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Executives

Karen Fletcher – VP, IR

Ellen Kullman – CEO

Jeff Keefer – EVP and CFO

Nick Fanandakis – SVP

Analysts

Sergey Vasnetsov – Barclays Capital

Jeff Zekauskas – JPMorgan

PJ Juvekar – Citi

Ashish Gupta – Sterne Agee

John Roberts – Buckingham Research

David Begleiter – Deutsche Bank

Frank Mitsch – BB&T Capital Markets

Mark Gulley – Soleil Securities

Robert Koort – Goldman Sachs

Steve Shuin [ph] – Vayad Research [ph]

Peter Butler – Glen Hill Investment

Edward Yang – Oppenheimer

Laurence Alexander – Jefferies

Don Carson – UBS

Kevin McCarthy – Banc of America

Chris Shaw – Ticonderoga Securities

E. I. du Pont de Nemours and Company (DD) Q3 2009 Earnings Call Transcript October 20, 2009 9:00 AM ET

Operator

At this time, I'd like to welcome you to the DuPont 2009 third quarter earnings 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 floor over to your host Karen Fletcher, Vice President of Investor Relations.

Karen Fletcher

Good morning and welcome. With me this morning are Ellen Kullman, CEO, Jeff Keefer, CFO and Nick Fanandakis CFO designate. The slides for today’s call can be found on our Web site at 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 earnings news release and on our Web site. And finally, we have posted supplemental information on our Web site that we hope is helpful to your understanding of our company’s performance.

With that, I will turn the call over to Ellen.

Ellen Kullman

First of all, let me say I'm pleased with our third quarter earnings performance in which aggressive cost productivity results are clearly evident, coupled with higher sequential sales for most of our industrial businesses. Company sales this quarter excluding Ag are up 11% on a sequential basis. The underlying demand signal that is emerging reflects a developing recovery that is shaped differently by market and by geography.

Let me touch on a few areas where early signs of recovery are becoming more clear. DuPont titanium dioxide is approaching a sold-out [ph] position. Our coatings and polymer products experienced strong demand in response to increases in motor vehicle production and engineering polymer products experienced an additional boost from re-stocking demands across their automotive supply chains in the quarter.

From a regional perspective, Asia Pacific year-over-year comparison was encouraging with sales only down 5%. On a closer look, China sales were up 7% year-over-year and sales in India, Singapore and Vietnam were down just a few percents. U.S. and European markets are showing some signs of improvements, but are clearly lagging behind Asia.

On the other hand, our aramids business, which includes Nomex and Kevlar was late heading into the downturn and lagged into the third quarter. Demand for aramid products was weak in the third quarter with more destocking occurring than we had expected coming into the quarter. More recent sales trends indicate demand for Kevlar is turning up though.

Our Ag & Nutrition sales were down 5% due in part to weather and lower corn acreage in Latin America, seed sales were up 7% over last year, helped in part by strong sales of Y series soybeans. We anticipate great yield performance from this new family of products once the harvest data is in.

Sales of Rynaxypyr insecticide are about 140 million year-to-date, indicating that we will easily surpass our sales target of 150 million and be closer to 200 million this year which is the second year of launch. The success of Rynaxypyr is an outstanding example of how we identify market need, developed a family of products with exceptional performance and are meeting with enthusiastic response from customers around the world.

Stepping back to a broader view of DuPont's market-driven science at work, we launched 323 new products in the quarter, bringing our year-to-date total to 1,107 or almost 50% more than the first three quarters of 2008. I am pleased that our businesses continue to see every opportunity in today’s difficult environments to bring value to customers using new products to help them differentiate their own offerings in the marketplace.

Another example of how we are putting new products to work is in the photovoltaics market. After a slow start to the year, we're seeing a rebound in PV markets in the second half. While the 2009 market will likely end up flat versus 2008, we expect our sales to be up over 10% this year. We believe annual growth rates will return to more historic levels of around 30% annual growth starting next year and we're focused on delivering a constant stream of product innovation and value. PV customers have aggressive cost reduction targets to meet as well as greater environmental responsibilities.

And we recently introduced a new generation of Solamet metallization paste that contributes to a solar module with a significantly reduced environmental footprint. These pastes meet high product performance requirements without requiring the use of materials such as lead or cadmium containing glasses.

We also partnered with a company in the thin film manufacturing to develop a Solamet product for modules that require low temperature processing and therefore lower production cost. These are examples of market-driven science in action.

Turning to productivity, fixed costs, we delivered $900 million in savings through the third quarter and are closing in on our $1 billion goal for the year. We remain vigilant about keeping about $750 million of these cost reductions out long term. Our shareholders should expect continued cost productivity from DuPont beyond 2009.

All in this was a very good quarter where our employees delivered on four key priorities. Excellent pricing discipline, new product innovation, cost productivity and overall strong execution. I'll have more to say on these topics at our investor event in Wilmington scheduled for two weeks from today.

Before I turn the call over to Jeff, I want to mention our new organizational structure which we announced in August. It's on effect October 1st and it's aimed at driving decision making closer to our customers with greater regional accountability within our businesses. We took out our layer of management and consolidated a number of business units. Each business has clear accountability for earnings and cash management and a clear mission to enable DuPont to deliver sustainable earnings growth.

