Good morning. My name is Don and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont 2009 first 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. (Operator instructions)
In the interest of time, management requests that you limit yourself to one question and one follow-up question and please pick up your handset to allow optimal sound quality. If you have additional questions, you may re-enter the queue. Please note that this conference is being recorded. To listen to the webcast, please go to www.dupont.com. Thank you.
It is now pleasure to turn the floor over to your host, Karen Fletcher, Vice President of Investor Relations. Madam, you may begin your conference.
Okay. Thank you, Don. 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. The slides for today’s call can be found on our website dupont.com along with the news release that was issued earlier today.
Please turn to slide two. 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 posted supplemental information on our website that we hope is helpful to your understanding of our company's performance.
Please note today that in discussing segment performance, comments on results are before significant items and all references we make to earnings are on a pretax operating income basis. In addition, all comparisons are on a previous year basis unless otherwise noted. We also provide considerable detail about the segment performance on the DuPont IR website.
So with that, I'll turn the call over to Ellen Kullman.
Thanks, Karen. And good morning, everyone. In January, I made a commitment to you that we would move with urgency and discipline, taking cost out and focusing on executing the fundamentals in each one of our businesses. We stay close to our customers and markets while implementing aggressive actions to take out costs. These actions enabled us to withstand further deteriorating economic conditions during the quarter to deliver results in the range we expected. Volumes are down, but our costs are down too.
To be clear, we had to reset our expectations for economic conditions for 2009 versus our position three months ago. In January, global GDP was predicted to decline 0.6%, and today our outlook is about a 2.5% decline. Three months ago the forecast for global motor vehicle builds was about $68 million; today it’s $58 million. Three months ago US housing starts were estimated to be 720,000 units, and today consensus guides us to about 560,000 units.
These changes are indicative of a deeper recession and reflect the volatility of our markets. In light of these macro updates and what we see in our sales pattern, we now expect larger volume contractions in 2009 than what we expected just three months ago and have revised our earnings outlook for the year appropriately. The ongoing actions we are taking position the company for a strong recovery and future growth.
We remain committed to take steps that will keep DuPont ahead of the weak economy. And that’s why we are expanding the action plans we reviewed for you in December. We have now increased our 2009 fixed cost reduction target from $730 million to $1 billion. In doing so, we are reducing additional contractor positions, expanding work schedule reductions companywide, and developing additional restructuring plans. And we made further reductions in capital spending.
An important part of DuPont’s approach during this downturn is to constantly think and act opportunistically even as we work on a day-to-day basis to manage the challenges of this severe recession. For example, we are redeploying employees from excess position into inventory and receivables mega projects. These efforts are well underway and expected to delivery $1 billion in working capital improvement this year. This approach allows us to retain highly talented people and adequately staff top priority initiatives during the downturn. It’s a win-win.
Likewise, we are taking out costs structurally particularly in businesses serving auto and housing markets. These businesses will emerge from the recession leaner, more competitive and well position to mass our science-based offerings against growth opportunities such as energy efficiency, safety and security, and advanced materials, just to name a few.
And a continued focus on our science will enable our performance during these volatile times. We launched 500 new products in the first quarter, a dramatic increase over the first quarter of 2008 when we launched 297. One of the biggest contributors to the increase was Pioneer. However, all our businesses delivered new products to continue to differentiate us in the marketplace.
Our Ag business segment delivered strong growth in the quarter. And Jim is going to review their performance and talk about the outlook in just a few minutes. I’m quite pleased with the enthusiastic market reception to our new products like our high yielding corn hybrids, our Y series soybeans and Rynaxypyr insecticide. The year-over-year growth in our business is in part due to the value of our high performing products offered to the grower in combination with an outstanding global sales and marketing team that delivers on its commitments.
At this point, I’m going to turn things over to Jeff for a comprehensive review of our financial results. Jim and Karen will follow with business segment updates, and then I’ll close with comments on our outlook. Jeff?
Thanks, Ellen. And good morning, everyone. Ellen has covered the extraordinary market conditions we encountered in the first quarter and touched on our market assumptions for the remainder of 2009. Let’s put the quarter in perspective by focusing on the three primary financial drivers. First and foremost is the significant volume decline attributable to the overall global recession and rapid inventory liquidations particularly in auto, housing, electronics, and general industrial end markets.
Second and equally important for our company is the strong results delivered by the Agriculture & Nutrition segment despite the significant currency headwind, which was about two-thirds of the total company’s currency impact to earnings. And finally, the contributions of our disciplined pricing and our aggressive cost and capital repositioning. Our teams are executing well and delivered solid performance under challenging conditions.
Our number one priority remains on driving cash generation and taking actions on the things we control. Cost reduction, improving working capital productivity and tight capital expenditure control while we serve our customers well. To further strengthen our position in the current environment and for future growth when the markets improve, we are expanding our cost and capital actions.
Now let’s turn to an overview of the quarter starting with slide three. First quarter reported earnings per share were $0.54, within our guidance range. Consolidated net sales of $6.9 billion were down 20% compared to prior year, reflecting 19% volume decline and a 5% unfavorable currency and a 1% sales reduction from portfolio changes, which more than offset the 5% pricing gain.
As the quarter progressed for our non-seasonal businesses, destocking was the most pronounced in January and February, with March sales pattern sequentially improving as the destocking slowed.
