower earnings versus prior-year quarter, with improvement sequentially.

As we plan for significant volume and pricing pressures, our teams are focused on delivering productivity improvements in costs and capital. Please turn to slide 11 for electronic and communications technology segment. Sales of $834 million were down 13% due to weakness in consumer electronics, automotive and industrial markets, offsetting strength, and [photoble payex] and pricing gains in floral products.

Earning of $9 million reflect broad-based market weakness, charges due to low capacity utilization, higher raw material costs in the absence of a land sale gain in the fourth quarter of 2007. Turning now to the first quarter, we expect sequential and year-over-year volume declines reflecting the global downturn in raw material energy and transportation costs that are expected to flatten sequentially and trend down. The segment is confident it will meet aggressive fixed cost reduction targets and that these actions will contribute to partially offsetting volume declines.

Please turn to slide 12 for performance materials. Sales of $1.2 billion were down 30%, as weak demand drove down volume 32%, partially offset by higher US dollar prices. The pretax loss of $129 million reflects lower volumes across all performance materials businesses, charges for low capacity utilization, weaker sales mix, and product availability due to hurricane impact and the impact of higher raw material costs that were not fully covered with higher U.S. dollars selling prices. As previously reported, part of the earnings decline is attributed to the shutdown of the neoprene production line in Louisville, at the end of 2007. In total, volume declined about 32% for the quarter.

I'd like to update you on our operations in Orange, Texas. If you recall, that sight was significantly impacted by hurricane Ike. After extensive repairs, three polymer units are not operating. The Fling Cracker Unit is not operating, but we expect to re-commission it during the first quarter.

Looking ahead for the first quarter, we expect lower demand for motor vehicle markets to continue, with competitive pressures on both volume, and price. We will continue to have supply limitations with our [Flink] polymers products, due to rate limitations and product scheduling, as our plant in Orange, Texas, comes back up to full operating capability.

Performance materials is aggressively taking cost out. As an example, over 60% of their contractor force were taken off role by the end of 2008. In addition, they are actively reducing working capital through discipline processes and the use of redeployed, highly capable employees. First quarter earnings are expected to be down substantially, over prior year, primarily due to weak demand and continued downstream supply chain de-stocking, particularly outside of the U.S.

Turning to slide 13 and looking at Safety and Protection segment, sales of $1.3 billion were down 10%. Pricing gains, particularly in [aramas] and chemical products were more than offset by lower demand, as all businesses experienced the impact of the global economic slowdown, and destocking that was taking place in the value chain. PTOI of $105 million reflects lower volume, charges for low capacity utilization, and increased raw material prices, partially offset by higher US dollar selling prices.

The impact of the housing market is the largest contributor to the earnings decline. The segment is facing tough market conditions in housing, as North America housing starts were down 32% and we're still seeing inventory destocking, as downstream participants deleverage in response to credit tightness.

Kevlar and Nomex product lines, again, delivered pricing gains. Nomex delivered volume growth, primarily driven by electrical paper products. The new Nomex capacity line was commissioned in fourth quarter. Given the global economic slowdown, we intend to maintain our investment plans to increase Nomex and Kevlar capacity, but will show down this pace a little to keep our spend rates in line with the new reality.

Looking ahead to first quarter, we anticipate moderate sales and earnings decline, for safety and protection, as the housing market will continue to be weak during the quarter. That completes our segment review. I'll now turn the call over to our CEO, Ellen Kullman.

Ellen J. Kullman - President and Chief Executive Officer

Thank you, Karen. Last October, as the pace of deterioration accelerated in key markets, we quickly issued a call to action for senior leaders throughout our company. Essentially, we immediately shifted our focus to fundamentals and execution, making sure we increased our sense of urgency and matched our operating framework to the severity of the recession that we were all clearly facing.

We put in place very concise corporate directives focused on cash generation, reduction in cost and capital expenditures, and improvements in working capital. We reinforced those directives with clear score cards and accountability. All employees received and heard the same message, "Cash is king". We put a strict focus on performance through the end of the first quarter. We gave every business and function specific targets and were reviewing progress on a regular basis.

