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E.I. du Pont de Nemours & Company (NYSE:DD)

Q2 2009 Earnings Call

July 21, 2009 9:00 am ET

Executives

Karen A. Fletcher - VP - DuPont Investor Relations

Ellen J. Kullman - Chief Executive Officer

Jeffrey L. Keefer - Executive VP - Chief Financial Officer

Analysts

David Begleiter - Deutsche Bank

Don Carson - UBS

PJ Juvekar - Citi

Lucy Watson - Jefferies

Robert Koort - Goldman Sachs

Edward Yang - Oppenheimer

Sergey Vasnetsov - Barclays Capital

Frank Mitsch - BB&T Capital Markets

Mark Connelly - Stern Agee

Mike Judd - Greenwich Consultants

Jeff Zekauskas - JP Morgan

Operator

Good morning. My name is John and I will be your conference operator today. At this time I would like to welcome everyone to the DuPont 2009 Second 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)

To listen to the webcast, please go to www.dupont.com. It is now my pleasure to turn the call over to your host, Karen Fletcher, Vice Present of Investor Relations.

Madam, you may begin your conference.

Karen A. Fletcher

Thank you, John. Good morning and welcome. With me this morning are Ellen Kullman, CEO, and Jeff Keefer, CFO. 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 reconciliation to GAAP statements provided with our earnings news release and on our website. And finally, we have 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 income basis. In addition, all comparisons are on a previous year basis unless otherwise noted. We will also provide considerable detail about segment performance on the DuPont IR website. So with that I will turn the call over to Ellen.

Ellen J. Kullman

Thank you, Karen, and good morning. Today with the economy still a dynamic yet unusually uncertain factor in overall performance, I’d like to open with comments on macro conditions before discussing our results in the quarter. We are seeing macro conditions start to stabilize versus three months ago.

Last quarter I shared our view that global GDP would decline about 2.5% in 2009, and that view is unchanged. I also said our performance outlook in 2009 was based on global auto bills of about 58 million vehicles and US housing starts at about 550,000, and those outlooks are also unchanged. Many of our markets showed improvement in the second quarter with an apparent end to destocking across several supply chains. Our coating, electronics, and performance materials business segments all had sequential volume improvements. Our safety and protection segments volumes were essentially flat with a weaker mix given the lagging market conditions for our Nomex and Kevlar businesses, as we expected. And Ag had a strong quarter, as we expected. And all segments were positive earnings contributors.

With macro conditions evolving about as we expected, our aggressive cost actions have served us well. Our earnings results this quarter benefited from an aggressive fixed cost reduction, new product launches, pricing discipline, as well as from lower raw material cost. Last quarter, we made a commitment to increase our fixed-cost productivity with the goal of $1 billion in 2009. We delivered nearly 60% through the second quarter and are on track to meet our goal. What’s more important is the productivity mindset of our business leaders. We are committed to keeping about 75% of these fixed cost reductions out for the long term. That includes benefits from restructuring, manufacturing cost reduction using DuPont production systems methodology, and finding ways to keep half of our eliminated contract positions out permanently.

I was to emphasis, however, that even in these difficult times, we have demonstrated that innovation and cost discipline can not only co-exist, but together can enhance our competitive advantage in the marketplace. By continuing to invest in our differentiated market-driven science, we launched 316 new products in the quarter, up 20% from the second quarter of 2008. And when you look at the combined total for the first half, new product launches are up 46% over last year. Particularly in a downturn, customers have greater interest in assessing the merits and value of new products. We are seizing the opportunities in today’s environment to bring value to our customers using new products to help them differentiate their own offering in the marketplace. We believe this emphasis positions us well for eventual recovery.

The strong sales and earnings growth from our Ag segment this quarter, despite significant currency headwinds, is a great example of our innovation investment paying off. The success of our Y series launch in soybeans, the continued improvement in seed germplasm and new traits, and growth of Rynaxpyr insecticides are example of our robust pipeline contributing to bottom-line results.

Overall, we expect economic recovery to develop slowly. We continue year-over-year weak demand in our outlook and we remain laser focused on the customer to assure we are ready to meet their needs as demand picks up. Our priorities are clear throughout the organization and everyone is working with the right sense of urgency that will carry us through the remainder of this extremely difficult period and into eventual recovery.

Now, I’ll turn things over to Jeff to review our financial results and later in the call, I’ll comment on our full year outlook.

Jeffrey L. Keefer

Thanks Ellen and good morning everyone.

We had a solid quarter in an environment that continues to be very challenging. Our results for the quarter were modestly better than the midpoint of our planning range. The global teams executed well, delivering fixed cost and working capital improvements, with pre-tax margins expanding sequentially in four out of the five platforms. While volumes remain weak, we did see some sequential improvement in the quarter, which we’ll cover in a few minutes. Our teams aren’t waiting for recovery, but instead are capitalizing on their strong market positions by gaining share in some of our key target markets, executing value-based pricing, while simultaneously transitioning to a lower cost structure.