Moving to slide four for a review of sales by regions, first quarter US sales were $3.1 billion, down 9%, reflecting 14% decline in volume, 6% pricing gains, and a 1% decline due to portfolio changes. The Agriculture & Nutrition segment had strong results, specifically strong volume and pricing performance in our seed business. Excluding agricultural demand, segment volumes were down substantially versus the same period last year, reflecting several end market contractions, notably a 54% decline in North America auto builds and a 50% decline in US housing starts.
Europe sales of $2.1 billion were down 28%. Pricing gains primarily from 2008 actions were more than offset by broad-based volume declines of 20% and a 11% unfavorable currency. Results reflect increased demand for agricultural products, offset by substantial demand decline across a broad base of end markets. Volumes were down in both Western and emerging Europe. Emerging Europe had more pronounced headwinds due to relatively weaker Eastern European currencies.
Asia sales of $900 million were down 28% versus last year’s same period, primarily due to a 31% decline in volume. Volumes were most pressured in January and February with some improvement in March. For example, Coatings & Color Technologies saw more positive trends in March, particularly for TiO2 products.
Finally, Latin America sales of about $600 million were down 21%, primarily on unfavorable currency impacts and broad based volume declines attributable to auto and general industrial end markets, as well as weaker crop protection product sales reflecting drought conditions in certain areas.
Looking now at the first quarter EPS variance analysis versus prior year on chart five, pricing gains delivered in each region contributed $0.37 per share. While all segments demonstrate a good pricing discipline, a majority of the contribution reflects the success of a strong seed selling season.
Moving to variable cost, excluding the impacts of currency and volume, net variable cost increased $0.16 per share in the quarter, representing about a 5% increase in raw materials, energy, and transportation costs. As we expected, this increase primarily reflects increases in agricultural and nutrition inputs, higher costs still being liquidated from our inventories, contracts and purchasing patterns.
Our variable cost outlook for 2009 remains unchanged. We continue to expect about a 4% to 6% decline, excluding currency and volume. Increases for agricultural and nutrition inputs will partially offset the larger decline expected for the remaining businesses. We anticipate year-over-year raw material cost declines will begin to build in the second quarter and will be most meaningful in the second half of the year.
Moving now to volumes. Our 19% volume decline equates to an earnings decline of $0.62 per share compared to the same period last year. With double-digit demand decline and an intensive focus on cash and inventory control, we kept tight reins on production resulting in a low capacity utilization headwind of about $0.18 per share year-over-year.
Although the environment remains uncertain, our demand outlook for the second quarter for the industrial end markets is for slight sequential improvement, primarily reflecting certain seasonality and the slowing of destocking. The Agriculture & Nutrition segment looks solid. Our full year total company outlook anticipates moderate volume declines versus 2008.
Fixed cost, excluding currency and volume, was a net gain of $0.05 per share in the quarter. Increased non-cash pension cost of about $0.10 per share and continued growth investments particularly in agriculture were more than offset by the cost reductions. We estimate that our cost reduction programs produced about $250 million dollars in savings. Our previously announced actions to reduce our cost structure are on tract and delivering strong results.
For the full year, we previously communicated fixed cost programs, excluding currency and volume, targeted to deliver $730 million in 2009, $130 million benefit from restructuring and a $600 million additional cost reductions and productivity efforts. To address the current environment and position us well for when markets improve, we are increasing our targets for fixed cost reduction programs by about $270 million, with total year fixed cost reduction programs of about $1 billion. This will be accomplished in large part by reducing additional contract positions by increasing the breadth of work reduction programs and by developing additional restructuring plans.
The additional restructuring is being designed to ensure that our businesses are more streamline and flexible to compete and win. We are developing actions targeted to deliver more than $200 million pretax run rate savings with about $70 million pretax benefit and positive cash impacts in 2009. We will update you during the quarter as we gain approval and finalize the plans.
Finally on fixed costs, we’ve provided you with the approximate distribution of full year pension expense in the appendix to help you with your modeling. Year-over-year currency impact is an $0.18 per share headwind, reflecting a 10% stronger dollar. Because second quarter of 2008 represented the trough point for the dollar, we expect second quarter 2009 earnings impact to be at least in the range of the first quarter impact with diminishing impacts in the second half of the year.
Others, a headwind of $0.05 per share primary reflects increased earnings from pharmaceuticals, which were more than offset by lower earnings of equity affiliates, higher interest expense and portfolio changes. As we look forward to the second quarter, we expect these latter items to again be headwinds in the quarter. In addition, we anticipate pharmaceutical earnings to be flat and slightly down and the absence of a $50 million legal settlements booked in the second quarter of 2008.
As a reminder, the appropriate tax rate to use for pharmaceutical earnings is about 35%, higher than the corporate average. Our base tax rate was 23.1% versus 25.5% same period last year, reflecting favorable one time items and improving earnings by $0.02 a share. Volatility in regional earnings has the potential to create some volatility in the base tax rate. That said, our base tax rate assumption for the remaining quarters of 2009 continues to be about 26%.
Turning now to the balance sheet and cash on slide six. In line with our typical seasonal cash flow patterns, first quarter free cash flow was an outflow of $1.2 billion compared to an outflow of $1.4 billion in the same period last year. Reductions in working capital and capital expenditure requirements versus the same period last year offset the cash impact of reduced earnings. We have redeployed and retrained hundreds of employees to focus on reducing working capital requirements. These aggressive efforts will significantly and permanently improve working capital productivity.