During this time, we also recognized how especially critical it is to stay close to the customers. It was important to clearly understand our customers' needs, secure every order, and even seek out new opportunities. One benefit from our customer intimacy in the fourth quarter, was about a 40% decline in past due accounts. The teamwork between our account leaders and our business financial folks was outstanding and clearly paying dividends.

Business teams were actively engaged with customers to secure every order. They took a customer-by-customer, region-by-region approach to understand their situation and make decisions that delivered maximum value to the pot.

We made it clear to our leaders that one size does not fit all. Each business has to uniquely assess their own market dynamics, solicit input from key customers, and implement decisive actions to yield immediate results in a way that is consistent with our corporate directives.

Last week, we just completed the most intensive meeting with the top seventy-five leaders, in my history with DuPont. Our leaders are very clear on what they must do in this environment. We're revisiting market and customer segmentation. It's changed since last year. We're marrying it to a new resource deployment plan so we can reduce cost while improving our line of sight to our customers.

Our aggressive action plans are a direct result of all of these activities. While Jeff gave you updates on various components of these plans, I'd like to recap four specific areas to drive for cash and to eliminate or avoid costs. Please turn to slide #14.

First is fixed cost reduction – we identified immediate spending cuts. We announced a restructuring program, last month, and that program is on track to deliver at least $130 million in benefit in 2009. We have another $600 million in fixed cost projects, under Richard Goodmanson's direction. I'm confident we will meet or beat these targets. You've already heard from Jeff about the status on eliminating contract to positions, only one of many examples of delivering against these commitments.

Other examples are the elimination of merit salary increases in 2009, and the implementation of diminished working schedules at certain sites.

Second is variable cost reductions – clearly, raw material prices are significantly lower to be headed into the New Year. Although we will not realize a benefit in the first quarter, we still expect full year benefits to be around $1 billion. We are also implementing a wide range of projects, for example, rationalizing FKU's or driving process yields.

Third is capital spending – We will cut capital spending by about 20% for the full year, and are continuing to assess each project justification to determine whether further cuts are warranted. We're approaching this on a zero-based approach, and raising the bar on project justification.

Some of the cuts will delay projects to match our revised, long-term outlook in market demand.

Fourth is working capital reduction. We will reduce working capital by $1 billion in 2009. This is in our control, and we will deliver. As I mentioned, earlier, strong focus on accounts receivable and past due paid off in the fourth quarter and we will maintain our vigilance in this area. Significant projects have been identified and we are beginning to staff them, focused on inventory productivity. Our first mega project in this area is already under way, using our DuPont integrated business approach. We are evaluating systems and processes to ensure we produce only what we need, in some cases shifting from a make to stock approach, to a make to order.

Another example is to holistically evaluate supply chains and see where we can take out warehousing, streamline shipments, and optimize the whole, rather than incrementally grow from a baseline that was established under a very different set of market and regional conditions. I'm confident in our work process and our capabilities of these teams to deliver.

I'd like to address our outlook for 2009. We will be transparent. We don't have a crystal ball about the future, but we'll share the assumptions and the expectations for the full year, that are billed into our EPS range, and update you as appropriate.

We reduced full year EPS guidance by $.25, primarily due to lower volume expectations, for the year. We're staying close to our customers so we can respond to the changes in demand rapidly and efficiently.

One last comment on R&D investments, overall we're maintaining a robust and market oriented pipeline of R&D projects and an outstanding bench of talent, under the direction of Uma Chaldery and Tom Connelly. While R&D spending is being trimmed in certain businesses, and timed appropriately to market conditions, we will continue to invest more in high growth areas such as seed... aramids, and bio-fuels. When you put it all together, we're keenly aware that we are in the midst of continued challenge and dislocation on a global basis. Our actions reflect this and we're attacking costs and expenses aggressively, keeping tight controls over fundamental elements of our operations to maximize efficiency, productivity, and cash.

