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

RBC Capital Markets Global Industrials Conference

September 11, 2013 2:30 Pm ET

Executives

Jim Borel - EVP

Tim Johnson - IR

Analysts

Chris Nocella - RBC Capital Markets

Chris Nocella - RBC Capital Markets

For those, I haven’t met yet I’m Chris Nocella, the Chemical Analyst from here at RBC. We are very pleased to have Jim Borel, who heads the Ag & Nutrition businesses for DuPont. Jim grew up in a family [forming IOS]. He started DuPont actually in 1978. He pretty much spends most of his time in the Ag business so with that history knows his business very well. We are very excited to have him here today. With him is Tim Johnson sitting in the audience. He is the Director of Investor Relations helps [our men] in the Ag side. So, if you have any questions, follow-up stuff like that he is a great guy to reach out to great resource and then stuff.

The Ag & Nutrition segment is about 40% of DuPont sales and it’s a very important growth driver for the company. It’s certainly been a focus for the past number of years and certainly going forward for the next number of years as well. So, Jim’s remarks today will be very timely. He is going to start with a pretty brief introduction about the company and then we would go and do some Q&A I’ll ask some questions initially. If you have any questions in the audience please raise your hand and I want to try to make it a little bit interactive.

So, Jim with that…

Jim Borel

Great. Thanks, Chris. Good morning and welcome to everybody here in the audience and on the webcast and thanks for the opportunity to have a chance to talk a little bit about DuPont’s Agriculture and our Nutrition & Health segments. I’ll make a few brief comments as Chris mentioned but then we can get to the questions. Obviously today I’m going to talk about some current expectations of the future and that means forward-looking statements that involve some risks and uncertainties and assumptions. I’ll refer to some non-GAAP measures. So, I’ll encourage you to look at our Investor Center at www.dupont.com and it will clarify some of the, or list some of the uncertainties et cetera and also either reconciliations around the non-GAAP measures.

As you know at DuPont, I think that, I think, we are executing a clear strategy around building a higher growth, higher value company by deploying our integrated science in a way that will hopefully create innovative solutions for our customers. The two segments that I have responsibility for are integral to that plan. We have made some important portfolio enhancements over the last several years. We have sold performance coatings. We have acquired the Danisco company. We are now evaluating our Performance Chemical segment. We save billions of dollars through both cost and working capital productivity initiatives. And we have been making meaningful shifts in how we allocate capital and resources across the company and all while we are staying very focused intensely on execution.

The Pioneer Crop Protection in the Nutrition & Health businesses have grown, as Chris said they represent about 40% of our revenue and segment operating earnings today. We see Agriculture nutrition continuing to be a high value, high margin, attractive market space. In the past few years, we have enhanced our portfolio in that space with acquiring several seven regional seed companies. In the U.S. we bought the majority share of the Pannar seed company in South Africa.

Of course the Danisco acquisition and the minority share of the Solae joint venture. So, as we look to the future the macro trends around rising incomes, population growth expanding by another 2 billion people are going to create challenges for feeding the world and we know that in order to produce enough food to nourish billions of people, we have got to essentially double the amount of food we are producing over that period of time.

And at DuPont, we believe that our science can make a difference. We can’t do it alone but we think our science can make a difference in helping the world solve that challenge. If you look at just the last couple of years from 2010 to 2012, our Ag businesses outperformed their peers. They grew at 15% rate over that period of time. We also, we also we are making strategic investments in research and building out our global presence and building additional production capacity to set ourselves up for the future growth.

And while we are making all of those investments, we expanded our margins from 18% to 21%. Looking forward, we can, we expect continued growth in agriculture. We expect an average of 8% to 10% with over half of that growth coming from outside of North America, fast growing markets like Brazil, Eastern Europe, India and China are going to be central to making that happen. We have got already a long-term presence and a leading position as well as strong momentum today in each of those markets that we can build on.

At the same time, we are expecting to further enhance margins to 22% to 24% while continuing to make smart investments to support growth. We’ve also over the past several years enhance our technology position in seeds we continue to build on strong germplasm potential of our seeds. We are really the leading indicator or proprietary and license to technologies that gives us the flexibility and the option to really create the product that serves the customer the best.

In Crop Protection we are approaching $900 million of sales from our blockbuster insect control product called Rynaxypyr. We are now expecting the combination of Rynaxypyr plus Cyazypyr foliar applied as while the seed treatment applications for those two active ingredient will approach $1.5 billion in the next couple of years in the next few years. And recent launches of Picoxystrobin and Penthiopyrad disease control products are also going to contribute meaningfully to the growth that we are expecting.