We have established a new target for capital expenditures of $1.4 billion, a 30% year-over-year reduction and a $200 million lower versus our previous 2009 commitment. Our first quarter spend was about $360 million, which is on track to meet this new objective. We are making investments on a differentiated project-by-project basis. We continue to support future growth in areas such as agriculture and nutrition, applied biosciences, photovoltaics, while aligning capital spend with the level of demand in our other businesses.
On the dividend front, we paid $0.41 per share or $375 million in dividends to our shareholders in the first quarter. And we announced today that the Board declared a $0.41 per share dividend for the second quarter. Our balance sheet is strong. Our borrowing rates on both long and short-term debt continue to be low. We have proactively moved to operating with higher levels of cash and long-term debt. Importantly, our net debt is slightly lower versus the same period last year.
Turning to slide seven and summarizing, there are many puts and takes in our outlook and a fair degree of uncertainty for the next couple of quarters. Given the current view of industrial market conditions, we are expanding our actions in cost and capital reductions to better align with demand. Taking all of this into consideration, including the expectations for strong agricultural and nutrition performance, we are updating full year guidance to a range of $1.70 to $2.10 per share, in line with Street expectations.
Our focus to generate more cash in 2009 versus 2008 remains unchanged. Specifically, our free cash flow target is about $2.5 billion. Our efforts are directed at both the current environment as well as the future. We are repositioning our businesses to achieve increased operating leverage to compete and win.
Now I’ll turn it over to Jim for an update of our Agriculture & Nutrition segment. Jim?
Thanks, Jim. Moving to our Ag & Nutrition segment on slide eight, sales grew 6% to $3.1 billion and earnings grew 8% to over $850 million despite headwinds of $150 million from foreign currencies. Excluding currency, earnings from operations grew 28%. The global long run fundamentals that have driven the Ag economy are still in place, but are now starting to feel the impact of the general economic downturn while the aggregate consumption of grains and oilseeds is still increasing.
Global economic situation is putting margin pressure on end users. The impacts on crops have spread across the global to varying degrees. But on positive note, however, even with the downturn in the global economy, crop commodity prices, income per acre, and aggregate farm income measures are still at higher – at historic levels. And DuPont is well positioned to navigate these dynamics and to continue growing around the world.
Crop protection product sales were essentially flat with substantial price increases across all regions, offset by unfavorable currency and decreased Latin American market demand. Our SU herbicide portfolio renewal actions continued to deliver impressive results, as did Rynaxypyr insecticide with volume growth primarily in North America and Asia Pacific, as well as technical sales to Syngenta. Earnings were up moderately, driven by increased local pricing and continued fixed cost productivity, but offset by significant unfavorable currency and higher variable unit costs. Earnings excluding currency grew substantially.
So let us share some highlights on the various regions to help you better understand the strong fundamentals. In North America, prices were up across all product lines and volumes were up due to Rynaxypyr growth and strong demand for soybean herbicides. Our two new soy SU herbicides, Enlite and Envive, are sold out on strong grower demand to manage weed resistance to glyphosate and soybean acreage. In fact, all of our soybean products are doing quite well this year as our efforts to reposition our portfolio to meet the challenging needs of farmers are gaining momentum.
In Europe, we incurred our most significant currency headwind, which offset improved local prices and volumes. Volumes were driven by serial herbicide and fungicide demand in the UK, the launch of our new corn herbicides and continued strengthen of our serial fungicides for use across Europe. Growth was particularly robust in Central Europe as market conditions were favorable to our portfolio.
In Latin America, the overall market was down on significantly lower acres due to drought conditions in Argentina and Southern Brazil. Latin America prices were up despite significantly lower glyphosate prices from Chinese generics and higher channel inventories.
In Asia Pacific, we enjoyed record sales this quarter, driven primarily by strong Rynaxypyr sales across the region. Of special note is the strong support by Chinese regulators for Rynaxypyr as well as the fast adoption of the new technology by Chinese rice and fruit and vegetable growers. And while demand for fruits and vegetables has slowed somewhat, the impact is going to be minimal as we expect the gain in market share in this important market.
Looking ahead to second quarter, currency appears to be an even bigger headwind for crop protection and will fully offset the revenue impact of favorable local pricing and volume increases. Earnings are expected to be down also due to currency and higher variable unit costs.
Moving to seeds. First quarter revenue increased 14% to a record $2.1 billion, driven by global corn and soy price increases, volumes associated with expected market share gains, and strong product performance, as well as increased technology in the product mix, partly offset by unfavorable currency.
Record seed earnings reflecting strong global price and volume growth were up modestly, but were moderated by increased variable costs and the significant currency headwind. Again, earnings excluding currency were up substantially. North America revenue grew substantially driven primarily by the combination of pricing and the expected Pioneer brand corn and soybean market share gains. Also contributing was the new PROaccess distribution channel, which Paul Schickler, the President of Pioneer, announced back in December.
North America first quarter earnings also grew an impressive 20%, including headwind from the Canadian dollar. This earnings growth was driven by net price increases for corn and soybeans that were even higher than the overall 17% increase that we realized globally. These price increases reflect the value of elite products and our right product, right acre positioning that come together to create a real win-win with customers as well as shareholders.