This emphasis on fundamentals also means protecting our core competitive advantages, and making sure we position ourselves for the inevitable recovery. We will emerge in partnership with our customers, stronger, leaner, more agile, and better poised for growth. Karen, back to you.

Karen A. Fletcher – VP, IR Designate

Okay, thanks Ellen. For Chris, we're ready to open up the lines for questions.

Question-and-Answer Session


Thank you. We will now begin our Question and Answer session. To ask a question, press *1, and to withdraw your question, press #. Please remember to limit yourself to one question and one follow-up question.

Our first question is from Kevin McCarthy, at Bank of America.

Kevin McCarthy – Banc of America

Yes, good morning. Jim, I was wondering if you could quantify the amount of seed share gains that you have achieved in Brazil, in corn and soy, as well as your expectation for US corn share gains, in the upcoming planting season, here?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Sure, Kevin, first of all in Brazil, share will certainly be up. The dust hasn't settled on the complete season, but it will be a point or more. Until we get the season completely finished, we won't have actual numbers. There are similar kinds of things in Argentina. I think our gains in the Northwest market in Mexico will be even more than that.

In North America, I'm not going to try to size it, right now. It's too early, with nobody planting yet, but clearly, we are confident that the share will be up.

Kevin McCarthy – Banc of America

As a follow-up, you mentioned that herbicide volumes had declined in Latin America. Would you elaborate on that? Is it a function strictly of the drought in Argentina, or are there credit availability issues, or other fundamental issues that you think may be at work there?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

That's a good question. The drought in Argentina is certainly having some impact. That's one of the factors. Overall, a lot of it is more timing than anything else. In Latin America, we saw some delays. In Europe, I think I mentioned that we saw some delays with distributors kind of holding off until first quarter. We think the volume will still be there, but it's moving around a little bit.

From a credit point of view, there is some issue in terms of delays while people are looking for cash. For example, we have some farmers that are holding grain, looking for better prices, and while they're holding the grain, they don't have the cash to invest right now. In the big picture, they're going to be fine. They may not have the cash at the moment.

Overall, we feel like the volume will be there but that timing is a big issue.


We'll take our next question from Alexander Laurence at Jefferies.

Alexander Laurence - Jefferies

Good morning. My first question is in terms of the overall – on the industrial side, to what extent to you think you can maintain pricing as raw materials fall, starting in Q2 and Q3?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Alexander, let me take that question. I think that we have had – you can look at our track record and it supports our pricing, the success that we have had. I want to emphasize here that we really price value in use, new products, and product differentiation. We have also, over the last several years, put in pricing discipline. I think that based on that new capability, we are in a good position to maintain our pricing through this.

We will see, in some segments, some pressure that are more commoditized, but again, our pricing discipline will allow us to hold and lag the market there.

Alexander Laurence - Jefferies

Secondly, on vendor financing, can you address your overall policy on vendor financing and how that is changing, and in particular, what you are seeing in the seed market?

Ellen J. Kullman - President and Chief Executive Officer

Our vendor financing, we have a very strict credit function, working with each of our sales organizations in each of the businesses around the world. As we mentioned, we had a particular focus in the fourth quarter, on past dues, and we reduced them over historic levels by 40%. It is an area that we stay on top of, day by day, because we think it is an indicator of the health of our customers. We want to make sure we are very active in that area. Jim, do you want to comment on LAG?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Sure Ellen, a couple of things, first of all collections from 2008 are on track. In fact, past dues are kind of at an all time low. That hasn't been an issue. As we are looking in North America, for example, to 2009, we are seeing a slight increase in grower elections for deferred pay versus cash, but it's not huge. It is within the range that we were expecting, but we are seeing a little bit more demand for deferred pay.