As we look to the next couple of quarters, the timing and the pace of economic recovery remains uncertain. As a result, we are leaving in place our full year outlook in continuing to focus on the things we can control, including: a relentless pursuit to serve our customers well, driving cost and working capital improvement, and maintaining tight capital expenditure controls. We are on-track to meet our goals and emerge stronger when economic conditions improve.

Turning now to slide three, which summarizes earnings per share and sales results. Second quarter reported earnings per share were $0.46 and included a net charge of $0.15 for significant items that includes the 2009 restructuring charges, hurricane insurance recoveries, and reductions to previous year hurricane and restructuring charges. Excluding significant items from the quarter, earnings were $0.61 per share, down 48% from prior year. Consolidated net sales was $6.9 billion--we’re down 22% compared to the prior year, reflecting 19% volume decline, 5% unfavorable currency and 1% sales reduction from portfolio changes, which more than offset 3% pricing gain.

The sales highlight of the quarter is clearly the outstanding performance of our seed business in the North American planting season. Karen will cover the details, but the teams delivered share gains in both North American corn and soy, reflecting our strong product performance, as well as flawless execution by our sales teams of Great Product Right Acre Strategy. Excluding sales to agricultural end markets, segment volumes were down year over year in a range between 20% and 30%. Looking sequentially, there are examples of seasonally adjusted improvement, which include about 15% demand improvement for titanium dioxide products with particular strength in China, about 20% demand improvement in engineered polymer products, and about 20% demand increase in electronic products with a transition from a significant first quarter destocking to some restocking. We view these trends as encouraging, yet not enough to call it a turn because the sustainability is unclear.

Moving to slide four for a review of sales by region. Second quarter had two noteworthy regional results. Europe market conditions were still among the most challenging globally, as sales of $1.7 billion were down 38% versus same period previous year. Slight pricing gains were more than offset by broad-base volume declines of about 27% and 13% unfavorable currency. Asia, on the other hand, showed a considerable improvement in the rate of decline, posting sales of about $1.2 billion, down 18% versus same period last year, but about 35% sequential improvement. Selective pricing actions were more than offset by a 16% decline in volume.

Turning now to the second quarter EPS variance analysis versus prior year on slide five. Pricing gains delivered in each region contributed $0.23 per share. The majority of the contribution reflects the success of a strong seed selling season and to a lesser extent, coatings and color technologies. Pricing declines incurred in those businesses with contractual pass-through pricing, such as the chemicals businesses in safety and protection, as well as the electronic businesses with metals pass-through. Finally, performance materials continue to demonstrate discipline pricing performance. Importantly, all businesses delivered improved variable margin versus the same period the previous year.

This leads into a discussion of variable costs. Excluding impacts of currency and volume, the net variable cost was a benefit of $0.19 per share in the quarter, representing a 5% decrease. The benefit reflects increased agricultural and nutrition inputs, the absence of a $52 million charge on open soybean contracts from previous year, as well as lower cost starting to roll through the inventories of the remaining businesses. Because of the continued (inaudible) cost, we are holding the outlooks range for 2009 at about a 4% to 6% decline, excluding currency and volume. We anticipate year over year raw material cost declines will continue to roll through in the third quarter, peaking in the forth quarter, noting that we experienced a peak impact of raw material increases in the fourth quarter of 2008.

Moving now to frame the volume impact on earnings. The 19% volume decline resulted in an earnings decline of $0.61 per share compared to the same period the previous year and a related low-capacity utilization headwind of about $0.09 per share. Our demand outlook for the second half for agriculture and nutrition anticipates a strong selling season in Brazil, as well as an improvement in volumes for crop protection products. For the industrial end markets, our mid-case demand outlook is for continued sequential improvement in end market demand. Looking year over year, we expect third quarter volume to be down versus prior year with fourth quarter moving into positive territory. Continued low visibility makes it prudent to provide a range which leaves room for more improved demand rebound on the upside as well as a potential slower improvement on the downside.

Covering fixed cost now, excluding currency and volume, fixed cost was a net benefit of $0.04 per share in the quarter, which reflects increased non-cash pension costs of about $0.10 per share, and continued growth investments, particularly in agriculture, more than offset by cost reduction in other areas.

The estimated benefit in the quarter of our cost-reduction programs was about $335 million, added to the first quarter impact of about $250 million. With nearly $600 million of reductions today, we are confident we will deliver at least our previously communicated target for total year fixed-cost reduction programs of $1 billion.

The teams are executing the plans to achieve the goal with an eye towards redesigning the work to ensure much of the savings is long term in nature. This includes our efforts in DuPont production systems related to manufacturing, as well as our streamlining efforts in corporate services. This will ensure that we retain about 75% of the savings for the long term.

Let me provide a quick update, specifically on restructuring actions. Last quarter we announced plans for additional restructuring to ensure that our businesses are more streamlined and flexible to compete and win. This quarter we solidified the plans and recorded the accrual. We provided you the charges by segment in the appendix, along with the run rates, for both 2008 and 2009 restructuring actions.