The USDA’s recent survey of farmers indicated that farmers should plant nearly the same acres of corn and soybeans as last year. Ultimately, final plannings and the balance between corn and soybeans will likely be determined by weather and planting conditions in the next several weeks. But regardless of the final outcome, we have ample quality suppliers to deliver our growth commitments. North America is realizing remarkable operating performance improvements from the combination of product performance and positioning, value and use of pricing, and the expected solid market share gains.
In the international markets, our industry-leading results continue. Strong global net price and product mix improvements delivered more than $300 million of additional sales, although nearly half of that gain was offset by unfavorable currency. Another increase in Europe corn market share is expected on lower planted acres, while the weakening Euro offset increased corn prices and increased volumes that were skewed toward this quarter versus the same period last year. And so corn volume will be relatively flat for the season.
Latin America realized strong fundamental operating results with reported revenue and earnings reduced by significant currency devaluation to Brazil real, which was strong when the inventory was produced but weakened through the sales season. The good news is that the (inaudible) season corn units increased on lower planted acres, which supports our market share gain expectations for the full year.
In addition, Brazil continues rapid adoption of corn insect resistance technology driven by the Herculex advantage. Daniel Glat, Pioneer Regional Director for Latin America, Asia Pacific and Africa, will give you more details on our May 6th webcast when he and Jim Collins, DuPont Crop Protection President, will share the key production Ag growth drivers for their respective businesses.
Before closing the outlook, I’d like to give you just a brief review of key technology ramp-ups and breakthroughs taking place in the Southern Hemisphere, which is an important part of how we continuously advance our industry-leading seed pipeline. Parent seed of 52 Optimum GAT soy experimental lines that were growing in our nurseries in Argentina and Chile is now being harvested and sent back to the USA. These off-season increases are part of delivering our launch projections for 2011 and rapidly ramping up volumes beyond that.
Another example is our reliable double haploid system. The impact of six years of focused work is being felt in all of our corn product development and breeding programs. With the opening of our new research center in Chile along with its sister station in Hawaii, crop genetics research and development will create more than 500,000 double haploid lines for corn breeders in 2009. Double haploid lines are key to our plan for doubling the rate of genetic gain in corn over the next ten years.
Speaking of corn, we have really transformed our corn product line in the last few years, most notably in North America. Product performance has improved, both in yield and in agronomics. Technology now makes up over 90% of our line-up with triples around 35%. Inventory is in place to meet increased demand, and our pipeline is strong in both elite genetics and new technologies. Although this will drive a 2009 corn share increase in North America, it’s going to contribute strongly to our one to two-point increase worldwide, with further gains to come in 2010.
Moving to our second quarter outlook for seed, currency headwinds begin to moderate for seed, and reported sales and earnings are both expected to grow substantially. Additionally, we are looking forward to receiving a final decision from the EPA late second quarter regarding our Optimum AcreMax 1 submissions for the industry’s first integrated refuge in a bag as well as reduced refuge for below-ground infect protection.
Coming back to the segment, I’ll wrap up by highlighting the unmatched management experience and track record of DuPont and Pioneer have to successfully navigate global agricultural market volatility. We are the industry best in country talent around the world leading strong business teams supported by systems and processes with the time and experience tested. And while international markets can be challenging and more variable than in the US, we expect to continue to exploit our competitive advantages and drive additional international performance.
Overall, we are well on our way to deliver more than 15% compound annual PTOI growth for Ag & Nutrition between 2007 and ‘13. And this includes our plan to continue reinvesting in R&D as our sales continue to grow through these years. Karen?
Thanks, Jim. Please turn to slide nine for Coatings & Color Technologies. Sales of $1.2 billion were down 30%, primarily reflecting broad-based volume declines across all regions and businesses. The pretax loss of $19 million reflects lower sales volumes, including charges for low capacity utilization and unfavorable currency impact, partly offset by fixed cost reductions and higher US dollar selling prices.
Titanium dioxide product line sales and earnings declined substantially, driven by volume declines in all markets and regions. This reflects the global slowdown and industry destocking, which started in the fourth quarter and continued through the first quarter. March was the strongest month of the quarter driven by strong sales in Asia Pacific. Higher US dollar selling prices were mostly offset by currency and increasing energy and raw material costs.
Coating sales and earnings also declined substantially due to the decline in motor vehicle production. North America motor vehicle production was down 54% versus prior year quarter and Western European motor vehicle production was down 42%. Refinish paint products volume dropped substantially driven by continued supply chain destocking, particularly in North America and Europe. Unfavorable currency and higher raw material costs more than offset higher US dollar selling prices.
Looking ahead to the second quarter for this segment, we expect sales to increase sequentially and year-over-year comparisons to remain weak. Demand assumptions reflect the following. The global motor vehicle production levels will slightly increase on a sequential basis. The global demand for titanium dioxide products will moderately increase sequentially, as destocking has potentially hit the bottom, coupled with Northern Hemisphere coatings seasonality and with higher demand for refinish paint products as inventory levels have moderated. As a result, we expect substantially lower earnings versus prior year quarter with improvement sequentially. Our team continues to be focused on delivering productivity improvement in cost and capital.