And these investment in R&D over the past few years have strengthened our biotech capabilities and product pipeline in agricultural. So we are expecting important product launches of our Lumigen seed treatment technologies in 2014. We expect to launch proprietary seed trades DP 4114 and Optimum GLY canola early in the second half of this decade. So we got some very excited things coming from the research side of the equation.

Second on Nutrition & Health we are a leader today in specialty food ingredients. This is about a $40 billion market segment which we expect to continue to grow at about 6% overtime. This is a segment of the industry where science can make a difference and with population growth and income growth the same kinds of secular trends that are supporting agriculture but also the health and wellness and food safety and security interest that people have around the world continue to underpinned the kind of market growth that we are expecting and at the par we’ve got a very strong competitive position we can build from now.

Its leveraging leading edge science and state-of-the-art or leading industry leading go to market approach we’ve got really solid food, science and application technology and a unique go to market process with one face to the consumer. We really are a very strategic partner to most of the global and regional branded food companies when they are looking to solve challenges or create new products. Our goal is to grow the business at 7% to 9%. So we had intend to grow faster than the market and we also intend to improve the margins in that segment to 12% to 14% overtime and that’s going to come from continued innovation which creates new value from differential management and making wise choices and on going productivity improvement.

Let me make just a quick comment about our Danisco acquisition. Danisco has been a very good acquisition. I’ve never seen two organizations more complementary whether you look at products or technologies and it’s been a hand and glove organizational hookup. The integration work has been very successful. In 2012 we exceeded the 4130 million we had committed to from synergy target on cost. The acquired businesses which are now reported as Nutrition & Health and industrial biosciences.

We are accretive to EPS by $0.25 of share and they generated $500 million in cash flow from operations in 2012. So a very important contributors. We’ve got ongoing initiatives in place to continue to integrate people and processes and create additional revenue synergies and significantly expand Danisco’s product pipeline all with the focus to increasing cash returns on our investment.

So in conclusion I’m very pleased with our recent performance in agriculture in Nutrition & Health. I’m excited about what these businesses can accomplish together and particularly as we work forward to the future.

So with that Chris I’m happy to take questions from you and the audience.

Question-and-Answer Session

Chris Nocella - RBC Capital Markets

Thank you. I appreciate the overview there by detail. We are just coming off the Farm Progress Show here and we are entering the harvest seasons right. Maybe you could just start with your thoughts on this year’s crop?

Jim Borel

Well first of all going into the season in North American farmers really responded to the low stocks kind of the demand they try to build that cushion again the USDA says we’ve got 97 million acres of corn and 77 million acres of soybeans and so that was important. We are hearing something as the crop progresses and certainly there has been hot and dry in certain sections of the corn belt. So the crop condition report is going to be an important one to watch. I wouldn’t be surprised if we had some very liberty in the harvest as we go through the season and the harvest this fall.

We are going to have a much bigger crop than we had last year I’m sure but we think it could be a little bit variable. So we’ll see how that shakes out. We’re all obviously anxious to see the results at the end of the season for our Heckor Cromax and AcreMax and approach fungicide some of the things we’ve been expanding in the market, they all look really good in appeal so far but when we get to harvest we’ll see how they really paying out. So, we’re optimistic.

Chris Nocella - RBC Capital Markets

Great. And you had very good momentum in South America. And maybe can you just touch your outlook there for the summer season the upcoming spring season?

Unidentified Company Speaker

Yeah. So, first of all there is a trend that’s been going on over time in South America where growers in the summer season have been shifting more towards soybeans and corn acres have been dropping. And this spring season short season, corn acres have been going up. So, we see that trend continuing as we go into the season this fall and that supported as well by reinforced as well by the current corn and soybean price to ratio. So, farmers down there are expected to plant more soybeans and a little less corn in summer. And the planning is just getting under the way now there is a lot of water to go into the bridge and I think that actual planting in the summer and particularly by the time we get to the spring season it is going to be driven by what the pricing and weather and everything else is doing at the time but that’s broadly what we’re expecting.

We’re optimistic about our competitiveness down there. We’ve gained a three points of corn share in both summer and spring markets over the past couple of seasons, we’ve built additional soybean capacity and we got strong performance of our insect control products led by Rynaxypyr. So, we’ve got strong product performance, we got a good position on the ground and we think we’re set up for a good season.

