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

Q4 2009 Earnings Call

January 26, 2010 9:00 am ET

Executives

Karen Fletcher – VP, IR

Ellen Kullman – Chairman and CEO

Nick Fanandakis – SVP and CFO

Analysts

Laurence Alexander – Jefferies

Paul Mann – Morgan Stanley

Edward Yang – Oppenheimer

David Begleiter – Deutsche Bank

Frank Mitsch – BB&T Capital Markets

Kevin McCarthy – Bank of America/Merrill Lynch

Mark Gulley – Soleil Securities

John Roberts – Buckingham Research

John McNulty – Credit Suisse

P.J. Juvekar – Citi

Jeff Zekauskas – J.P. Morgan

Mark Connelly – Sterne, Agee

David Howard [ph] – Goldman Sachs

Don Carson – UBS

Sergey Vasnetsov – Barclays

Operator

Good morning. My name is John and I will be your conference operator. At this time I would like to welcome everyone to the DuPont 2009 fourth quarter investor call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator instructions) To listen to the webcast, please go to www.dupont.com. Thank you.

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

Karen Fletcher

Thanks, John. Good morning and welcome. With me this morning are Ellen Kullman, Chairman and Chief Executive Officer and Nick Fanandakis, Chief Financial Officer. The slides for today's call can be found on our website at dupont.com along with the news release issued that was issued earlier today.

Please turn to slide one. 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 these 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 website. And finally, we've posted supplemental information on our website that we hope is helpful to your understanding of company's performance.

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

Ellen Kullman

Thanks, Karen and good morning, everyone. During a year of extraordinary challenges, our efforts to aggressively cut costs, generate cash and focus on customers' and markets generated strong momentum going into fourth quarter. We delivered 10% sales growth in the quarter with volume increases in every region. Disciplined pricing, lower raw material costs and fixed cost productivity created especially strong operating leverage in the second half of the year.

The company met its free cash flow target for the year, invested CapEx into the company for select growth opportunities and returned cash to our shareholders in the form of a very attractive dividend yield. I'm pleased to report that during the year we surpassed our $1 billion target for fixed cost productivity and cost-cutting actions, giving us traction toward margin goals by business. We streamlined the organization into 13 business units while bringing decision making closer to our customers with greater regional accountability.

In 2009, more than any other year, it was paramount importance to stay close to customers. Our streamlining effort helped us better understand what was happening across supply chains, so we could quickly respond to changes in demand signals. That customer intimacy also led to additional opportunities for us to demonstrate the value of new products and as a result, we were prepared with expanded offerings that were ready to go when the demand signals turned up.

We launched over 1,400 new products during the year, 60% greater than 2008 and the highest number since we began tracking this metric in 2004. We also filed 286 patents in the United States, up 8% over 2008.

An important component of our overall performance was Ag & Nutrition, which benefited from strong agriculture markets around the world. This segment delivered 10% earnings growth for the full year despite significant currency headwinds. Pioneer sales team turned in strong market share gains around the world including two points of share in North American corn and three points of share in North American soy.

Overall, we performed well against our plan and in the face of formidable challenges, we positioned DuPont well for recovery.

Next, I'm going to go through the financial and segment highlights and then I will close the call with thoughts about the year ahead. Nick?

Nick Fanandakis

Thank you, Ellen and good morning, everyone. I'm pleased to report that our fourth quarter performance represented a solid finish to the most challenging year for DuPont in decades. As the global economy began to recover, we drove volumes up in all regions and continued to exercise a robust pricing discipline across all of our businesses.

Our teams around the world delivered on their commitments, which differentially he reflected the needs and realities of their regions and their markets. This global execution was a resounding expression of the directives that Ellen and the leadership team had laid out 14 months ago. Those directors allowed DuPont leaders around the world to meet or exceed their commitments to price for value, drive costs and capital productivity and to generate cash, allowing for growth investment and consistent dividend payouts.

Today, DuPont is at a great fighting weight. We're stronger and leaner than ever before and we're facing 2010 with a momentum that comes from a deep sense of accomplishment. I'm going to review the details of the quarter, pointing out our accomplishments against goal as well as how our actions are in step with a transition out of a recessionary environment.

Let's turn to slide two, which summarizes earnings per share and sales results. The first quarter earnings per share was $0.48, which includes a $0.04 per share reversal of recent restructuring charges. Excluding significant items from both periods, earnings per share were $0.44, up from a loss of $0.28 in the prior year. Consolidated net sales of 6.4 billion were up 10% compared to the prior year, reflecting a 10% volume improvement, 4% favorable currency, 3% price decline and 1% portfolio decline.