Please turn to slide ten for Electronic & Communications Technologies. Sales of $696 million were down 32% compared to same period last year, reflecting continued weak demand and significant destocking across consumer electronics, automotive and industrial markets, and to a lesser extent, sales pattern shifts in refrigerants. Regional cut of sales shows double-digit volume losses in each region from those product lines. Pretax loss of $54 million is attributed to broad-based market weakness, high unit rates due to low capacity utilization, higher raw material costs, particularly in fluoro products.
Turning now to the second quarter, our outlook reflects the expectation that base demand will be significantly down year-over-year. Sequentially sales are expected to be up significantly, reflecting seasonality in fluorochemical products, specifically refrigerants and an end to destocking in electronic and fluoro products – fluoropolymer supply chain. In addition to the boost in sequential sales, raw material release and aggressive fixed cost reduction are anticipated to improve earnings sequentially.
Please turn to slide 11 for Performance Materials. Sales of $942 million were down 45%, reflecting declines in major markets in all region, precipitated by destocking and weak final demand, particularly in motor vehicle and general industrial end markets. The pretax loss of $146 million reflects lower volume across all businesses, chargers for low capacity utilization, weaker sales mix and the impact of higher raw material costs, partly offset by reductions in fixed costs.
Looking ahead to the second quarter, we expect demand from all markets to remain weak, with intensified competitive pressure on volume and price. Second quarter earnings are expected to be down substantially over prior year with improvement sequentially. Our team is focused on delivering productivity improvements in cost and capital.
Turning to slide 12 and looking at Safety & Protection, sales of $1 billion were down 24%, primarily reflecting an 18% volume decline and 5% lower selling prices. Volumes were down in all product lines, most significantly in North America and European motor vehicle construction and general industrial markets, with significant destocking going through the first quarter in most markets. Pretax operating income of $72 million principally reflects the impact of lower volume and charges for low capacity utilization.
Looking ahead to the second quarter, we anticipate substantial sales and earnings declines for Safety & Protection, as the housing market remains weak year-over-year. Destocking will continue for our high performance industrial product. We continue to work to expand our addressable markets by using market-driven science.
As an example, we recently introduced DuPont Nomex On Demand, a new patented smart fiber technology that gives firefighters up to 20% more thermal performance. When temperatures reach 250 degrees Fahrenheit or higher, this material automatically expands to trap more air for greater thermal insulation. Yet in routine conditions, thermal liners remain thin and flexible, providing excellent thermal protection and good mobility. As a market-driven science company, we continue to bring forward new products and enhance our current position across markets that we participate in by delivering real value to the customer.
That completes our segment review. And I’ll turn the call over to our CEO, Ellen Kullman.
Thanks, Karen. You just heard the business segment updates. Let me try to summarize our collective market views for the second quarter. During our earnings calls, we typically provide you with perspectives on a quarter by comparing it to the same period in the prior year. Today I think it’s more insightful for us to compare sequential quarters, given the volatility of our markets. In lieu of providing what would be a wide earnings per share outlook for the second quarter, we are providing here with market-specific guidance coupled with the planning assumptions that Jeff provided.
Please turn to slide 13 where you’ll find a list of major markets that we participate in, with the current outlook for sequential sales change going from the first quarter to the second quarter. Let me start with our production Ag businesses. You’ve already heard Jim share his expectations for strong sales growth in the second quarter versus prior year. When you look at Ag sales sequentially, we expect them to follow typical seasonal patterns that have been in place for years.
Our seed sales will decline sequentially as the Northern Hemisphere planting season winds down, while sales of crop protection chemicals are expected to be flat. It is very typical of sales patterns in the first half of the year. For protective materials such as our aramid products, overall demand is expected to decline. Many of these end markets tend to lag in economic cycles. Destocking really just started in the first quarter and is expected to continue through the second quarter.
Moving to building materials, we expect the US should benefit from a seasonal uptick in the second quarter, while Europe markets look to remain soft. Our outlook is a bit more cautious higher, given that building forecasts remain weak and volatile. So, on the slide, you see our overall sequential outlook is for sales to be flat to slightly up.
For automotive markets we expect to see a slight uptick in sequential, with the expectation that auto builds will increase in the second quarter, up from very low rates in the first quarter. What remains to be seen is whether this is a short-term bump in car builds or a slow improvement trend. So for the second quarter we are showing the sequential sales outlook to be flat to slightly up.
Electronic customers are indicating some benefit from the China stimulus package. And this couples our expectations that destocking will slow down. We expect to see sales in the second quarter. Similarly we expect to see sequential sales improvement for many of our industrial chemicals and polymer businesses as destocking is subsiding, and we gain better visibility to the true underlying demand signal as we progress into the second quarter.
And finally, we have TiO2 refinish paint and refrigerants, all of which we expect to deliver sequential sales growth driven by seasonally stronger demand in the second quarter, coupled with a slowdown in destocking through their value chain. So, to summarize this chart, while there is clearly volatility and seasonal shifts in our markets, we expect sales in the second quarter to be flat to slightly up from the first quarter.
Moving to the full year, I’d like to summarize where we stand on the directives that I spoke about last quarter. If you turn to slide 14, this is the same slide that we shared in January but have updated the targets. These actions and increased targets reflect our commitment to remain flexible and responsive in today’s changing market conditions.