Turning now to currency, year-over-year currency headwind was $0.18 per share, reflecting about a 13% stronger dollar based on our sales-weighted currency. We expect the impact in the second half to be substantially less than the first half, with a headwind in the third quarter changing to a tailwind in the fourth quarter, assuming currencies are stable. Other on the waterfall is a headwind of $0.07 per share, primarily reflects lower income from equity affiliates and a higher net interest expense. Also included in the variance is a $0.04 headwind, reflecting the absence of a $51 million legal settlement recorded in the second quarter of 2008.

Our base tax rate was 27.4% versus 22.7% same period previous year, creating a headwind of $0.04 per share. Our base tax rate assumption for the second half of 2009 continues to be about 26%, noting that volatility in regional earnings could change this rate for the second half.

Turning now to the balance sheet and cash on slide six, second quarter free cash flow was an increase of over $500 million, compared to an inflow of about $40 million in the same period last year. Again this quarter, reductions in working capital and capital expenditure requirements versus the same period last year offset the cash impacted reduced earnings.

Our capital expenditure target is $1.4 billion, a 30% year-over-year reduction. The spending plan anticipates investment in agriculture and nutrition, applied bioscience with photovoltaics, while aligning capital spend with the level of demand in other businesses. Our year-to-date spend puts us solidly on track to meet this target.

Moving to an update on year-to-date dividend payments, we paid $0.41 a share in both the first and second quarters. DuPont yield is about 6% based on current stock price. Our plans have been and continue to be focused on generating more cash in 2009 versus 2008, and we are pleased that we have delivered cash during a severe recession while continuing to invest in our highest-growth opportunities.

Another accomplishment is the continued strength of our balance sheet, which remains strong with net debt modestly lower versus same period previous year.

In summary, things played out slightly better than we expected despite the amount of volatility which still exists in the markets. The rate of volume decline eased in some areas, costs were down, pre-tax margins were sequentially flatter-up in four out of the five platforms, inventories were down, and capital expenditure was down.

As I stated to you earlier, we are not shifting gears, and instead we are steadfast about delivering our cost and capital commitments. This will provide operating leverage when recovery occurs. With this as a backdrop, we are reaffirming our full-year underlying guidance range of $1.70 to $2.10 per share.

Our second-half earnings split is typically even between quarters, however this year our assumptions are for sequential demand, cost, and currency improvements, to favor fourth-quarter earnings over third quarter. Aligned with the earnings-per-share guidance, our free cash flow target remains at about $2.5 billion.

Now I'll turn it over to Karen for a review of the segments. Karen?

Karen A. Fletcher

Thanks, Jeff. Let's start with Ag & Nutrition on slide seven. Revenue for the platform grew 3% to $2.6 billion and earnings were up 15% to $581 million. This reflected strong pricing across all products and regions, partially offset by significant currency headwind and higher commodity costs.

Food and nutrition products pretax operating margins increased by nearly four points on disciplined portfolio management and fixed-cost productivity. Excluding currency and last year's mark-to-market charge, earnings for the segment from operations grew 23%.

Growers continue to invest more in technology to protect their crops and maximize their yields. While these Ag marketplace fundamentals for growth remain relatively strong, the general economic turndown did impact currency devaluation, customer inventory management of crop protection, and food and nutrition product, and a higher portion of credit versus cash sale.

Let me share some of the segment details. As Jim indicated last quarter, crop protection sales and earnings were down substantially. Favorable local pricing was more than offset by lower fungicide and herbicide market volumes and unfavorable currency. The overall crop protection market has softened due to weather conditions in key agricultural areas.

Europe saw near-perfect planning conditions, despite the fact that it was a late season. North America had delayed plannings and Latin America continued to be affected by the draught. European volumes were impacted by lower cereal and corn acreage, and extremely tight credit in Eastern Europe. In North America, insecticide growth was more than offset by lower market demand for cereal and corn herbicides. Delayed plannings due to the wet weather eliminated some fungicide and herbicide applications. Latin America price was down due to lower glyphosate pricing. Volumes declined mainly due to draught and lower sugar-cane acres. Significant volume growth in Asia Pacific was driven primarily by strong Rynaxypyr sale.

Looking ahead to the third quarter, volume increases will be partly offset by unfavorable currency. Seasonally low earnings are expected to be down versus prior year, primarily due to currency.

Moving to seeds, we're proud of a 2009 milestone with Pioneer brands realizing the industry's largest North American corn and soybean market share gains of more than one point and two points respectively. In addition to those gains, PROaccess will bring one point each of corn and soybean market share in the US. These market share results are calculated off of the USDA June 30th report.

Driven by a strong North America performance, seed sales and earnings grew substantially. Sales were $1.7 billion up 21% from last year, with local price up 23%, volume up 3%, and a currency headwind of 5%. North American seed volumes were up 7% in the quarter, and European corn volumes were lower than expected on lower acres. Earnings, which reflect the absence of a $52 million market-to-market charge from open soybean contracts, more than offset currency headwinds.

Moving to the third quarter outlook for seed, currency continues to be a headwind while southern hemisphere sales are expected to improve moderately on price. Seasonal losses are also impacted by currency as well as higher commodity costs.