Beginning with the fourth quarter, we will report results for seven financial reporting units.

Now, I'll turn the call over to Jeff.

Jeff Keefer

Thanks, Ellen, and good morning, everyone. DuPont had a strong third quarter and I confidently echo Ellen on all the specific commitments we are on track to deliver, pricing for value, cost and capital productivity, generating cash, and finishing the year with a strong balance sheet. The actions on cost and pricing are creating strong operating leverage as demonstrated in our early cycle businesses performance despite lower volumes. The quarter contained two items I want to highlight.

First item is lower raw material costs. While fourth will show lower raw material costs versus prior year, we estimate that these costs bottomed in the third quarter in effect, shifting a few cents per share to the third quarter from the fourth. Secondly, a one-time benefit of $0.04 to $0.05 from a lower based tax rate this quarter compared to our guidance of 26% which I will detail out in a few minutes. After accounting for the tax benefit, still a very, very solid quarter.

Turning, now to slide three which summarizes earnings per share and sales results. Third quarter reported underlying earnings per share of over $0.45, excluding significant items from the third quarter of 2008, earnings per share were down 20% from the prior year. Consolidated net sales of $6 billion were down 18% compared to prior year, reflecting 12% volume decline, 3% unfavorable currency, 2% price decline and 1% sales reduction from portfolio changes. Excluding sales into agriculture end markets, segment volumes were down year-over-year about 15%.

Early in September, we updated investor showcasing the tremendous strengths of titanium dioxide. This is an early cycle product. On slide four the data depict out year-over-year sales variances showing measured and visibly improving conditions. As a contrast, Nomex and Kevlar which is a significant portion of safety and protection revenue are late cycle products and are lagging our early cycle by several months.

Turning to slide five and looking at the sales variance by segment. Karen will cover all of the detail in a moment, but I would want to make a few comments on prices so that there is no confusion. First, all businesses are showing a negative currency impact in price ranging anywhere from 1% to 5%. In addition, electronics and communication technologies price decline primarily reflects metals pass through effects. Safety and protection protects the chemicals businesses which have contractual, commodity pass through as well mix shift from aramids to chemicals.

Performance materials are affected by a mix shift towards less specialty applications in our packaging segment. While markets are very competitive, we have not seen broad-based price decreases. In some cases, businesses have raised price based on new products or other dynamics specific to their local market conditions. The bottom line, pricing overall is about as expected. This combined with aggressive cost productivity has resulted in market expansion in coatings and color technologies, performance materials and electronic and communication technologies versus same-period last year.

Moving to slide six for a review of sales by region, two areas to highlight. Asia results show the most favorable improvement in the rate of decline, sales of $1.4 billion were down 5% versus the same period last year reflecting both volume and price declines. Our businesses are seeing a quarter-over-quarter improvement in volume. We move from a 31% volume decline in the first quarter to volumes being down about 3% in the third quarter.

China sales are leading the region's recovery. Our sales in China were $520 million, up 7% in the third quarter versus the same period last year, with our electronics product sales up about 18%. In contrast, European volumes are still the most challenged. Emerging Europe volumes are down about half that of developed Europe. Our sales in Europe are $1.6 billion, down 27%.

Turning now to the third quarter earnings per share variance analysis versus prior year on slide 7. The quarter showed a net benefit of $0.30 reflecting the spread between price and variable cost excluding the impacts of currency and volume. Variable costs decreased year-over-year in all segments excluding agriculture and nutrition. As I mentioned at the opening, the forecasting of timing of raw material is difficult due to change in purchasing patterns, contract, contract sales patterns and continued volatility of commodity prices.

The results in the third quarter outpaced our expectations somewhat, but have not significantly changed our view for the full year. We are narrowing the outlook range for 2009 to about 5% to 6% decline excluding currency and volume. We anticipate year-over-year raw material cost declines will continue to roll through in the fourth quarter, but we expect that the largest (inaudible) will have been realized in the third quarter.

Looking at volume impact on earnings, the 12% volume decline resulted in an earnings reduction of $0.32 per share compared to the same period previous year. In addition, related low capacity utilization resulted in a reduction of about $0.03 per share. With the increased volumes, this charge is down about $0.06 versus the second quarter.

Our demand outlook for the fourth quarter is for improved volumes year-over-year, noting that the fourth quarter of 2008 marked the start of tremendous demand disruption and inventory to stocking.

Moving now to fixed costs excluding currency and volume, fixed cost was a net benefit of $0.04 per share in the quarter. Non-cash pension costs of about $0.10 per share and continued growth investments particularly in agriculture were more than offset by cost reductions from the vast area of array of restructuring and productivity actions we have taken. The estimated benefit in the quarter of our cost reduction programs was about $300 million in savings. On a year-to-date basis, that puts us at $900 million reductions and we are on track to meet the target of $1 billion.

All of the businesses across the globe stepped up to this challenge and established processes to deliver reductions in 2009 as well as to reset the cost structure for the long term. At our November 3 investor event, we will outline our planned productivity efforts.