Chris Nocella - RBC Capital Markets

And your long term sales target for the agriculture segment 8% to 10%. If you see that pretty nicely in the past four years or so a concern maybe just now that as grain prices moderate a little bit and potentially could that become a challenge, I'm not sure. So, we’re kind of curious to hear your thoughts if corn is lower next year for whatever reason. What that means for your business both on the revenue side not in the cost side.

Unidentified Company Speaker

Yeah. So, first of all it’s important to recognize we – from a pricing point of view, we price per value. And so it’s all based on what the new products, what’s the value they’re delivering to farmers and what’s the share that it makes sense for them and for us. And so it’s not really driven just by commodity prices. So, as long as the commodity prices are in a range where farmers can be profitable at $455 corn, they’re still profitable I mean obviously farmers would love to have $7 but they could still make money there which means if we can deliver an extra couple of bushes of corn it’s worthwhile as there is a return on that investment.

So, that’s the first thing. And so we’re expecting over time to continue based on the innovation that we’re delivering to the market to be able to gain net average price, realized new average price increases. And we’re also expecting volume growth as part of that. So, as we deliver new value to the market, it’s our expectation that we’ll deliver – that we’ll be able to capture that as both price and volume growth.

Another thing, as we look at next year or the season coming up with the lower prices, we reduce new products at new price points but then as that penetrates the market, that also ends up as price – on that pricing. So, there are some other things that are just the new launches but the other one is just as those recent launches worked their way into penetrating the line up, it helps us from a price point of view. So, it’s little too early to give you what we think the actual net price will be next year but we’re continuing to work with farmers acre by acre but we’re broadly we’re expecting positive things despite the fact that commodity prices would come back a little bit.

Second element that might – that will impact to some is that we – our sales in the first half of this year were based on product reproduced is really high commodity prices the year before for so our cost of goods we’re feeling a bit of a headwinds besides that where you roughly we our best estimate is that we – that was a better point in margin the springs so that could kind of give you some sense that if it turns out by the time the season rolls around that the prices are down in the (inaudible) are normal, hopefully we’ll get better part of that back.

And then finally, with really high grain prices, there is been some demand destructions. So, the question will be do livestock numbers start to come back or there other sources of demand that are encouraged by the fact that prices would moderate a little bit but overall it can be good.

Chris Nocella - RBC Capital Markets

And you mentioned some new products and maybe can you just spend a couple of minutes on your new pipeline which being introduced next couple of years?

Jim Borel

Yeah. First of all, probably one of the nearest terms is Plenish high oleic soybean. We have engineered a soybean that has 70% or 75% oleic acid, high oleic acid, which is above the healthier oil profile than normal soybeans. It doesn’t have any trans-fats. When you use normal soybean oil you have to hydrogenate it or partially hydrogenate it and then that introduces a lot of other problems in the food companies in the U.S. particularly once they had to start labeling for trans-fats really want to be get away from that.

Plenish was going to give them kind of commodity price to oil based on soybean that has some really great health and fine characteristics. We’ve got import approvals around the world. The last one we’re working on is the EU and (inaudible). So, we are optimistic that we’ll finish that and be able to go. There is a tremendous demand from food companies already. We’ve been restricting the production just because we didn’t yet have all the import permits that we needed but we believe that it will come through and we can [grow] that so Plenish is just around the corner.

DP 4114 it’s built on our insect control for corn is built on some proven efficacious traits that we had in our lineup but its going to allow more flexibility and better performance so it’s a better version of those traits that will be out in the next few years. Optimum GLY canola it’s an in-house version of herbicide problems for canola that we’ll be able to launch in the next several years.

Of course on the crop protection side, Cyazypyr was registered in Mexico last year, few of the places around the world. We’re expecting a U.S. registration hopefully by the end of the year. So, Cyazypyr is going to be rolling through. Lumigen, our Rynaxypyr based seed treatment will be launched in 2014. So, we’ve got a lot of things on both sides of the house that are just into the market or just going to be coming out over the next few years plus a lot of things behind them.

Chris Nocella - RBC Capital Markets

Right. And you just recently licensed Roundup Ready 2 and dicamba tolerance from Monsanto. So, can you just talk about how you see that playing through your portfolio as well as potential there?

Jim Borel

Yeah we’ve performed very well in soybeans over the last number of years since 2008 we’ve been I think 10 points of share in soybeans and that’s based on just performance high yielding of good performing products. So, I think the first thing is we’ve got some great momentum. Roundup Ready 2 and Xtend are going to be additional fields you can put into that lineup. We’ve already got access to herbicide tolerance and we’ve got access to the Enlist trait from Dow but having the access to the Roundup 2and Xtend will give us even more flexibility around creating products that really deliver the most value. We’ve got some Roundup 2 soybeans out in the field now. We’re expecting good things but we’ll see how they stack up and how they work their way into the lineup over time.