We'll take our next question from Robert Koort, at Goldman Sachs

Robert Koort – Goldman Sachs

Thanks. Jeff, you have done a pretty good job, over the last year or two, beating into our heads that this industrial pricing index chemicals was a proxy for your raw materials. I guess you have talked to some improvement later in the year. Why wouldn't we see that more immediately, as you have eaten up some of the high priced inventory in the fourth quarter? I guess related to that, you gave an outlook that suggested the first quarter in markets as dismal as the fourth. Should we expect the same kind of 20% volume erosion or do you think you have taken care of some of that destocking and you can operate at a bit better utilization rate?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Thanks for the question, Bob. Let me try to adjust your raw material question, first. For the full year, we still expect to be in the same range that I talked to you about, on December 4, of a 4%-6% decline. That's a combination of two pieces; up for Ag inputs and down in our other businesses. Yes, we had our inventories in the fourth quarter come down. I'm very pleased with that. But, we still have, for the remaining inventory, high cost raw materials held up. That is really the dynamic that we're dealing with here. It's just going to spill over into the first several months of first quarter. I'm not anticipating any significant declines in raw materials in the first quarter.

Robert Koort – Goldman Sachs


James C. Borel – Group VP of DuPont Production Agriculture Businesses

Your second question, I'm sorry.

Robert Koort – Goldman Sachs

You took a pretty big hicky in the fourth quarter, on your operating rates, and obviously from destocking across the customer base and gave the comment that the first quarter looks like the fourth quarter, from a demand standpoint. Would we expect your operating rates to be equally impaired, or will we actually see some improvement, there?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

I think – first of all, let me comment on volume and then we will talk a little bit about production. From a volume standpoint, I did a very thorough review of all the businesses over the last couple of weeks, here. What we see, as I said, is volume is down equal to or perhaps a little bit more than the fourth quarter. We have not seen the end of the destocking.

Having said that, the business response will be very situational, based on their individual situation. I can't make a general comment about that, other than to say that as the quarter continues to go on, I would expect the trend in our idle mill's expense to go down or improve, if you will.

Ellen J. Kullman - President and Chief Executive Officer

I'm sorry, Bob. There are two areas you might want to consider as you dissect our portfolio. Certainly, on the industrial side, [TR2] and [Floro] both have seasons starting in the first quarter. Although the season will not look like first quarter of last year, I think sequentially, you'll see those improving.


We'll go now, to Jeffrey Zekauskas, at J.P. Morgan.

Jeffrey Zekauskas – J.P. Morgan

Hi, good morning. One of the themes of the conference call, so far, has been your strong balance sheet. We're also in an environment in which there are all kinds of interesting assets that are being offered to different companies, at discounts. Some of them are quite large. Is your balance sheet sufficiently strong that if you came across a $4 billion or $5 billion acquisition that was offered to you, at very attractive terms, is your balance sheet strong enough that you could actually engineer that kind of acquisition?

Ellen J. Kullman - President and Chief Executive Officer

Well, Jeff, what do you think?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Let me speak, in general, our philosophy here, in this current environment. Strategically, we're still looking to grow, particularly in Ag and safety and protection. We're monitoring our pipelines and making sure we understand exactly what the opportunities are. Jeff, we are going to be cautious, in this current environment, until we get a little bit more visibility. I think what we're seeing now is asset values are down. I think those opportunities are out there, but we're going to be cautious about jumping a little too early.

Jeffrey Zekauskas – J.P. Morgan

For my follow-up question, you mentioned this low capacity utilization charge. Is this something you are doing that is different, from an accounting standpoint, and how did you arrive at the precise number that you arrived at? What's the 2009 number, using your guidance assumptions, if there is an unusual accounting change?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

There is no unusual accounting change here; I can assure you of that. We typically have taken idle mills, prescribed by GAAP accounting. Fundamentally, what happens here is when you fall under about a 60% utilization rate, rather than taking costs to inventory, you need to take them as a period cost. As I said, this is not increase spent; this is just timing of when it hits the income statement. That is really, what's going on, here. The purpose of that is so we don't inflate our inventory values, that we get those right.