Turning now to currency. Year-over-year, currency reduced earnings per share by about $0.06 reflecting about a 9% stronger dollar based on our sales weighted currency. Assuming currencies hold around the current levels, we expect fourth quarter benefit to essentially net-out the third quarter impact. Other on the waterfall reduced earnings by $0.02 a share reflecting higher net interests of $0.02 and offsetting impacts of other income headwind of $0.03 and exchange gain and loss benefit of $0.03.

Our base tax rate was 18.1% versus 14.4% same period prior year, creating a $0.02 headwind. As discussed in my opening comment, the base tax rate created about a $0.04 to $0.05 benefit versus our previous guidance of about 26%. Favorable geographic mix of earnings has resulted in a reduced full-year forecasted base tax rate to a range of 24% to 25% which created a current quarter benefit.

I wanted to highlight the difference between our third quarter base tax rate of 18.1% and the effective tax rate of negative 5.9%. The difference in rate is caused by taxes generated from our balance sheet hedging program we refer to as exchange gain/loss or EGL. When the tax benefit of EGL is matched with the pretax loss of $128 million, the quarter-over-quarter impact of exchange gain and loss is a $0.03 benefit and included in other on the water fall. We have provided more detail and schedule D to show you the exact impact of our hedging program had on our effective tax rate.

Turning now to the balance sheet and cash on slide 8. Third quarter free cash flow was an inflow of $607 million compared to an in flow of $413 million in the same period last year. The increase within the quarter reflects lower cash flow from operations more than offset by lower capital expenditures. Working capital is down versus same period last year reflecting in part a $1.2 billion reduction in inventory.

Each quarter this year we had differentiated capital spending by business based on their involving business environment. We continue to support growth areas of agriculture and nutrition, apply bioscience and photovoltaics while allying capital spend with the level of demand and other businesses. We expect to meet our target of $1.4 billion, a 30% year-over-year reduction.

Regarding dividends, today DuPont stock is yielding about 5% with the dividend payment in September, we have paid 420 consecutive dividends. Our forecast for free cash flow remains $2.5 billion, reflecting a strong cash generation in the fourth quarter.

In summary, based on the way the quarter has successfully unfolded, we are narrowing earnings guidance towards the upper-end of our previous range to $1.95 per share to $2.05 per share. We feel good about the accomplishments so far in 2009 and the solid basis put into place for improved operating leverage for 2010 and beyond. We look forward to outlining our growth plans for 2010 and beyond in our upcoming investor event on November 3rd.

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

Karen Fletcher

Turning to slide 9, Ag & Nutrition revenues of $1.2 billion were down 5% on lower industry volumes and unfavorable currency, partly offset by Ag market share gains on seed price. The seasonal pre-tax operating loss of $113 million reflected lower sales, higher costs and the absence of a $49 million gain from closing soybean contracts in the third quarter 2008.

While segment fixed costs increased modestly due to continued strategic growth investments and seed research and our global sales force and to seed inventory adjustments, food and nutrition products realized another quarter of improved cost productivity performance.

Let's take a closer look at the results from our crop protection products group. Revenue declined modestly, impacted primarily by glyphosate price and high channel inventory, serial herbicide volumes and unfavorable currency, partly offset by fungicide price and volume and global Rynaxypyr sales.

Earnings were down substantially, also the seasonally small base due to lower glyphosate market price, soft industry volumes and unfavorable currency, partly offset by higher selling prices across the remainder of the portfolio and fixed cost productivity.

For the fourth quarter, we expect crop protection product sales to be up moderately on demand for North American soybean herbicides, European serial herbicides, Latin America fungicides and insecticides, Asia Pacific Rynaxypyr sales and favorable currency partly offset by lower prices. Pre-tax operating losses are projected to be essentially flat with higher volumes and favorable currency being offset by price and higher business fixed cost associated with increased Rynaxypyr sales, given new registrations in Japan and Brazil.

Turning to seeds; sales increased 7% to $471 million, reflecting higher prices from strong product performance and technology sales in Brazil and strong in-season sales in North America. Seasonal pre-tax operating loss has increased substantially, reflecting the third quarter 2008 soybean gain and the contract settlement I mentioned earlier, reduced corn planting area in the Southern Hemisphere, continued investments in R&D and sales force expansion and unfavorable currency.

Looking ahead to the fourth quarter, we expect seed sales to be up substantially on strong global sales, favorable currency and international price gain. As is typical for fourth quarter, with seasonal sales against the period's full complement of fixed costs, we expect to have a pre-tax operating loss.

Seed earnings are expected to improve substantially, reflecting expected market share gains associated with Latin America summer and early safrina corn sales, early North America corn and soybean sales, Africa and Asia Pacific sales and early Europe corn sales. And international price and favorable currency partly offset by base cost of goods sold and growth investment.

So for the full year 2009, Ag & Nutrition segment outlook, we expect the segment to deliver mid single-digit sales growth and pre-tax operating income growth of at least 10% or more than 30% if you exclude currency over 2008. Despite significant effective currency, which we anticipate will be about a $350 million impact to sales in 2009, we're on track with our compounded annual earnings growth rate of more than 15% over the time period 2007 through 2013.