Chris Nocella - RBC Capital Markets

Monsanto launches INTACTA trait in Brazil so what’s your competing product for that?

Jim Borel

We’ve got really, really strong performing lineup in Brazil as well on soybean. So, one is we’ve got solid base and some good momentum in the crop itself. And for insect control for the next few years, we’ve got we’re going to be launching I mentioned the Rynaxypyr based seed treatments, Dermacor and Lumigen and we’re seeing excellent Lepidoptera control early season from that treatment.

We‘re seeing good crop vigor and our research drought is showing through in yield boost. So, right over the shoot we’ll have our top performing varieties and the seed treatment option that has a good spectrum and it looks like very good performance so I think that’s it and longer-term we’re going to look at additional options whether that traits or additional coming through. We’ve got several things that we’re working on that will come out later on.

Chris Nocella - RBC Capital Markets

Right, okay. And this is your second year for AcreMax right. So, how does your offering compared to Monsanto’s, I think initially you commented you are expecting four million acres that came in a little bit higher than that, that’s already seeing with AcreMax this year?

Jim Borel

Yeah, AcreMax has gone very well. I mean first of all we had a great season in the first year and farmers, who had the water stress situation, we’re seeing on average about 9% yield improvement. The great thing about AcreMax is the folks who didn’t see waters stressed didn’t pay any penalty in fact we were seeing on average a couple of percent yield improvement. So, so that was a great start. We’ve got probably seven million acres in rough terms out there so we exceeded the four million and we’re anxious to see how it performs this year. We’ve got a really another rough season for different reasons. We‘re pretty optimistic things are looking good in the field. We’ll see how things come through in yield.

You mentioned at the beginning kind of how does it differ from others. AcreMax the generation that we’ve got in the market today is kind of the pace that are and its actually based on native trade. So its actually not transgenic the seeds transgenic because it exhibit Zytel into something else built into it but the AcreMax itself was build on the deep germplasm base that we already have the breathing that we’ve done over the years around find in ways to get corn to grow well in low water environment but then uses some of the modern tools to really understand which genes and they are making that happen and how do we bring those together into a commercial product. So AcreMax that’s out there is based on native trades and we’ve also got another generation coming behind it later there later on that we’ll be transgenic and hopefully we’ll take it whole another whole level.

Chris Nocella - RBC Capital Markets

And what is that I expecting?

Jim Borel

Late this decade or early the next yeah.

Chris Nocella - RBC Capital Markets

Okay. And then so half of your growth is going to be outside of the U.S in the next five years right that’s a pretty important region. Maybe can you just highlight some of the opportunities outside of North America and South America basically?

Jim Borel

Yeah. So as you said about half of our growth is expected to be outside of the U.S. We’ve already got a really well established position and a lot of markets around the world in fact we are in most cases we are the brand leaders in many of these markets but if you had just pick out a few high points obviously Brazil is very important and continuing to grow steadily but Eastern Europe when I was in Ukraine in May we opened a new seed plant there expanded capacity that market is growing really nicely and we’ve got a really good position. China is a challenging market but it’s also a good market. We are the largest multinational seed company there. We’ve got a really good position with our corn hybrids and so good some good momentum. So we are expecting a lot of growth there. India has got a lot of corn acres as well not just corn but we are doing very well in India that’s another source of significant growth. So really in each of those markets we are not just moving in we’ve been there we’re established and now we are really starting to see the growth momentum pick up.

Chris Nocella - RBC Capital Markets

Right and just similarly you recently acquired the remaining shares in South Africa sorry. So where do you see that market I know its quite small today maybe still a bit longer term out. So just it’s going to?

Jim Borel

Yeah. If you look at Africa, Sub-Saharan Africa just from South Africa see we hope the maizes are stable and then Egypt also has a nice corn market but a lot of folks don’t realizes about 17 million hectares of corn there. Now in most cases half and more of that is still open-pollinated varieties but it’s a huge opportunity. We’ve got a very established business already as pioneer. So when hybrid maize to large commercial farmers as well as small scale farmers but then our has about an equal presence to us. They’ve got some great local germplasm locally adapted germplasm. They’ve got a footprint around production and things in some of the markets that we didn’t yet. So it’s fairly complementary. So I think the combination is going to be great. It’s going to significantly strengthen our existing market footprint. Our access to market. It’s going to give us additional production capacity and combining the research and the germplasm basis from both companies everything is going to be a real boost on the continent.