We remain focused on what we can control. We are staying close to our customers and markets, managing for cash and taking our cost. We will continue to preserve our strong cash generation capability while assuring that our businesses are competitively positioned for an eventual recovery in the global markets.
With that, I’m happy to take your questions.
Okay. Don, could you remind our callers on the procedure to ask a question?
Thank you. (Operator instructions) Our first question comes from Jeff Zekauskas from J.P. Morgan. Please go ahead.
Jeff Zekauskas – J.P. Morgan
Hi, good morning. Your local currency price was up 5% in the first quarter. Do you expect much change in that number for the second quarter? That is, do you expect it to be more or less up 5% or will it really vary?
Jeff, good morning and thank you for that question. Our pricing is really predicated on the new production introductions that Ellen talked about. You can see from our first quarter performance that was excellent. And we are going to continue to push those new products out where we value new price [ph]. In addition, we have put quite a bit of pricing discipline capability in all of our businesses. This is a fundamental good old blocking and tackling. So I’m not going to be able to predict exactly prices for the second quarter. But I would say that all of that work is a very, very strong foundation for us for the second quarter and the rest of this year.
Jeff Zekauskas – J.P. Morgan
And then maybe if I can just follow-up with a question to Ellen. When I look across the chemical industry, there really has been sort of surprisingly good price strength across many, many product lines and obviously raw materials have really come down and obviously demand is under tremendous pressure across the different markets in the chemical industry. Why is it that the industry in general and DuPont in particular has been able to really maintain its prices at a relatively healthy level, notwithstanding the demand in raw materials drop?
So, Jeff, I think it’s easier for me to respond to the DuPont position and then the industry position. And we have over the last years really focused our science on differentiating us in the marketplace. And certainly we have some industrial chemicals businesses that have been slow with our capacity utilization, but the vast majority of our portfolio has moved towards very differentiated product performance and value and use for customers. And we retrained our sales forces globally and specifically you see the results of that this past quarter to really focus on bringing that performance story to bear and to really focus on how we can make that customer more productive, how we can make them more successful in their marketplace. And I think that has supported us tremendously during this period of volatility. We see with the 500 new products that we announced in the first quarter still a tremendous interest and desire for our customers to differentiate themselves in this environment. And that’s why we are so focused on continuing to invest in our critical product lines and areas that will position us for the future.
Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.
David Begleiter – Deutsche Bank
Thank you. Good morning. Ellen, Performance Materials has been your worst performing segment by a wide margin. Are the elements of this business that are not – or that are disadvantageous, why will this business improve in the next few quarters, if it will?
Thanks, Dave. Certainly we can all see the results on Performance Materials. They are very closely coupled with OEM production. And item for item we have seen their volumes go down as we’ve seen automotive production go down around the world. We stay very close with our customers to make sure that the engineering polymers area is very well connected into – to not being traded off against maybe cheaper alternatives. And so we are very focused there, but obviously clearly under great pressure due to OEM builds.
In the packaging area, that fell off a little later than automotive did. We are still recovering our position from the hurricane last year where with Sabine out for that large number of months, we lost some position in the marketplace and we are working with our customers to regain that. So this is a platform that’s under severe pressure. We are looking very critically at how we continue to improve and take cost out and align our cash position with the reality this marketplace that I put our application development folks in this area up against anybody in the world. And there still is going to be a strong automotive industry out there coming up over the next few years. And I see us very well positioned to bring highly engineered solutions that are going to benefit around energy efficiency, light weighting of cars, things like that. Those trends are still going to continue. But it’s an area of focus for us around our cost and right-sizing to the market realities that we are seeing.
David Begleiter – Deutsche Bank
Understand. And Jim, just on your forecasted seed market share gain, from whom are they coming from in both the US and Europe?
Dave, thanks. It’s coming from a wide array of competitors. It really depends on the local situation. So we are taking business from a number of different companies.
Our next question comes from PJ Juvekar with Citi. Please go ahead.
PJ Juvekar – Citi
Yes, hi, good morning. Jim, couple of questions on Ag. You talked about your lines for Optimum GAT. Can you share with us some yield data on Optimum GAT? Are you satisfied with the yield you are getting in the performance related to (inaudible) resistance?
First of all, the – what we are finding in the trial so far is that the Optimum GAT lines are providing a 6% yield advantage in soy. So we are excited about that. More work going on this year, but that gives you some sense of the size. So it’s going to be a nice additional next step follower in the pretty significant Y Series launched this year that were also – you know, the whole lineup was 5%, many of them 6% to 10%. And –
PJ Juvekar – Citi
I’m sorry, go ahead.
Yes, what was the second part of your question?
PJ Juvekar – Citi
I was just saying, was there – are you saying that everything is on track as far as Optimum GAT is concerned?
No, we are on track for the 2011 launch. As I mentioned, we are ramping up from parent seed material. We have the lines ready to go. So everything is on track.
PJ Juvekar – Citi
And do you see a potential fit in those Ag businesses if that business were to come under the market?
PJ, I just can’t comment on – you know, there have been a lot of rumors in the marketplace around that one. So I just can’t comment on rumors or speculation.
Our next question comes from Sergey Vasnetsov with Barclays Capital. Please go ahead.
Sergey Vasnetsov – Barclays Capital
Good morning. Jim, you mentioned fuel price increase number. Can you explain the routine price increase for the same products and the mix change when you introduce some new freight?