Now let's turn to slide 10 and Coatings & Color Technologies. Sales of $1.5 billion were down 16% primarily reflecting continued weakness in motor vehicle markets. Pre-tax operating income of $182 million was 4% lower, reflecting lower sales volumes in unfavorable currency partly offset by lower variable cost, fixed cost reductions and pricing gains. Titanium dioxide product sales declined moderately, driven primarily by volume. Earnings were up modestly with lower raw material costs and fixed cost reductions partly offset by reduced demand.

Coatings sales declined significantly year-over-year reflecting a corresponding decline in motor vehicle sales. However, this drop in revenue was the smallest quarterly drop this year as auto-builds grew moderately, sequentially in most regions. North America motor vehicle production was down 19% versus prior year quarter, and European motor vehicle production was down 15%. Refinish paint products volume dropped significantly driven by continued weakness in global economic conditions. Coatings earnings were down modestly driven by declines in volume and unfavorable currency partly offset by lower raw material costs and lower fixed costs.

Looking ahead to the fourth quarter for this segment, we expect sales to be flat sequentially and moderately up year-over-year. Demand assumptions reflect the following. First, that global motor vehicle production levels will modestly increase on a sequential basis. Second, that global demand for titanium dioxide products will slightly decrease sequentially in line with seasonal patterns.

And finally, that lower demand of refinished paint products will be driven by normal seasonal patterns. As a result, we expect earnings to be up in the fourth quarter versus prior year with essentially flat earnings sequentially. Our team continues to be focused on delivering productivity improvements in costs and capital.

Please turn to slide 11 for electronics and communication technologies segment. Sales of $919 million were down 13% compared to same period last year reflecting 10% volume and 3% U.S. dollar price declines. Sequentially, sales improved 16%, attributable to increased demand in photovoltaics, seasonality and consumer electronics and to a lesser extent Pacific downstream sales initiatives and displays.

Refrigerants experienced year-over-year and sequential volume declines. Continued growth in our HCFC replacement products ISCEON and HFC blends was more than offset by seasonal declines and refrigerants.

Pretax earnings of $125 million reflects year-over-year volume declines, unfavorable currency impacts and investment in photovoltaics, more than offsetting disciplined pricing, particularly in refrigerants and the lower benefits, the benefit of lower costs.

Importantly, pretax operating margins were 40 basis points higher versus same period previous year. For fourth quarter, the outlook anticipates sales and earnings growth year-over-year. Sequentially sales and earnings are expected to be down primarily reflecting seasonality that favored third quarter in electronics, refrigerants and fluoropolymer solutions.

Please turn to slide 12 for performance materials. Sales of $1.3 billion were down 24%, reflecting weak demands in major markets in all region particularly in general industrial and motor vehicle markets. As we indicated during last earnings call, we believe industry de-stocking was largely completed in the second quarter.

Third quarter volumes appear to reflect true underlying demand with all regions showing sequential volume improvement versus second quarter. It was led by Asia, although North America, Western Europe and Latin America regions also showed improvement particularly late in the quarter.

Segment sales also benefited from cash-for-clunkers program. Pretax operating income of $230 million was up versus prior year earnings of $125 million, excluding hurricane-related charges. The improvement also reflected lower costs, partly offset by lower sales volume, unfavorable product mix and currency. Current quarter includes $24 million of insurance recoveries related to hurricane Ike claims.

Looking ahead to the fourth quarter, sequential sales are expected to be flat reflecting seasonal pattern and unfavorable product mix. Earnings are expected to be down sequentially reflecting higher raw material costs and the absence of a $24 million insurance recovery benefit in third quarter 2008, partly offset by fixed cost reductions. We expect more intense competitive pressure as additional competitor polymer capacity continues to come back online. The business teams continue to be focused on delivering strong cost productivity performance in the fourth quarter.

Turning to slide 13 and looking at safety and protection, sales of $1 billion were down 32%, reflecting a 22% volume decline primarily in industrial and construction market. Pricing decreases reflected the pass through of lower raw material costs. Pretax operating income of $93 million principally reflected lower market demand partly offset by lower raw material costs, fixed cost reductions and pricing actions. Current quarter includes a $26 million asset impairment charge.

For the fourth quarter, we anticipate sales to be down and earnings to be up year-over-year. Sequentially sales and earnings are expected to be up driven by increased sequential demand with no further inventory de-stocking by customers and a slight improvement in underlying demand. Earnings should continue to benefit from lower raw material costs and fixed cost reductions.

So that completes our segment review, and now I'd like to welcome Nick to our call and turn things over to him.

Nick Fanandakis

Thanks, Karen. It's a pleasure to be here today. Our solid third quarter financial results along with our outlook say a tremendous amount about DuPont's ability to deliver against its commitments whatever the climate may be. Ellen and Jeff have established a solid foundation. By this I mean a corporate structure and processes that enable the company to focus on the fundamentals and deliver attractive results for our shareholders. Clearly, the year-to-date successes we've achieved are encouraging, but it's only the beginning of the big opportunities that lie ahead of us.

On November 3, we'll be hosting an investor event here at our headquarters in Wilmington Delaware. On that day, our focus will be a long-term view of DuPont's growth prospects as seen from a perspective of our new leadership team. Our innovation coupled with the focused investments we have made affords us some unique long-term opportunities. In addition, we'll provide insight into 2010 relating our long-term view to our short-term deliverables.