Additionally, we don't expect to have a similarly high gain of the $49 million pretax market-to-market benefit from settlement of soybean contracts that we had in the third quarter of last year.

So, for the segment outlook for the remainder of this year, we expect high single-digit top line growth with significantly improved earnings, excluding the mark-to-market benefit from 2008, and continued growth investment plans in R&D and sales to further strengthen our capabilities.

We look forward to sharing additional updates with you in the coming weeks, including a decision from the EPA regarding our optimum AcreMax 1 submission for the industry's first integrated refuge in a bag, and reduced refuge for below-ground insect protection, as well as an Ag-focused investor event that we're planning in early September. Please look for further details to come.

Now let's turn to slide eight and coatings and color technologies. Sales of $1.4 billion were down 26%, primarily reflecting continued weakness in motor-vehicle markets and to a lesser extent, titanium dioxide products. Pretax operating income of $133 million reflects lower sales volume and unfavorable currency, partly offset by aggressive fixed-cost reductions and pricing gains.

Titanium dioxide product sales declined significantly and earnings were down moderately, driven by lower volume in all markets and regions. This reflects the global slowdown, partly offset by moderate restocking in many markets. Higher local selling prices and lower fixed costs were more than offset by lower volume, unfavorable currency, and slightly higher raw material costs.

TiO2 products continued to strengthen sequentially, resulting in more than 25% increase in revenue versus the first quarter 2009, driven by markets that hit their low point and have started to rebound, especially in Asia Pacific, Latin America, and certain developed markets.

Coating sales and earnings also declined substantially, reflecting a decline in motor vehicle production. North America motor vehicle production was down 48% versus prior year quarter, and European motor vehicle production was down 26%.

Refinished paint products volume dropped substantially, driven by continued weakness in global demand, partly offset by modern restocking in developed markets. Higher local selling prices and fixed-cost reductions were more than offset by volume decline and unfavorable currency.

Looking ahead to the second half for this segment, we expect sales to increase sequentially, and year-over-year comparisons to remain weak. Demand assumptions reflect the following: first, that global motor vehicle production levels will slightly increase on a sequential basis; second, that global demand for titanium dioxide products will moderately increase sequentially as destocking is completed; and finally, that lower demand of refinished paint products will be driven by normal seasonal patterns.

As a result, we expect substantially lower earnings in the third quarter versus prior year, with essentially flat earnings sequentially. Our team continues to be focused on delivering productivity improvements in cost and capital.

Please turn to slide nine for electronics and communications technologies. Sales of $795 million were down 26% compared to same period last year, primarily reflecting demand declines of 23%. While moderate restocking began in second quarter for consumer and automotive electronics, our results reflect year-over-year demand declines in all regions. In addition to the pressures from the recession, the cold wet spring (inaudible) and refrigerant seasonal pattern.

Pretax earnings of $37 million reflect the broad-based market weakness, as well as unfavorable currency impacts. Importantly, the results also reflect continued investment in photovoltaics, disciplined pricing particularly in floral products, and the benefit of lower fixed costs, all key deliverables of the 2009 plan.

Turning now to the second half, our outlook is for base demand to be moderately down year over year, reflecting a weaker back-to-school and holiday electronic device season in third quarter, more than offsetting the favorable comp in fourth quarter.

Sequentially, sales are expected to be up significantly, reflecting seasonality in electronics, in addition to modest improvements in photovoltaic demands. Earnings are expected to reflect lower raw material costs and continued aggressive fixed-cost reductions both heavily weighted to the latter part of the half.

Please turn to slide 10 for performance materials. Sales of $1.1 billion were down 40%, reflecting weak demand in major markets in all regions, particularly in motor vehicles and general industrial markets. We believe industry destocking is largely completed with all regions showing sequential volume improvement versus first quarter, and sequential improvement in each month of the quarter.

It was led by strong pickup in Asia, although North America, Western Europe, and Latin America regions also showed improvement. Pretax operating income of $37 million principally reflects weaker sales volume and unfavorable currency, partly offset by lower raw material costs and fixed-cost reduction.

Looking ahead to the second half, destocking is largely completed. Sequentially, third quarter sales and earnings are expected to be up, reflecting higher volumes and continued gains on both raw material costs and fixed-cost reductions.

We expect intensified pricing pressure as polymer capacity gradually comes back online. The business teams continue to be focused on pricing discipline and delivering strong cost productivity performance in the second half of 2009.

Turning to slide 11 and looking at safety and protection, sales of $1 billion were down 37%. Volume was down 29%, reflecting the weak macro conditions, including continued destocking in our highest margin businesses.

Pretax operating income of $71 million principally reflects the impact of lower sales volumes, unfavorable mix, and currency headwind. Also included in the result is significant progress towards delivering a step change in productivity, particularly in North America and Europe, key actions to ensure continued leadership position and headroom for margin improvement in coming months.

For the second half, we expect stable demand for most product lines, no further inventory destocking by customers, and we expect third quarter (inaudible) substantially lower than same period last year, driven by continued weak demand in major markets. Earnings benefit from lower raw material costs and fixed cost reductions are expected.