Good question, Sergey. I don’t have that with me now, but it is a combination of both. We had just because of a straight yield gain that we are bringing to the market in the elite genetics, that’s bringing more value to the farmers so that part of that is driven by just across the product line, but then the technology mix is also strengthening. So it is a combination of the two, if that’s helpful. But I’m sorry, I don’t have the specific split between the two.
Sergey Vasnetsov – Barclays Capital
Okay. And a follow-up to Ellen. You mentioned these quite wide range of possible outcomes this year, which is – we quite understood. In the second quarter sales will be flat to up sequentially, but I didn’t see any comment on second quarter EPS outlook, either sequential or year-over-year, perhaps I missed it?
We are not providing any EPS guidance for the second quarter. We are going to give you the best estimates in the planning assumptions that we have, but with the external environment, we think that it’s imprudent at this time.
That’s why we have provided more information to you this quarter about what we see and also for the quarter, but also, again, the assumptions in what we see for the balance of the year, so you can put that all in context.
Our next question comes from Don Carson from UBS. Please go ahead.
Don Carson – UBS
Yes, thank you. Jim, just a couple follow-ups on Ag. I mean, two things. One, you said solid market share gains. I assume that’s not just US corn, but also US soy. Can you be more definitive on that? And then on seed pricing, you indicated you are up more than 20% or so in the US. Obviously there has been a lot of chatter about price discounting. So are you finding that basically it’s the second and third tier players like Syngenta, et cetera, who are cutting price just because they don’t have the yield to attract farmers to buy their product? I mean, again, how would you characterize all this price discussion when in fact you’ve been holding the line in increasing prices?
Yes. Let me answer the second one first. It’s really difficult, Don, to try to speak to what other people are doing. We just – as we have said through the last several months, we feel very positive about the pricing moves that we made and the way the teams been holding price, which is fundamentally based on the value. So I think – who knows where the rumors got started, but the point is we’ve got the value and the farmers are happy to make that investment in a very important crop – or a couple of crops.
On the corn and soy share, first thing, I think it’s important to recognize that we’ve got – I think yesterday’s report said we got about 5% of the corn crop in the ground and virtually no soybean. So in essence, it’s still pretty early in the season to try to predict final shares. What I would say is that in North America – we have big momentum in both crops in North America. And I mentioned that we’ve committed – we expect one to two-point gain globally in corn. North America will be at least that and soybeans will be up as well, but there is a lot of water to go under the bridge, so I won’t try to size that one yet.
Thank you. Our next question comes from Frank Mitsch with BB&T Capital Markets. Please go ahead.
Frank Mitsch – BB&T Capital Markets
Good morning, everyone. Ellen, you have had a little bit of time now to sit in the CEO’s seat. I’m wondering how do you view the linkages between the Ag business and the rest of DuPont. Obviously the company made a lot of portfolio changes over the past decade. In your view, does the current portfolio make the optimum sense?
Thanks, Frank. I’ve always been a proponent that biotechnology and our basic science there and the investments that we’ve made over the past 20 years is going to benefit this company in many different ways, in the agricultural end markets, which we’ve seen, in the materials and biofuels end markets that we’ve talked about very broadly. So I’m a big believer in the core technology and the strength of DuPont is really applying it in very many different marketplaces around the world. The portfolio question is always something that we take a look at and understand how our science plays out, how we are differentiated in the marketplace and how we can deliver the best combination to provide the best value to our shareholders. That’s obviously a question we continue to actively look at. But I’m a big believer in the technology, to your question specifically to the Ag point you made earlier.
Frank Mitsch – BB&T Capital Markets
Okay, great. And given the acknowledged strong balance sheet that the company currently has in this current negative environment, there probably would be some properties that come up at more attractive valuations. Could we expect that DuPont would look closely at something along those lines, particularly as it pertains to some of the biotechnology areas that you are talking about?
I think we’ve been very clear in our target areas when we look at acquisitions in terms of things in agriculture and safety and protection and in biotechnology in general. Jeff is keeping a pretty tight grip on the purse strings here. We think that we have to have a pretty high borrower in order to pass to get there in this volatile environment. But we are still actively looking to understand how we could enhance our portfolio in that way.
Frank Mitsch – BB&T Capital Markets
Great, thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Laurence Alexander – Jefferies
Good morning. First, for those three segments that you have that posted PTOI losses in the first quarter, when do you expect them to return to profitability, or at least if you use – and maybe if you want to speak to the midpoint of your range or somehow tie it back to the way you're looking at the full year?
These platforms have very different combinations of businesses, some which energy stocking earlier and some which energy stock – you know, the volume declines later. So it’s hard to pinpoint a date. We obviously, as we have given you indications on the second quarter very clearly in my chart in the deck around what we expect sequential volumes to be doing in those areas, that's obviously going to be a key indicator. And as well you can imagine these are platforms that we are very actively focused on cost reduction and productivity improvement. So those numbers aren’t lost on us and we are very focused on making sure we are doing the right things here. Jeff, anything you’d like to add?
Well, the only thing I would add is someone said it’s very difficult given the uncertainty in the markets to pinpoint specific dates, quarters and so forth, but I do anticipate that all of the platforms will be positive for the year.