Finally, on a more personal note, I would like to take this opportunity to thank Jeff for his leadership in CFO role. He has displayed a winning combination of business experience, operational excellence, dedication to the company and perhaps most importantly his innate ability to inspire individuals and motivate organizations. Jeff, I really look forward to building on the impressive foundation that you have laid.

With that, I'll turn it back over to Ellen.

Ellen Kullman

Thanks, Nick. In closing, I would like to summarize our performance for the quarter. Volumes were down 12% and a significant improvement over the second quarter when volumes were down 19%. We realize the biggest top line sequential improvements in performance materials, coatings and electronic business segments. During this quarter, we saw the confluence of several factors that favored dramatic sequential margin improvement.

Raw material prices finally appeared to have hit the bottom line in full force essentially they bottomed in this quarter. Our sales and marketing teams were able to hold prices reasonably intact and they seized opportunities to introduce new products with greater value for our customers. Benefits from aggressive fixed cost actions and restructuring paid off.

As for the fourth quarter, we anticipate sequential improvement in our industrial businesses, although we expect the trajectory to be erratic as supply chains are restocking and stabilizing to various degrees. Some markets like US housing will take much longer than others to recover. So against this backdrop of stabilization and early signs to recovery, we remain vigilant about the priorities that have enabled us to weather this storm and more importantly, will assure that we capitalize fully on a recovery. We are strong, focused and agile, and are delivering products that add value to customers and different us from our competitors.

Cost productivity is a way alive and we're determined to make $750 million of our fixed cost productivity permanent. And we will be disciplined as we invest our growth resources in markets where they are differentiated and can capture value from a competitive advantage such as agriculture and alternate energy. And we're very well positioned to leverage our presence in emerging markets that we expect will return to growth as global recovery begins to take hold.

So on slide 14, you can see our 2009 directives updated with progress through the third quarter. Simply stated, we're delivering against our commitments.

Before I close, I would like to add my comments to Nick and to thank Jeff. His leadership over the last three plus years, his wisdom, his guidance, his focus, his tenacity, I just look at Nick and say you've got big shoes to fill. But thank you, Jeff and Nick. We're really looking forward to working with you as CFO. So with that I hope you'll be able to join us on November 3. And I look forward to seeing you then. And we're happy to take your questions.

Karen Fletcher

Okay, John. If you would just remind us of the instructions and open the lines please?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Sergey Vasnetsov of Barclays Capital. Please go ahead.

Sergey Vasnetsov - Barclays Capital

Good morning. My question is say little bit more about next year. This year, fourth quarter typically a recent could be a little erratic I fell the weak and also we're really looking 2010, what's the early view of 2010 in terms of earnings and also what's' your view for the CapEx and growth?

Jeff Keefer

Sergey this is Jeff. We're going to lay all of that out for you on November 3 and so you get a comprehensive picture. What I would comment on is, is that clearly we've laid a solid foundation for growth this year. We commented about pricing discipline, cost productivities evident and our new products. So I think that bodes well for the future and the operating leverage of the company.

Sergey Vasnetsov - Barclays Capital

Okay. Thank you.

Operator

Our next question comes from Jeff Zekauskas from JPMorgan. Please go ahead.

Jeff Zekauskas – JPMorgan

Hi, good morning. In the performance materials business you had a small gain, but if we exclude the gain, you made about $200 million, and what I was wondering is, how sustainable is that level of EBIT in that your volumes are still way below the year ago period, you've cut out a lot of fixed costs there's some puts and takes. Is that $200 million or so a normalized quarterly level now?

Jeff Keefer

Let me just thank you for that question. Let me clarify. The performance materials platform has really put in a lot of productivity efforts and maintained discipline pricing. I would point out last year we did have the hurricane quarter-over-quarter which was an impact on the comparison, so you need to take that into account.

Jeff Zekauskas – JPMorgan

I'm sorry, please.

Ellen Kullman

I was just going to add, Jeff that we're very well positioned by lowering our break even, our lower cost point and I think you can expect double-digit margins in the long term from that segment.

Jeff Zekauskas – JPMorgan

Okay and then as my follow-up. One of the themes has been higher raw material costs in the agricultural area and obviously seed prices have been very, very volatile this year or rather grain prices have been volatile. Is it the case you get some raw material benefit in 2010 or can you not see that just yes yet?

Ellen Kullman

Well, we're just harvesting the seed now. There's a lot of puts and takes to what that's going to be. Costs of goods sold will probably not be down as great given the lower commodity cost environment but if we have very little carry over, I think we'll see a little bit. So, that’s hard to call because we're right in the middle of harvesting our seed so we can, come on November 3rd and have at least two weeks more information to be able to share with you.

Operator

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

PJ Juvekar – Citi

Yes, good morning. If you take a look at your end markets, auto, housing and others, can you tell us where you're seeing inventory restocking taking place? You mentioned auto's but are there any end markets where you're seeing that phenomena?

Ellen Kullman

I think that in the electronics market we believe as we look down there that we've seen some of that in the third quarter as that Christmas season comes upon us. I think where we are, a second or third tier in the automotive markets. We've seen a little bit of that as well. But those are the two areas that I would say that we can clearly identify it versus just a base demand.