Chris Nocella - RBC Capital Markets

Okay. Just on the Ag side near term regarding just pretty unique for a profit in the fourth quarter not to the goal. I think would be the first time that you have a profit in the fourth quarter. So why we are getting a profit and what is the risk to that?

Jim Borel

Yeah there is a couple of things going on. First of all the growth of the business in the Sophronia season in Brazil. It continues to grow and that bridges a little bit late fourth quarter early first quarter. So that’s one of the things the increased acres and our increased presence there. So that’s fueling a little bit of the fourth quarter. And I already mentioned the kind of the shift in general from somewhat to a Sophronia corn acres in Brazil. Second we are expecting a strong start to the North America season. We already seeing inclines of that as the folks are working with farmers prior to harvest and we’ll see the corn that we’ll sell the seed that we’ll sell in the fourth quarter and into the first quarter then its largely produced in an environment with the lower commodity cost because hopefully we’ll start to get out of some of the headroom we saw it earlier in the year. So there are a number of factors that kind of come together that give us confident that 4Q is and that’s just on the seed side across Crop Protection also as a strong business and as they grow and disease and insect control are less herbicide focus that means they’re little less seasonal.

Unidentified Analyst

Yeah.

Jim Borel

If not completely but a little less that contributes a bit as well.

Unidentified Analyst

Okay.

Chris Nocella - RBC Capital Markets

Before I turn it over to the Health & Nutrition side. Does anybody have any questions on the Ag side? Okay. So, you talked about little bit the integration of Danisco in your prepared remarks and some growth opportunities there. It seems like the initial synergies are complete they’re quite happy with the targets we’ve made. From the outside investor I mean how is this business growing now going forward as you’ve integrated, you understand the difficulties at both companies?

Jim Borel

Yeah. So, let me focus first on the N&H side, I can also maybe offer commentary on that but really N&H is my primary focus. And the couple of things, the market is growing as we said earlier about 6% per year on average and we’re expecting the combined entities how do we put together between Solae and Danisco food ingredients in our existing business to be able to grow faster than the market, that’s based on innovation that we see already in the pipeline and work we’re continuing that’s based on the very competitive position we have in terms of customer access with our go-to-market model.

The – these segments are – these businesses are really building on some of the same kinds of secular trends we saw in Ag but if you look in addition, food protection and food safety is a really increasing issue. And the Health & Wellness side of things both in the developed world as well as in the developing world that they could maybe a little different shape in those key places. But those were also trends and we can really help food companies with our technology and with our food science and application capability appeal for those trends. So, we think the market is solid and we’ll continue and we think our position versus competitors gives us an advantage to be able to grow slightly faster than the market.

Chris Nocella - RBC Capital Markets

Okay. And just near term in that business, the – you had the tough second quarter, there is some higher cost that were flowing through. So, historically I think we would thought it’s going to be able to more stable I mean what were the issue there.

Jim Borel

Yeah, that was primarily based on Guar. Guar is just one of the food ingredients that gets used in food formulations and it had a kind of an unusual demand for partially driven by some things going on in fracking because that temporarily drove the price significantly up by 10 or 12 X of overnight. And so that price spike has mostly normalized and we’re expecting in the third quarter sequentially to start seeing improvement, we think that will continue again in the fourth quarter and on. So, we’re – our expectation is that, that should be largely behind this as we go into 2014. But that was a pretty unusual situation broadly, we’re expecting the margin improvement targets that we’ve set to be coming from as I said innovation and expansion around the world in emerging markets and ongoing productivity of course.

Chris Nocella - RBC Capital Markets

Okay. Just one final one from me in the sake of time. Can you just remind us the timeline for Cellulosic Ethanol and how you’re approaching the market there?

Jim Borel

Yeah. Our – we’ve looked around on our commercial scale facility and demonstration facility in Ohio last November, it will be in the neighborhood of 30 million gallons. So, it’s a significant scale and we’re doing that to demonstrate the technology. So, we’ve got the capability to make that we’re going to demonstrate that and then our intention and we expect to start that up mid next year. And that will not only give us a business around, Cellulosic Ethanol from that site but more importantly then again it sets us up to be able to license of the people and that’s our primary intend for this business is to develop technology and license it broadly to help other people do the production.

Chris Nocella - RBC Capital Markets

Excellent. Jim, thank you very much. I appreciate your time.

Jim Borel

Thanks, Chris.

Chris Nocella - RBC Capital Markets

(inaudible) there is a lot of stuff going on but that’s exciting.

Jim Borel

Thank you. Thank you.

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