So that completes our segment review, and I'll now turn the call back to our CEO, Ellen Kullman.

Ellen J. Kullman

Thank you, Karen. Last quarter we provided you with a sequential view of our sales outlook for major markets in addition to our overall financial planning assumptions for the full year. We're going to continue with this approach for the sales outlook for the third quarter.

Please turn to slide 12. This is the same format that I used last quarter. I include the actual sales pattern for sequential sales from first to second quarter, followed by our outlook for sequential sales from second to third quarter.

Based on market intelligence we are gathering almost on a daily basis from our customers and partner interactions around the world, following is our best assessment of how a few key markets are developing.

Starting with our production Ag businesses where we expect the typical seasonal sales pattern, we expect year-over-year sales will be up where sequential sales will be down in the third quarter. For protective materials, which include our aramid products, Kevlar and Nomex, we expect to see an end to the destocking that took place during the second quarter with sales trending sequentially up in the third quarter.

Moving to business materials, we look for sales to be flat to slightly up based on market forecasts which indicate US housing starts have bottomed and global markets remain weak. In automotive markets, global auto builds were up in the second quarter from a very low rate in the first quarter, and our sales were up sequentially.

Market forecasts don't indicate much of an uptake in global auto builds going into the third quarter. We expect our sales of automotive coatings and polymers will be flat to slightly up depending on the region, customer mix, and the potential for restocking activity that may begin to occur.

For example, auto builds in greater China were up year-over-year in the second quarter and forecast to be up in the third and fourth quarters as well. We're positioning our sales and new product efforts towards growth opportunities such as this one.

For the remainder of the businesses shown on this slide, we're seeing an end to destocking and expect seasonally adjusted sales to be flat to slightly up. I would call your attention to the electronics and TiO2 markets where we are seeing a pickup in demand signals. Keep in mind that those businesses are benefactors of government stimulus packages as well.

So to summarize this slide, while most markets remain weak, it's fair to say we've seen an end to much of this destocking that took place in the first two quarters. For the company, we expect total sales down 10 to 15% sequentially, primarily due to the seasonal decline in the production agriculture sales.

In closing, second quarter results reflect weak but more stable market conditions, coupling our innovation-driven pricing discipline with the impact of lower-cost raw materials and aggressive cost reduction work going on across the company. We drove variable margin expansion and solid earnings growth versus the first quarter. We remained focus on what we can control, and our 2009 directives are updated for you on slide 13.

To be clear, we are staying close to our customers and markets, managing for cash, and taking out cost. And we expect to reap benefit from our actions through the remainder of 2009 and beyond. We will continue to preserve our strong cash-generating capability while assuring that our businesses are competitively positioned for an eventual recovery in global markets.

Now we're happy to take your questions.

Karen A. Fletcher

So, John, let's go ahead and open up the lines, please.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. (Operator's Instructions) Our first question is from David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank

Thank you, good morning. Ellen, on the guidance for the back half, what is the range of volume assumptions underlying that $0.40 range?

Ellen J. Kullman

Yeah, it is the same volume assumptions we had coming through and shared with you in the first quarter. We came in the second quarter pretty much right in the middle of where we expected, and that's why we maintained our estimate for the full year.

David Begleiter - Deutsche Bank

And just on pricing, are we seeing any sequential pricing pressure besides what you mentioned in performance polymers?

Jeffrey L. Keefer

No, not really, David. This is Jeff. I think our pricing discipline remains good. We talked about our new products. And what we are seeing in our business, excluding Ag, is principally the effect of raw materials pass through and chemicals, and a pass through of metals and electronics, and as I said, some pricing pressure in performance materials. But again, good pricing discipline in that business.

David Begleiter - Deutsche Bank

Thank you.

Operator

Our next question is from Don Carson from UBS. Please go ahead.

Don Carson - UBS

Thank you. I have a question on your seed gains this year. You've had a strong year; you gained share in US corn seed, I think, for the first time in eight years. I think that is certainly attributable to narrowing a bit of the yield gap with Monsanto, but that yield gap still exists. They've got a very competitive product in SmartStax next year. What is your degree of confidence that you can sustain this year's market share gains in both US corn and soybean as you go into 2010?

Ellen J. Kullman

Yeah, Don. Thanks for your question. In working with the Ag team and the Pioneer team as I have through the last nine months, I guess I don't see the yield drag that you talk about. (Inaudible) that 2010 that we will continue our momentum in that marketplace and continue to see positive results.

Karen A. Fletcher

And I would just add to that, Don. We are awaiting the final EPA ruling on our AcreMax product, and we'll have that in a matter of days or weeks. Then it'll be added to a very diverse lineup of products, and it comes back to our right-product-right-acre strategy, and working with the farmer on giving him the highest yield on his farm under his conditions.

Don Carson - UBS

Just to follow up on costs, I mean, you've had some volatility and you're hedging costs this year. I know that seed costs are one of your largest inputs. Where does that go in 2010? With the broad reduction we’ve seen in corn and soy prices, is that going to lead to a material reduction in your seed cost next year?