PJ Juvekar – Citi

Okay. And in Ti02 you mentioned that, it’s a leading indicator and volumes are improving, are your price increases in that area sticking? Thank you.

Ellen Kullman

Well we have price increases out there right now. We're certainly seeing a tremendous amount of tightness in the environment, so we'll see as it comes but I think there in the market places is in a positive way would be supportive of it since just look at ourselves. We're practically sold out.

Operator

Our next question comes from Mark Connelly from Sterne Agee. Please go ahead.

Ashish Gupta - Sterne Agee

Hi, good morning, this is Ashish Gupta, for Mark. Just wanted to ask about what's going on with, I know that pesticide demand has been off in some markets because of the good weather, but just curious why pricing hasn't held up as well. I know we saw pesticide prices moving up slowly with other Ag, when other Ag inputs were on it too. They looked pretty good even last quarter as other inputs have slowed. Should we just think about pesticide prices as lagging the rest of the Ag inputs or is there something more specific?

Karen Fletcher

Yes Ashish, this is Karen. I think really what you're seeing is some of the influence of generics and the market that's been generally down due to weaker insect pressure, weaker fungicide needs, so in that kind of environment you’re definitely seeing some competitive pricing pressure.

Ashish Gupta - Sterne Agee

Great. Thank you.

Operator

Our next question comes from John Roberts from Buckingham Research. Please go ahead.

John Roberts - Buckingham Research

Good morning.

Ellen Kullman

Good morning, John.

John Roberts - Buckingham Research

You didn't provide any update on pharma, so I assume as we enter the transition period it's still relatively normal through year and I just want to check are there any pipeline or inventory effects that might cause us to be non-linear as we enter the transition period?

Ellen Kullman

I would say, John, at this point, we'll guide you to expect flattish in the fourth quarter year-over-year, and when we have our event in two weeks, we're going to give you more color on pharma for 2010.

John Roberts - Buckingham Research

Okay. And then as a follow-up on the raw materials, I think you were saying sequentially things have bottomed and will start to move up because of the lag with oil prices. Year-over-year in the fourth quarter, we still had a pretty big decline going on late last year. As we look year-over-year, we're also expecting that variable cost of $0.44 benefit to narrow materially as we go into the fourth quarter?

Jeff Keefer

What I would say, John, is again we expect for the full year, we still expect 5% to 6%, lower raw material costs then if you recall in the first quarter, we were up about 5%, second quarter down about 5% and third quarter down about 12%. And as you remarked, we think it bottomed so we're expecting some uptick in the fourth quarter as a result of that. Still coming in at the same area we expected.

Operator

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank

Good morning. Ellen, I noticed some pricing pressure in safety performance and electronics given the bottoming of raws, do you expect some margin pressure going forward in those segments?

Ellen Kullman

First thing, if you dissect the price, first you've got some pass-through in metals and electronics and in chemicals and safety and protection, you have to account for. And the second thing is mix of business, especially in safety and protection with the late cycle of Kevlar and Nomex. That mix change in effect comes through on our price line. So we take a look at it and we dissect those as we go forward and the commodity pricing thing that will be what it ends up to be. But I think it's through new products and the real focus on the customer that and the discipline we put in will really help us get through this period.

David Begleiter - Deutsche Bank

Ellen, in the ag segment, you call out further growth investments. Can you quantify those growth investments for '09 and what they will be in 2010, either up, down, or flat?

Ellen Kullman

We'll defer '10 to the investor meeting. R&D as a percent of sales for this year is flat, but that means that we're spending more there, investing more in research and development. But we can take you through '10 in a little more detail in a couple weeks.

Operator

And our next question is from Frank Mitsch from BB&T Capital Markets. Please go ahead.

Frank Mitsch - BB&T Capital Markets

Good morning. In terms of the cost reductions, you've been at a steady clip of $300 million a quarter up to $900 million at the end of the third quarter and your target for 2009 was just a $1 billion so much slower progression for the fourth quarter is forecast. Internally, are you guys using a number higher than that in terms of cost reductions for the full year?

Ellen Kullman

Thanks for your question, Frank. I think this is one we want to make sure we covered. Last year, we started taking dramatic steps to slash fixed costs in the fourth quarter. If you just look at contractors, which was a big reduction for us between September of '08 and the end of the year, we took out about 4,000 contractors whose volumes fell across that period. So we had aggressive cost reduction in the fourth quarter. So, on a year-over-year basis it's not going to be as great as what we've seen, because of the actions we took in the fourth quarter of 2008.

Karen Fletcher

So the $1 billion target is still our target.

Jeff Keefer

So, Frank, we're driving all of the actions there. We'll tell you more about our productivity as we get together in November 3rd and look out the 2010 and beyond.

Frank Mitsch - BB&T Capital Markets

All right, terrific. And you'd indicated that I guess the fixed cost reductions were more than offsetting the non-cash pension expense. You expect that to continue in the fourth quarter as well?

Jeff Keefer

Yes. Close, but yes.

Operator

Our next question comes from Mark Gulley from Soleil Securities. Please go ahead.

Mark Gulley - Soleil Securities

Yes. This has been talked about before, but want to focus a little bit on pricing and cost. The appendix is always very helpful to us on looking at some of these trends. So, on slide 16, we see chemical prices heading back up again and of course your selling prices are still down, on slide 18. So do we face the potential for margin squeeze here maybe coming up in the next several months?