Please turn to slide three. I will address each segment reviewing key sales, earnings and margin impacts. First, Ag & Nutrition. Sales for the quarter increased 12% to $1.4 billion and earnings improved 67 million for a seasonal pre-tax loss of 97 million. This was a strong finish to a great year.

Despite substantial currency headwinds for the full year 2009, we grew sales to 8.3 billion and delivered 10% earnings growth to 1.2 billion, with nearly a full point of margin improvement. Taking a closer look within the segment, crop protection product sales for the quarter increased modestly due to favorable currency and insecticide sales in Asia Pacific and Latin America, which were partially offset by lower glyphosate prices in Latin America and decrease cereal herbicide volumes.

The overall crop protection market remains soft which had an impact on fall stocking programs and created pressure due to lower fertilizer and glyphosate pricing. Earnings declined substantially from a seasonally small base due to reduced prices and increased marketing spend to support our new product launches in 2010. That gives you a picture of last quarter, but in the context of the full year, crop protection products outperformed the industry overall.

We're pleased with the continued success of Rynaxypyr which helped us deliver $200 million in global sales, 50 million above our 2009 sales commitment. This success with improved price was offset by about 5% unfavorable currency for the year.

Moving to seeds, sales of $465 million increased 32%, reflecting 25% volume growth across all regions and an 8% increase in U.S. dollar selling prices. We have a strong start to the Northern Hemisphere season. Latin America corn volumes grew, reflecting early safrinha sales in Brazil and an expected 7% market gain in Argentina. This was partially offset by the timing of soybean planting, which were down for the fourth quarter but up for the season.

For the full year 2009, Paul Schickler and his team committed to growing the seed business both top and bottom line by at least 15% over 2008 and to gain global market share of 1 to 2% points in corn. I'm pleased to report that his team delivered.

Seed sales were up 17% to 4.7 billion on price and volume. Earnings grew 19% despite about $150 million worth of currency headwind. Looking ahead to the first half of 2010 for the Ag & Nutrition segment, we expect to increase sales moderately while delivering substantial earnings growth driven by a strong start to the North American seed season. And yes, we remain solidly on track to deliver greater than 15% compounded annual earnings growth through 2013.

Next, the electronics and communications segment shown on slide four. Sales of 582 million improved 22% compared to the same period last year, reflecting a 13% volume improvement, 7% pass-throughs for metal prices and 2% U.S. dollar price increases.

Sequentially, revenues were up 8% on good holiday sales and increased demand in photovoltaics. Pre-tax earnings of $61 million are double the earnings of the same period in the prior year reflecting volume increases and the benefits from our productivity programs. This quarter included an increase in fixed costs to support expansion projects in photovoltaics.

For the first quarter, we expect solid growth in the electronics industry and greater than 25% sales growth in photovoltaics. Sequentially, we anticipate flat sales with recovery offsetting a seasonally low quarter. Earnings will be up moderately.

Now slide five, the performance chemical segment. Sales of $1.3 billion increased 113 million or 9%. The sales increase was led by 17% higher volumes, partly offset by lower price. Volume increases were primarily driven by recovery in the titanium dioxide market across all regions.

Pricing decreases reflected the contracted pass-through raw material costs in industrial chemicals. PTOI was $208 million, an improvement of $194 million, this increase primarily reflecting higher volume and lower raw material costs. Again, looking ahead for the first quarter, we see sales and earnings are expected to be up significantly year-over-year due to improved economic conditions in most markets.

Next, slide six, performance coatings. Segment sales of 975 million increased $70 million or 8% versus the same period in previous year. This increase reflected favorable currency and pricing gains, partly offset by 2% lower volumes. Higher demand in the automotive market was more than offset by continued weakness in industrial markets.

From a regional perspective, the stand-out growth was Asia where volumes were up greater than 20%. One final comment on sales for perspective, sequential sales were up 10% driven by increases across all regions. PTOI was $70 million, up $151 million. The improvement was primarily led by lower raw material costs and aggressive fixed cost reductions.

Looking ahead to the first quarter for this segment, we expect sales to be up substantially year-over-year. Demand for OEM paints should improve moderately driven by global car build levels. In 20 10, the OEM and refinished paint products should benefit from continued improvement in consumer confidence in developed regions of the world. We expect earnings to be up in the first quarter versus prior year on higher sales and lower costs.

Now, let's turn to performance material segment, slide seven. Sales of 1.4 billion increased 242 million or 20%, principally reflecting 24% higher volumes led by improvement in automotive, industrial consumer and electrical marks with particularly strong demand in the Asia Pacific region. PTOI was $174 million, an improvement of $303 million. For the most part this reflects the strong volume recovery in all regions and margin expansion as lower selling prices and unfavorable currency were more than offset by the benefits of sharply lower raw material companies. Looking ahead for the first quarter, sales and earnings will be up on stronger volumes and lower raw material costs.