Jeffrey L. Keefer

Hey, Don, this is Jeff. Let's be clear about first of all, what we're seeing in terms of where that hedging cost was. It was really last year that we experienced that volatility which resulted in a loss in the second quarter and a hedge gain on soy in the third quarter. And of course, for the total year, it was really little or no impact on it.

With respect to 2010, keep in mind that our commodity cost, the higher seed price is for the most part determined on prior year's sales, but given our supply improvements and price increases, we do expect some margin improvement for both soy and corn.

Don Carson - UBS

Thank you.

Operator

Our next question is from PJ Juvekar from Citi. Please go ahead.

PJ Juvekar - Citi

Yes, hi. Good morning. You did not sound that optimistic on automotive OEM production as one of your competitors. So I'm just curious, are you looking for significant increase in production in second half as vehicle inventories come down? And what is your expectation for next year?

Ellen J. Kullman

I think that, what we see is improvement sequentially to the third quarter and maybe even the fourth quarter. What we see is a lot of that is going to be in Asia and with continued weakness in the US and Europe. And so I think we're taking a cautious approach, but certainly, if the market is there, we will be ready to serve it.

Karen A. Fletcher

And PJ, we were referencing some global market data that we have that shows sequentially a slight uptake in global builds, but it really is a story region by region, and that's really what we were trying to say.

PJ Juvekar - Citi

Okay. And a quick question for Jeff on free cash flow. You are looking for a significant improvement in second half. How much of that improvement is from seasonality and how much of that is from low working capital? Thank you.

Jeffrey L. Keefer

As you know, PJ, the seasonality question is really around our Ag business, and we collect, as you know, near the end of the year, a lot of money as a result of that. So the range is probably over 60, maybe 70% — in that range, Ag. The balance is the rest of the businesses, and I would tell you that we are on track in terms of our productivity targets and our mega projects on both inventory and accounts receivable continue to ramp up.

Operator

Our next question is from Laurence Alexander from Jefferies. Please go ahead.

Lucy Watson - Jefferies

Hi. This is Lucy Watson sitting in for Laurence. Given the amount of cost cutting year to date, how much do you think you have improved your incremental margin?

Jeffrey L. Keefer

What I would point to is take a look at our margins sequentially first quarter to second quarter, and I think that gives you a pretty good idea on PTOI. They were up about, I think, three percentage points roughly first quarter to second quarter. And as you know, the bulk of that is the result of our cost productivity efforts.

Lucy Watson - Jefferies

Okay. And can you provide a breakdown of the businesses in which you're having the most success with new product introductions, and if possible, to what extent you're seeing margins exchange in from that?

Ellen J. Kullman

Certainly, Lucy. In the first quarter our new product introductions were very heavily in the Ag space where our new germ plasms and trays (inaudible) as well as Y series and soybeans had tremendous impact, and I think we're seeing the results of that this quarter with our tremendous improvements in Ag.

The second quarter was broad and across the board. We saw new products in safety and protection in Nomex. We saw coatings and color technology, specifically our performance materials businesses. We had positioned a lot of new products in Asia with the increase in automotive builds there and the new position and the emerging market growth there. We're seeing that come in. So we do see, I think, the impact of those new products in our pricing line. They allow us to reset price with our customers, especially where there is added performance, and I think we're seeing the results of that as we come through this first half of the year.

Lucy Watson - Jefferies

Thank you.

Operator

Next question is from Bob Koort from Goldman Sachs. Please go ahead.

Robert Koort - Goldman Sachs

Thanks. I was wondering if I could ask about the crop chemical business. You mentioned trends were a bit weaker there; do you have any volume or price breakout? And then what is your expectation across the Ag platform as you go into the upcoming selling season given that futures prices on corn are about a third less than they were a year ago today? Did that change the dynamic for you at all?

Ellen J. Kullman

Well, let's take the second question first, and you know, we're not sharing our pricing strategy for the 2010 season at this point. We're working that through with our sales forces and we're going to have an Ag day, I guess that's early September, so we'll be in a position to speak much more definitively around those issues then.

As far as crop protection chemicals goes, certainly their volume was impacted by weather and by late planning seasons. Their pricing, I think, was still very good from that standpoint. Europe had the weather issue with less cereal and corn acres. Latin America, we’re still suffering from the drought. But we're seeing our new products, especially Rynaxypyr, getting tremendous reaction from the marketplace and uplift there. So as we go forward, we're looking forward to a very strong Rynaxypyr result this year.

Robert Koort - Goldman Sachs

And if I might ask, I saw the Cozaar and Hyzaar sales were off 4% year-on-year in the second quarter. Should we expect going into the patent expiration the continued erosion as customers destock, or can you give us any help there?

Jeffrey L. Keefer

I would say, Bob, expect it to be about flat year-over-year roughly, this year versus last.

Operator

Our next question is from Edward Yang from Oppenheimer. Please go ahead.