Going forward, as I said, it's very murky and volatile out there, but as the destocking ends and we reach some steady state of demand, albeit a lot lower than last year, I would expect those charged, directionally, to go down.


We'll go next to Mark Gulley at Soleil Securities

Mark Gulley – Soleil Securities

Yes, I want to focus on the balance sheet, as well, and operating rates. Given the fact that you're going to be drawing down working capital by a billion dollars, how shall I think about the change in operating rates, from 2008 to 2009?

Ellen J. Kullman - President and Chief Executive Officer

Our operating rates, through the fourth quarter, are operating pretty well against a demand signal. When we're taking our working capital, specifically inventory down, we're doing this systemically, starting with raw materials. Basically, it's a cycle time. It's a production-real issue, in terms of getting the velocity of our inventory up. We'll be turning our inventories, more for the year. That’s systemically how we're going to get to the $800 reduction in inventory for the year. That's done on a plant-by-plant, business by business basis, understanding the service levels and understanding that production reel and different ways of doing it.

We are putting people and process against it and we're very confident in our ability to achieve it.

Mark Gulley – Soleil Securities

For my follow-up, although I haven't dissected the numbers precisely, given the decent results in seed and given the reduction in sales in the overall Ag and nutrition area, it would appear as if crop protection chemicals are particularly week. Jim, can you talk about any areas where, for whatever reason, crop protection chemicals were worse than your expectations in the fourth quarter?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

The only things to highlight are the things I mentioned before. We saw volumes below what we were maybe expecting, going into the quarter, but not unexpected when you see what was actually happening with the timing and some of the economic situations. I think the important thing about both of the Ag businesses, but particularly crop protection area, is that fourth quarter is not a huge quarter. When you look at the year, crop protection had a really significant year, record sales and earnings, and productivity improved. I think you really need to look at that quarter in the context of the year. We are expecting continued progress going into 2009.


Mike Judd, from Greenwich Consultants, your line is open, sir.

Mike Judd – Greenwich Consultants

Good morning. You mentioned that your goal was to reduce working capital by roughly $1 billion. If I look at the last couple of years, on a quarterly basis, there is typically a substantial built on working capital, obviously in the first quarter or the March quarter. Is it reasonable to expect that given the current environment, that the magnitude of that typical build in working capital will be substantially this year, but that the sequential changes in working capital throughout the rest of the year look similar? I'm starting to get more of a sense, on a quarterly basis, how the cash flows look from a working capital perspective.

Ellen J. Kullman - President and Chief Executive Officer

You have to dissect our agriculture business from the rest of the business, if you think about that. In the first quarter, Ag is building inventories for season. That is very different from our industrial businesses. We have challenged our businesses for a 5% productivity… volume and currency for the first quarter. We are trying to get at – whether you are reducing volume or increasing volume, as you are in Ag, you can still get productivity. That is basically, where the focus is. There is a very different situation between our Ag and industrial business, on the cycle through the year, on inventory, that comes into play in that first quarter billed.

Mike Judd – Greenwich Consultants

Okay, so this is a follow-up to that. I understand the Ag component of that. That won't really change. When I look at the changes in working capital, last year and the year before, I was wondering if part of that big build was just due to preparing, in the other businesses, for the seasonal uptake you would expect in the second quarter. Basically, that could be substantially different, this year?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

No, Mike, in the past year or so, one of the things that drove up inventory values was really the high cost of raw materials coming in. I think that's a phenomena that you saw there, coming into our inventories as we had this $2 billion incremental cost, year over year, and incremental cost the year before.


Our next question comes from Sergey Vasnetsov at Barclays Capital.