Ellen Kullman

It's interesting. If you look at the pattern as it flows through there is usually about a 30-day lag on the way up and on the way down and that something we've seen historically. So, the squeeze would be very small from that standpoint.

Jeff Keefer

Maybe just build what Ellen said. Remember the pricing declines that you're seeing this quarter is mostly due to the pass-through and some mix shift. And looking at the top line, we're going to continue to introduce new products. And we've talked with you before about the pricing tools we put into place in our businesses. So, I feel pretty good about that whole thing. And we're about as expected for the year.

Ellen Kullman

Yes, and the comments around that kind of pressure would be strictly around electronics and chemicals where we have that pass-through issue, not for the rest of the businesses.

Mark Gulley - Soleil Securities

Okay. That's helpful. We've talked a lot about your ambitious goals in Ag and Nutrition and a lot about seeds. But except for Rynaxypyr, are there any new crop protection chemical products that will help drive your growth?

Ellen Kullman

Rynaxypyr has a young brother Cyasypyr [ph] that's coming out in a couple of years. We're going to be delineating out our growth prospects there in a couple of weeks, so, we feel very good especially in the insecticide area where we've got tremendous pipeline. That area is going to be about $1 billion by 2013 in revenue. So, good pipeline, get into more detail in a couple weeks.

Operator

Our next question comes from Robert Koort from Goldman Sachs. Please go ahead.

Robert Koort - Goldman Sachs

Thanks. Jeff, once more on the pricing and maybe you will be beating it to death here. But if I look at your charts, 16 and 18, so what you've set for the bench mark industry prices and then your own prices. The last time you guys went negative at the end of a recession it was nine out of ten quarters you had declines year-on-year. Can you just give me some sense of that $0.14 hit was the majority of that pass-through stuff so that we shouldn't expect that same sort of performance over the next eight quarters that we might have seen at the beginning of the decade?

Jeff Keefer

Bob, great question. So again, most of it was pass-through and mix as we kind of dissected and looked at this quarter. And I think we are very different from perhaps where we were at that point in time in terms of our capabilities that you commented on. And again, I'll come back to the new products. Ellen commented about how many we put out this year pricing for value as we’ve talked before is extremely important. We're doing well there and then our capability we put in around pricing, I think is really standing as a good stead, really the ability through market segment and customer segmentation to do pinpoint pricing and understanding the profitability by product and customer and that's how we go about it. So, I think we're in a different spot in terms of our capabilities now bode well for us.

Robert Koort - Goldman Sachs

And then you gave Ti0, Karen talked about some expectations into the fourth quarter. I guess the biggest question mark I would see is in pharma where you might have customers de-stocking that inventory channel ahead of generic competition. Can you give us some sense of what would be implied in your pharma numbers for the fourth quarter?

Jeff Keefer

I think Karen said about flat year-over-year, Bob.

Ellen Kullman

Yes. It's actually a very efficient supply chain, so we don’t anticipate de-stocking this early Bob.

Operator

Our next question comes from Steve Shuin [ph] from Vayad Research [ph]. Please go ahead.

Steve Shuin -- Vayad Research

Good morning. You mentioned your ag seeds were still in track for multiyear 15%, is that still on track for 2009?

Ellen Kullman

What we've said was between 2007 and 2013, our entire ag platform will have greater than 15% compound annual growth rate on earnings. So for 2009, I think they might be on the little bit on the lower side of that. I mean its going to average that over the period because of the things that we already talked about from a platform standpoint, but on the seed side I think we’re going to have a strong year in the seed side. So, I hope that helps answer your question, Steve.

Steve Shuin -- Vayad Research

Yes. I guess on cash flow, cash flow has been very difficult this year. Do you think some of your cost savings are going to keep you from raising more debt next year with pharma going away?

Jeff Keefer

No. Again, we've got a very strong balance sheet and we're on plan to deliver the $2.5 billion of cash this year. I'm not anticipating any issues at all in terms of our funding capability.

Operator

Our next question comes from Peter Butler from Glen Hill Investment. Please go ahead.

Peter Butler - Glen Hill Investment

Good morning. DuPont's waiting on some key approvals from the government on seeds and trades and on your previous conference call, you sounded pretty upbeat on getting some imminent approvals. Have there been delays? Could you handicap the prospects for some of the key approvals you're waiting on?

Ellen Kullman

Thanks, Peter. In Optimum AcreMax, we expect the EPA decision to come in a matter of weeks. We're confident that we'll receive it and get that in time for sales in the 2010 growing season.

Peter Butler - Glen Hill Investment

I hear everything awaits November 3rd, but the pharma royalties are such a large part of your current earnings, I'm wondering if they are going to drop off substantially next year, what sort of quarterly pattern are you expecting, are you expecting a sort of a normal first quarter and then drop off sequentially or how do you see it?

Ellen Kullman

Yes, Peter, we're going to address that in two weeks. I don't mean to keep putting you off, but we would like to be able to provide the full context and we will give you color on what to expect with pharma full year as well as the pattern of decline through the year. So give us a chance to do that in the full context of our expectations for 2010.