On slide eight, you see safety and protection segment. Sales of 759 million decreased 75 million or 9%, essential all volume driven. Sales into automotive and consumer markets rebounded while the industrial and public sectors continue to lag. PTOI was 135 million, an improvement of $48 million, primarily reflecting lower costs, partially offset by lower volume.

Here looking ahead to the first quarter, sales and earnings are expected to be up year-over-year. We anticipate improved demand for building innovation products and continued weakness in high-end industrial and public sector markets.

I'd like to turn to slide nine now for the corporate view of fourth quarter earnings per share variance analysis. The quarter showed a net benefit of $0.36 per share, reflecting the spread between price and variable costs excluding the impact of currency and volume.

Fourth quarter variable costs decreased versus the previous year by about 20%, again, excluding volume and currency, bringing the full year-over-year reduction to about 7%. We continue to anticipate that year-over-year 2010 variable costs will increase in the 3 to 4% range.

Looking from a quarter by quarter perspective, we anticipate the first quarter will be the final quarter showing lower year-over-year costs before the trend changes for the remaining quarters in 2010. Volume improvement resulted in incremental earnings benefit of $0.30 a share compared to the same period previous year. As you heard in the business reviews, this benefit is associated with early cycle business recovery, particularly strong in Asia as well as seed performance in the quarter.

Moving now to fixed costs. Excluding currency and volume, fixed costs reduced earnings by $0.08 per share in the quarter. Included in that calculation is a $0.10 incremental pension charge as well as actions in the fourth quarter to support grow including targeted increases of contractors at facilities as production ramps up, specific marketing initiatives and continued investment in our seed and photovoltaic business.

In addition, there were some one-time expenses such as accelerated depreciation and contractual adjustments. While we're taking actions to support growth, we estimate that DuPont realized about $200 million in savings in the quarter due to our cost reduction programs.

Our 2009 commitment was to deliver $1 billion of productivity, restructuring and cost reductions. The final tally shows results in excess of $1.1 billion. There were many actions taken to change our cost structure including specific efforts by DuPont production systems, which focused on structurally changing our manufacture and productivity.

Of course, for the year, we reduced our total workforce over the course of the year – rather, we reduced our total workforce including both employees and contractors by over 14,000. We are just now starting to support volume growth with additional contractors, but we are firm in our resolve to do so thoughtfully and always instep with strong volume.

As a reminder, we expect to deliver about 400 million in incremental program benefits in 2010 partially offsetting the targeted cost increases supporting the volume expansion. In addition to productivity and growth, we expect full-year 2010 incremental non-cash pension expense to be $410 million pre-tax or about $0.30 earnings per share. If you remember, that's $0.10 lower than we previously communicated, reflecting favorable movements in both discount rates and asset returns. The other category in the waterfall increased earnings by $0.04 per share. That's due primarily to higher equity affiliate and royalty income, which was partially offset by lower pharmaceutical earnings including a $63 million charge relating to the timing of rebates and other sales deductions.

Our 2010 range for pharmaceutical pre-tax earning stream remains 300 to $350 million. There are assumptions and uncertainties to this forecast such as generic erosion curve in both the United States and EU, estimated inventory levels as well as contractual elements. Our latest view anticipates about half of the pre-tax earnings will be generated in the first quarter.

Our fourth quarter 2009 base tax rate was 16.3% versus 45.2% on an earnings loss in the fourth quarter 2008, creating a net zero earnings per share impact. The 16.3% base tax rate reflects a greater than anticipated favorable geographic mix of earnings in low tax rate jurisdictions outside of the U.S. The full year 2009 base tax rate was 22.1% versus full year '08 tax rate of 20.4%, reflecting a $0.05 per share year-over-year reduction in earnings.

Looking forward, the full-year 2010 base tax rate is estimated to be 23 to 24%. Exchange gains and loss or EGL is the last point on the EPS waterfall. The incremental EGL impact in the quarter in the full year is $0.06 benefit versus 2008. Our goal continues to be to achieve zero after-tax impact from our hedging program in this area.

However, in 2008, there was significant volatility in exchange rates and cost of coverage, which created a reduction in earnings. As is typical, the detailed reconciliation is on Schedule D to show you the exact impact of our hedging program had on the effective tax rate as well as on our earnings.

You can now turn to slide 10, the balance sheet and cash. We generated $3 .4 billion of free cash flow in 2009, which included $1.3 billion invested back into the company via CapEx. We delivered on our goal to offset lower cash earnings with capital productive. The amount above goal was really a function of currency impact on net monetary assets with the offset in investing activities. We paid 1.5 billion in dividend payments and ended the year with a net debt of 4.9 billion, a billion less net debt than our position in December 2008.