Sergey Vasnetsov – Barclays Capital

I'm pretty happy that nobody asked my question because I thought this should be on their minds. Maybe some people have the answer and I don't. My question on the earnings outlook trajectory for 2009, and while I'm not asking for specific [DS] comments, I would like to understand the assumptions built in on a 2 to 2.25 expectation. If I take a look at DuPont's quarterly results for the past ten years, the first quarter, let's say if it's in mid-range at 6%, the typical second quarter is plus/minus about [$.10], so let's say 70. So, $.60 plus $.70 is a buck-thirty, is at least the second part of the year, on a quarterly basis, at $.40 each. Those seem to be pretty robust numbers.

My question is could you comment on your directional expectations, the main assumptions on economy and energy? Do you have some explicit expectations of a strong second-half year recovery?

Ellen J. Kullman - President and Chief Executive Officer

Let me give you some opening comments and then we can get some added help here. If you think about our restructuring, the benefit of that will be seen in the second half of the year. If you think about it, as our raw materials turn, the benefit of that is largely going to be in the second half of the year. The second half of the year is going to be different in 2009, than maybe some of the historic patterns that you've seen because we will see a tremendous amount of that $730 million in fixed cost productivity and the variable costs productivity hitting our books in the second half of the year.

That's a major component. Jeff, what would you add?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

The only think I would add is that we are not predicting any turn up – economic recovery. We are assuming, as we said, that the markets would remain down. Given that, we are not waiting for a recovery. What we are focused on are our actions and the things we can control. As Ellen says, that will largely pay off as we go through the year in the second half, Sergey.

Sergey Vasnetsov – Barclays Capital

Okay, as a follow-up, you commented that you have tried to work off your inventory. They inventory value is about the same in the fourth quarter as it is in the third, and seasonally, sometimes it picks up slightly. What was going on? Were the volumes of your sales dropping even faster that you were not able to adjust your inventories as much as you would have liked to?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

We were very successful in adjusting our inventories and our businesses did a good job. We do have hold over that is going to flow over into the first quarter, as I said.


We'll take our next question from Chris Shaw, at UBS.

Chris Shaw – UBS

Good morning everyone. I think I'm following up a little bit on Bob's question, but just in terms of – basically, are you seeing any sort of, in any of your myriad of product lines, outside of Ag and … things that are strong, but anywhere where this actually some signs of hope, where the destocking has calm and now people are coming back and reordering product?

Ellen J. Kullman - President and Chief Executive Officer

What we're seeing is a very – one term I would use is erratic environment. We will get orders one week and then two weeks later, they will be backing off because they're not seeing down their value chains. The order pattern is episodic, at this point, in the majority of our industrial markets. We are staying very close to it, understanding. We think we will see additional indicators from Asia, as we come through the lunar New Year. From mid-February, we should understand, really, at what level they are going to be operating at there. They basically did not come back from the end of the year and are really looking to start up, again, in mid-February.

Again, it is about maintaining that customer closeness during this period, understanding their issues down their value chain, and really keeping our people focused on working capital productivity and fixed and variable cost productivity.

Chris Shaw – UBS

On the [pension], can you give any estimates on what the pension that went to EPS would be and what kind of contributions you are going to have to make, this year?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Yes, I would be happy to. On December 4, I gave a range of $.40 to $.50 a share, a charge due – a non-cash charge due to pensions. We are still in the process of finalizing the re-measurement, so I don't have a pinpoint number for you. That will be available when we issue the 10K. What I can tell you is based on what we've seen so far. We will be at the lower end of that $.40 to $.50 range.

On the cash contributions, we are expecting somewhere in the range of $300 million this year, that's global. It's really, largely, outside the U.S., as legally required. We do not see a cash call from our principal U.S. pension plan.


Our next question comes from Frank Mitsch, at BB&T

Frank Mitsch – BB&T

Good morning, a follow-up on the balance sheet, I think you said your net debt was at $5.9 billion, at the end of the year. What is your targeted level?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

We were shooting for a target of lower than $6.3 billion, Frank. We exceeded that target for the year, and we ended about flat versus last year, on net debt.