Operator

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

Edward Yang – Oppenheimer

Hi, good morning. You showed some pretty nice volume improvement across the board, but Ellen, you mentioned the U.S. has been lagging and that was the only region where volume declines were basically equal to what they were in the second quarter and I was surprised by that given cash for clunker and so on, so which parts of the business in the U.S. kind of held back some of the improvement you've seen in other regions?

Ellen Kullman

The U.S. is a real mix. I mean, ex-ag, sequentially, we're up 11%. We were down 17% ex-ag whereas in the second quarter we were down 25%. Certainly that improvement is seen through our automotive value chains and through even construction being a little bit stronger, so the U.S. we see as that third quarter's being pretty good considering where we've been in the first half of the year.

Edward Yang – Oppenheimer

Is it just a greater percentage of your commercial construction assets are in the U.S. versus other regions or I'm thinking more year-over-year in terms of what businesses are still lagging in the U.S.

Ellen Kullman

Well, I think we mentioned that it's the Aramids, Nomex and Kevlar are lagging. They didn’t go down, they didn't head down from a volume standpoint until very late in the first quarter early in the second quarter. They're a late cycle business so they are still kind of bouncing along the bottom where we're seeing sequential improvements in other. And the other thing is that military is held off in this last quarter and they weren't at the profile that they've historically been. So, it's really those two things that have been an impact there.

Operator

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

Laurence Alexander – Jefferies

Hi, I had two questions on mix. First, for safety and protection, how much of an improvement in end market demand do you need to get back to your historical high teens margins now that the destocking has ended? And secondly, what flexibility do you have to pull forward PFOA substitutes to effect to offset any adverse mix effects that might arise there?

Ellen Kullman

In safety and protection there is two things. Volume needs to come back a bit. But we did a second quarter restructuring on our assets there since they went down late and they are going to lower the breakeven for those units. So, we're not going to need full volume recovery to get back to the kinds of margins that we've come to expect from that group. On PFOA alternatives, we're on track with where our commitments on there. We're active in the market in these areas and working to get basically approvals and from the customer basis as quickly as we can as we move out. Obviously, it impacts a lot of different individual products in our fluoro products in the fluoropolymers and the fluorotelomers area. But we're on track for those changeovers.

Operator

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

Don Carson – UBS

Thank you. Jeff, two questions for you, one pension has been running about $0.10 a quarter this year. Just wondering if you have a preliminary view on what that drag might be next year. And then on currency, you talked about that maybe swinging $0.06 positive in the fourth quarter, but obviously that doesn't include much of the benefit from Ag. Where would you expect if currency holds at current levels where would that $350 million hit that you have taken in Ag go to in calendar 2010? I am just trying to get an idea of how much gain you're going to get from currency and then what the ongoing drag on pension might be next yea?.

Jeff Keefer

Again, on the pension question, we'll kind of math that out for you on November 3rd. We know that's a key question on your mind. But again, rather than giving one-offs today, I would much prefer to give a holistic picture. Actually, right here on your question on currency, Don, anticipating a benefit, but to size it today is very, very difficult. And so, let me just say that it is going to be a benefit and we'll have to see how things shake out as we move forward.

Operator

Our next question comes from Kevin McCarthy from Banc of America. Please go ahead.

Kevin McCarthy - Banc of America

Yes, good morning. On slide 4, you highlighted the ongoing sequential improvement in Titanium Dioxide as an early cycle product. So was wondering if you could comment on your demand outlook for 2010 there and based on what you're seeing, do you plan to reaccelerate the time line of the capacity expansion in China?

Ellen Kullman

We're still working on the fourth quarter, Kevin. So again, 2010 is something that we really don't want to get into. We've done asset blueprinting and are looking at our capacity whether it's in Ti02 or across the company. And we are going to be putting that in as it is needed. There is still other opportunities for us to be able to improve our yields and things like that in the given structure we have. So, I think that that's something that from an investment standpoint we take very seriously and we're going to watch very closely.

Karen Fletcher

I think we have time for one more question.

Operator

And our next question comes from Chris Shaw from Ticonderoga Securities. Please go ahead.

Chris Shaw - Ticonderoga Securities

Good morning. Thanks for taking my question. China has been pretty strong this quarter. I was wondering if you guys have any opinion or seen any signs of maybe sort of the slackening stimulus there actually taking volumes down or at least the growth in volumes lower in the upcoming quarters?

Ellen Kullman

China's GDP, I am sorry, I kind of missed the question. China GDP from our economist standpoint they are projecting its going to be slightly stronger than this year. So the outlook is, if it's about 8% this year then next year it will be close to 10% or right around 10%. So everything that we're seeing, and I was in China couple of weeks ago everything I experienced when I was over there talking to government officials, talking to customers was very, very solid on that point. So I think they're going to stick with their plans and continue to drive.

Jeff Keefer

And we've got important opportunities to penetrate that market even further. And that's why we continue to put resources into China because of the importance of the market and the opportunities that are there.

Karen Fletcher

And with that I think that brings us to the end of our time. I would like to thank everybody for joining us this morning. And I really look forward to two weeks from now when we'll have our investor event where we can lay out 2010 as well as our growth opportunities in great detail. And hope you can join us then. Thank you.

Operator

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

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