Laurence Alexander – Jefferies
And then just by way of follow-up, as the recession has come in more severe than initially expected, how has your philosophy evolved in terms of longer term dividend payout target?
Well, the dividend is clearly a Board decision. Our principles, however, remain unchanged. And that is to maintain a strong balance sheet, return excess cash to shareholders, unless we have compelling growth opportunities. And I think we’ve demonstrated that over the years.
Our next question comes from Kevin McCarthy from Banc of America. Please go ahead.
Kevin McCarthy – Banc of America
Yes, good morning. I was wondering if you could comment on monthly volume trends. Some other companies in the space have pointed to improvement in the month of March, particularly in Asia. I’m wondering to what extent you might be seeing that and how April is shaping up for you.
Yes, thanks for that question. What we really saw was very specific to business and country around the world. What I would say is, let’s start with the US. We did see March uptick sequentially. If you look at Asia, again very country business specific. I mentioned that our TiO2 business saw some improvement. There were a couple of others that did as well. Europe continues to be down. And we have not seen the end of destocking there. In general, again, it will remain very specific by business and somewhat mixed as we go into the second quarter. But we are expecting in the second quarter flat to slightly up sequential sales as we move forward through the quarter.
Kevin McCarthy – Banc of America
As a follow-up, Jeff, you had variable costs, still a $0.16 headwind in the quarter. I know you’re battling some Ag inflation there on a year-over-year basis. But could you comment on when you would expect that number to turn positive, given the petrochemical cost relief?
I think – you know, again for the full year, our outlook or assumption remains unchanged for variable cost, down 4% to 6%. We have had a high cost inventory that we’ve been in the process of liquidating as well as the higher Ag input costs. We should start to see progress on that in the second quarter and most of the benefit in the second half then.
Our next question comes from Mark Gulley with Soleil Securities. Please go ahead.
Mark Gulley – Soleil Securities
Hi, good morning. Jim, I got a question regarding Optimum AcreMax if I can. You seemed unusually optimistic about getting approval providing a date for that. Given the fact you are asking the EPA to make a couple of different changes in refuge reduction, I wonder if you can elaborate a little bit on your level of optimism there.
Yes, thanks for the question. A couple of different things. I mean, first of all, if you look at AcreMax, it’s a unique and really game-changing product. And let me start with Herculex rootworm as a gene or as a trait. It's one that is less likely to develop resistance. It’s got an (inaudible) activity. You put those two together, it makes it a very robust trait. Also the fact that it’s considered a non-high dose trait as compared to things like the yield guard where pyramiding or stacking for resistance isn’t needed in fact to be detrimental versus helpful. All of that means that it’s a robust trait that offers really strong performance for growers.
And when you combine that with refuge in a bag, which from a farmer’s perspective is so much more convenient, and from a compliance point of view, EPA and others from stewardship, it guarantees or assures compliance. Put those things together and then add to it reduction in refuge, you just got an unbelievably compelling offering. So we’re very excited about Optimum AcreMax. We are working our way through the approval process. We’ve shared the science. We’ve made the proposals. Obviously the final decision would be by the EPA, so we respect that process, but we're very excited and very optimistic about it.
Mark Gulley – Soleil Securities
Okay. Good luck, Jim. Thank you.
Don, I think we have time for a couple more questions.
Thank you. We have Mike Judd on line with Greenwich Consultants. Please go ahead.
Mike Judd – Greenwich Consultants
Yes, thanks. If you could just talk a little bit about the second half of the year in order to meet the range of estimates that you are providing for the full year. Obviously there should be some improvement in the second half of the year. And how do you expect that to play out, please? Thanks.
Our outlook anticipate – again, year-over-year weaker volumes for the total year. Ellen covered with you some of the dynamics economically that are happening there. And counterbalancing that are our aggressive efforts around cost and productivity, both variable cost and fixed cost of productivity. When you take that altogether and also look at some of the uncertainty we face, it’s exactly how volumes are going to play out here. Net-net, that’s how we arrive at this range of $1.70 to $2.10.
Mike Judd – Greenwich Consultants
Our last question comes from John Roberts with Buckingham Research. Please go ahead.
John Roberts – Buckingham Research
Good morning, John.
John Roberts – Buckingham Research
One of the ways companies – one of the ways they measure their customers’ inventory levels is to look at requested delivery times or frequencies of orders or size of orders. Are you seeing anything in that you are getting more rush orders or more frequent, shorter orders that might give you comfort that customer inventories are nearing bottom?
You know, it’s interesting. I think in the last quarter we talked about the volatility of the order rate and orders would come on and off the books and that there was really no pattern. We see that settling out a little bit. We see some rush orders as you indicated. People all of a sudden not having (inaudible) but – you know, and we see a little more less volatility, I’d say a little more dampening of that curve as it come through. It’s different in every industry. The ones that started volume down earlier in the fourth quarter tend to be settling out a little more than the ones that started down in the first quarter of this year. But our people are staying very close to our customers and really trying to focus on understanding their needs. But there is still a certain level of volatility that says that we have to watch this very, very closely.
John Roberts – Buckingham Research
Okay. I think that wraps up our hour this morning. I know it’s a busy earnings day. I appreciate everybody joining us for the call this morning. Thank you.
Thank you. This concludes today’s DuPont 2009 first quarter investor call. You may now disconnect your lines at this time and have a wonderful day.
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