Frank Mitsch – BB&T

Yes, and so is there any reason that you need to take that materially lower than where it is, right now?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

I'm not anticipating taking it materially lower, but I think in this environment, our cash discipline policies haven't changed. We are going to maintain a very strong balance sheet. We face a lot of uncertainty now, so that is something that is front and center for us. I think that is also in the best interest to shareholders because we want to ensure the dividend.

Frank Mitsch – BB&T

Okay, and you mentioned some additional R&D – areas that you are ramping up R&D spending, included bio fuels initiatives. Can you talk about potential commercial successes there, in 2009, 2010?

Ellen J. Kullman - President and Chief Executive Officer

We are continuing our investment in the bio fuels area. We are on track with the programs that we put in place and committed to, a little over a year ago. We are making progress in key areas with the pilot plant, down in Tennessee, and things like that. I think you will see, throughout the year, as we continue to make our milestones, that we will be more than happy to come out and discuss them.

Karen A. Fletcher – VP, IR Designate

Frank, just to add to that, we are looking at earnings impact still 2012 and beyond. We haven't pulled that forward. It's basically on track, as Ellen said.

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Maybe Frank, just one additional comment, I think what you saw in the fourth quarter was a very differentiated approach. You should expect to see that as we go through 2009.


Our next question comes from Peter Jacobs at Reagan MacKenzie.

Peter Jacobs – Reagan MacKenzie

Good morning, everybody, the first question I have involves the decline in shareholder equity that we saw between the third and fourth quarter. It was about $5.5 billion. If I just kind of rough it out, I can get $1 billion of that decline due to the loss in the fourth quarter, plus the dividend. That other $4.5 billion, I'm assuming that is primarily accounting for the unfunded status of the pension funds at the end of the year, but what else would be in there?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

You have the principle things; it is earnings and the underfunding of the pension as a result of primarily the swing in asset values.

Peter Jacobs – Reagan MacKenzie

Can you quantify what kind of decline you saw in the pension assets for the year?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Again, we're still finalizing all of that. That will be available shortly, when we issue our 10K.

Karen A. Fletcher – VP, IR Designate

Chris, I think we are at the end of our hour. We will take one more question.


Our final question comes from David Begleiter, of Deutsche Bank.

David Begleiter – Deutsche Bank

Good morning, Jim, there have been claims of aggressive discounting of North American corn seed, by you. If that is not true, how would somebody get that impression?

James C. Borel – Group VP of DuPont Production Agriculture Businesses

Thanks Dave, let me be absolutely clear. The answer to your question is unequivocally we have not been doing that. Let me go back and give you some background. We came out with our pricing in September. Since that time, we haven't altered our programs. We haven't relaxed any early order dates. We haven't increased any discounts for early orders. Our sample budget experience, so far, has been below what it has been the last several years, as a norm.

If we recall back in December, I talked about our product performance. We got a great product line up that is delivering real value to farmers. We priced the value. We have an advantage route to market with folks working with farmers, to get the right product on the right acre. We are going to gain market share in double-digit prices, based on the fundamentals.

Ellen J. Kullman - President and Chief Executive Officer

You know, David, I can maybe be a little stronger than Jim. I think he is holding back a little bit here. I guess the phrase I would use is "hell no". Our pricing discipline cuts across all of our businesses. We take it very seriously. We are absolutely committed in driving for value in all of our markets, including our Ag space. I think people can make quips here, and there, but I think you have to come and talk to us about the facts. We will be happy to share them.

I want to thank you all for joining us on this call. It is my first quarter as CEO. It has been a very interesting process that we are on. I'll tell you, I really have a tremendous amount of focus on our cost productivity, both fixed and variable, and our working capital productivity. Our people are aligned behind very clear directives on this productivity and what we need to deliver this year. I look forward to talking to you in the future. Karen?

Karen A. Fletcher – VP, IR Designate

Okay, Chris, that concludes our call. I would just like to thank everybody for joining us, this morning.


This concludes today's DuPont fourth quarter 2008 conference call. You may now disconnect your lines, at this time, and have a wonderful day.

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