Edward Yang - Oppenheimer

Hi, good morning, and excellent job on the cost cutting. My question is on Cozaar and Hyzaar as well. Ellen, is that something you think you want to manage organically or do you feel that you may need some strategic action around that in terms of managing the expiration?

Ellen J. Kullman

We have a team that works very closely with Merck in this venture, in terms of getting aligned on Merck's strategy around the expiration of the patent. All that activity has been going on and we're very active in that. So there is active management of it in order to maximize the potential earnings for both parties, and I think that's where our interest and Merck's are very well aligned in really helping us get the most out of that franchise in the end of its patent life.

Edward Yang - Oppenheimer

And my followup question is on the pension and healthcare. It's about underfunded by around $9 billion. Is that something you'd expect regulatory relief from next year, and is that something that you consider in terms of how you manage your free cash flow going forward, 2010 beyond?

Jeffrey L. Keefer

Yeah, thanks, Edward. No, we're not relying on regulatory reform. Let me just tell you from a cash standpoint, and again, you know there's a difference between an accounting standpoint versus a cash standpoint — the treatment here. And we anticipate no required payment for the pension fund in either 2009 or 2010. That's the principle US pension plan, by the way. Outside of the US, we pay according to legal requirements.

Operator

And our next question is from Sergey Vasnetsov from Barclays Capital. Please go ahead.

Sergey Vasnetsov - Barclays Capital

Good morning. My first question was on safety and protection. This segment has held up strongly in '07-'08 despite US housing decline, but lately have a couple of tough quarters with accelerating sales decline. I'm just curious, Ellen, you've run the business very closely for several years; do you think it's inventory destocking or it's weakness in some other end markets (inaudible)?

Ellen J. Kullman

Yeah, and thanks, Sergey. A lot of their business is what I would call a long cycle business, and so the downturn did not even start to impact those long cycle businesses until the March timeframe. We saw a little bit of it at the end of the first quarter, saw the destocking heavily coming through the second quarter. Certainly the low industrial production doesn't help, but I think the second quarter we've seen a lot of the destocking and we expect that to stop in the third quarter and we'll see sequential improvement.

Sergey Vasnetsov - Barclays Capital

Okay. And secondly, on coatings and color technologies, you showed very strong results this quarter — strong compared to your previous results in other years. Do you think those kind of trends are sustainable and should they improve to even higher as the volume in auto comes back?

Ellen J. Kullman

Well, certainly a large part of their results are automotive driven. The external numbers that we take a look at on auto builds don't indicate that we're going to see a tremendous amount of improvement. That will not drive the improvement.

So I think for the rest of this year it's going to be our fixed cost and our drive around raw material improvements that are going to be positives for that. We expect to see lower seasonal demand for refinish coming through the second half of the year. And the TiO2 market itself, I think, is showing sequential improvement. We've seen it in Asia. The question is, when will other regions come back there? So we're not anticipating a large rebound in automotive to help that segment. We are very focused on our cost productivity efforts, both fixed and variable, to continue our rate of improvement.

Sergey Vasnetsov - Barclays Capital

Thank you.

Operator

Next question is from Frank Mitsch from BB&T Capital Markets. Please go ahead.

Frank Mitsch - BB&T Capital Markets

Good morning, everyone. Could you provide a bit more granularity on what you're seeing emerging in Asia? Obviously, that's the region that was down the least year-over-year. Can you talk a little bit about month-to-month throughout the quarter and how you're seeing the third quarter start out in that region?

Ellen J. Kullman

We've seen improvement in the second quarter versus the first quarter. You've seen that tremendous Ag season we had in Asia, and now granted that's a small market for us so the numbers look big, but sequentially all segments were up on a local market basis and it seems majority of that, outside of Ag, is driven off of the stimulus packages that we're seeing, especially in China, where there is a very focused effort on that and we're seeing real volumes come through on that. So we do expect in Asia to continue to see improvement, and I think that's part of our third quarter and fourth quarter story.

Frank Mitsch - BB&T Capital Markets

I see. Okay, great. And Ellen, you mentioned before in response to a question that the volume assumptions underpinning the $0.40 range was basically in line with what you had shared back in the first quarter. What were those? If you could refresh my memory, what were the volume assumptions that you were looking for?

Ellen J. Kullman

So, in a year-over-year basis we talked about the volume in the third quarter being down about 10 to 15%, largely driven off of Ag seasonal and then offset a little bit by — the industrial markets are still going to show down pretty far year-over-year. On the fourth quarter, year-over-year we expect to see a slight improvement versus the fourth quarter of last year. If you remember — unfortunately I remember it very clearly — the fourth quarter of last year we saw tremendous a falloff on the volumes and all the segments outside of agriculture, and so we see this year as the sequential improvement comes to the year it might look a little better.

Operator

Our next question is from Mark Connelly from Stern Agee. Please go ahead.

Mark Connelly - Stern Agee

Thank you. Ellen, I'm just wondering what you think about protecting price in an environment like this. And I'm thinking about electronic chemicals, I'm thinking about coatings, and even safety and protection. You are taking your cost down, your raw materials are down, but volumes aren't going anywhere, and customers are going to want you to share that. So how do you hold onto existing products? And I understand what innovation will do, but how concerned are you about prices?

Ellen J. Kullman

Well, we were pricing very hard. We've been doing it for a number of years now and we've seen the benefit of it. We have a corporate marketing and selling organization which puts on training programs weekly or monthly around the world on pricing (inaudible) really focusing in on understanding the benefits our products provide to the customer. And the new products, I know you said you understand that, but 816 new products in the first half of this year, that allows us 816 opportunities to go engage with our customers around new functionality and new features that help support our price or enhance our price. So we have a very active pricing program to support.

Mark Connelly - Stern Agee

Following on that, Ellen, on the temporary cost cuts, as demand does come back, where are you going to face the biggest challenge in terms of the headwind from those costs coming back, and how do you mange that process?

Ellen J. Kullman

Yeah. I think if you take a look, our restructuring is pretty much locked in, and that is an area that will just deliver on throughout this year and next year. Some of the temporary things have to do with variable workforce in our plant sites, and that's where the contractor loading comes in. DuPont Production Systems, which we've implemented at a large number of our sites so far, and as implementations continue, a lot of that work is in enhancing our operations capability, and the belief is that through that we will only need to reinstate about half of the contract workers that we had previously. I think that is going to be the area that we will need to watch very, very closely. And my concern is the true demand recovery. Are we going to be bumping along the bottom for a while where we don't want to think of it as a positive trend, when really what it is is sort of more of a sideways movement.

So that's the area where we have a tremendous amount of focus upon to really understand. That's where staying close to that customer, really important to understand those real demand trends, and hence then how we load our plants.

Jeffrey L. Keefer

And this is Jeff. I might add that we have a very rigorous process around contractors, in particular, and the management of them to ensure that we're making the right decisions, but importantly that we're maintaining the costs where they need to be.

Mark Connelly - Stern Agee

Very helpful. Thank you.

Operator

Our next question is from Mike Judd from Greenwich Consultants. Please go ahead.

Mike Judd - Greenwich Consultants

Yeah, just a quick one. In your discussion on the segments in the electronics area, you talked a little bit about photovoltaics demand improving in the third quarter. How significant is that overall to that segment?

Ellen J. Kullman

Last year photovoltaics was about 400 million in sales for all of DuPont. A majority of it is in the electronics segment. A small piece is in performance materials. And we're seeing growth year-over-year just north of 10% and so that's to help size both the base sales and the growth rate.

Mike Judd - Greenwich Consultants

Okay. And what level of profitability does that have?

Ellen J. Kullman

I think you would see that at or slightly above segment average for photovoltaic.

Mike Judd - Greenwich Consultants

Okay. And then just secondly and quickly, you guys have been doing quite a bit of research and development on new, I guess, enzymes or whatever, for ethanol based on — I think it was switch grass and things like that. Where are we — just like in two seconds — on that? Is that moving forward?

Ellen J. Kullman

Yeah. We're on track on our commitments we've made on the cellulosic ethanol and even biobutanol. We have a demonstration unit that's under construction as we speak, and the cellulosic ethanol unit should be up about midyear 2010 and we're on track there.

Karen A. Fletcher

Yeah. So the point there is we're proving out the technology to show that it's viable at commercial rates economically, and then we'll look at scaleup or licensing options beyond that.

John, I think in the interest of time we have time for one more question.

Operator

And we have a question from Jeff Zekauskas from JP Morgan. Please go ahead.

Jeff Zekauskas - JP Morgan

Hi, good morning. It sounds like your volume expectations for the second half are more or less in line with what you previously thought, but it looks like maybe your raw materials are falling a little bit faster than you expected and your overhead costs are coming out a little bit faster than you expected as well. So why haven't you narrowed your guidance range for the year? And do you have sort of a positive bias rather than a negative or neutral bias in the light of some of the trends you're seeing in your business in terms of your earnings?

Jeffrey L. Keefer

Well, thanks for your question, Jeff. What I would say is we're trying to maintain a prudent guidance range. Clearly we are, and are going to deliver on our productivity efforts, a lot of focus there, and as we said, at least that billion dollars. Our outlook for raw materials has really not changed; it's 4-6%. There is some uncertainty there, depending upon how things play out. And we expect currency to be in the range that we gave you some earlier ranges this year.

The question is around primarily volumes and to maybe just a lot lesser extent, variable cost or energy and raw material prices, and so we just think given the uncertainty that's out there, it really is prudent to maintain the range we have.

Jeff Zekauskas - JP Morgan

So it's volume, that's the issue for you?

Jeffrey L. Keefer

Primarily.

Jeff Zekauskas - JP Morgan

Okay. Thank you very much.

Karen A. Fletcher

Okay. Thank you, everybody, for your time on the call this morning, and we look forward to talking with you soon.

Operator

This concludes today's DuPont 2009 second quarter investor call. You may now disconnect your lines at this time and have a wonderful day.

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Source: E.I. du Pont de Nemours Q2 2009 Earnings Call Transcript
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