To emerge from a recession with a stronger balance sheet is in our view a very competitive advantage. I will add some color commentary on capital productivity. We surpassed our productivity targets due in part to our mega project strategy which by any measure was a successful – was very successful accelerating both our capability and our results.

Over 300 people reassigned and in some cases retrained to go after mega project opportunities. We gleaned a significant amount of knowledge from that work and will carry forward those learnings and that momentum to meet our 2010 goals.

Regarding dividends, with the dividend payment in December, we've now paid 421 consecutive dividends. Our strategy was to drive hard, delivering cash returns to our investors during very difficult and uncertain times, showing our leadership's confidence in DuPont's ability to execute and generate cash.

Our forecast for 2010 full-year free cash flow is unchanged, greater than 1.5 billion, reflecting higher cash earnings and continued productivity, offset by increases in capital supporting our improve sales. Looking back at 2009, in summary, it was an historic year. DuPont responded to the global economic downturn with decisive actions, both broad and deep that accomplished what we set out to do.

Now to summarize first quarter 2010 expectations. Our sales outlook for the first quarter 2010 reflects a rebound in early cycle business from a trough in the first quarter of 2009. We expect our late cycle business, safety and protection will show more modest growth.

In addition, we expect continued growth in the Ag & Nutrition segment with the split of the Northern Hemisphere season favoring the second quarter. All in all, we anticipate an increase of about 15% in company sales for the first quarter. Sequentially, sales will be up significantly primarily due to the seasonality of our Ag & Nutrition segment.

For the full year 2010, the leadership remains confident in our business plans and our ability to execute against the plan. We are raising our guidance from the range we communicated to you in November, that was $2.10 to $2.40 to a range of 2.15 to 2. 45. This change reflects the lower than estimated pension expense partially offset by the known costs incurred due to the Venezuela currency devaluation.

As I said, DuPont's at a great fighting weight and we have our mandate, grow our businesses across the globe and expand our margins. This should prove to be a very exciting year. Ellen, back to you.

Ellen Kullman

Thanks, Nick. I'd like to spend a few minutes talking about the market momentum we're seeing right now, which gives us confidence in our sales and earnings growth commitments and then I'll talk about our priorities for 2010.

First, there are encouraging signs in the region. As you can see on slide 11, total Asia Pacific sales in the fourth quarter were up 36% over prior year and up 14% sequentially. Not surprisingly, Asia demand was especially strong in automotive and electronic markets.

Asia Pacific finished the year strong with many countries in the region posting fourth quarter sales at or near record levels. Fourth quarter sales in greater China, which include Taiwan, were up more than 70% versus the fourth quarter of 2008 and they were up 26% versus the fourth quarter of 2007.

India sales were up 33% in the quarter enough to push full-year sales just over the half a billion dollar mark and ahead of 2008 by a couple of percent. Latin America sales were up 13% in the quarter with strong contribution from our coatings, chemical and production agriculture businesses.

Altogether, sales in emerging marks, which represented 36% of company sales in the fourth quarter were up 28% versus prior period. The turnaround and momentum we're experiencing right now in the emerging market bode well for DuPont as we head into 2010.

Second, there are encouraging trends in consumer and industrial markets that are important to DuPont, starting with motor vehicles. Global vehicle production was down almost 15% in 2009, but there were some places like South America and Asia Pacific where builds were down only a couple of percent. Global production forecast call for about 10% growth in 2010.

Now with the restructuring and productivity actions we took in businesses that serve this market, namely performance coatings and performance polymers, we're confident in our plans for growth and margin expansion. Another important market is U.S. housing. After several years of steep declines, we finally saw a bottom in 2009 was about 560,000 housing starts. Consensus forecasts point to a 30% increase in 2010 to about 750,000 starts. This is certainly an encouraging outlook and we'll be tracking this all year. This is an area where our restructuring and productivity action, coupled with a strong product offering position us well for recovery.

Another market of high importance to DuPont is electronics. We expect solid growth in 2010 driven by improving economic conditions and continued government incentives for photovoltaics. And finally, strong market fundamentals continue in production agriculture underpinning what we expect to be great year for the Ag & Nutrition segment as our right product, right acre strategy continues to build momentum.

Now I'm going to talk about priorities for 2010, which are shown on slide 12. First, what we will deliver superior revenue growth. We've shared our target of more than 10% top-line growth in 2010 and a 10% compound annual growth rate through 2012. Keys to meeting this are surpassing these target are superior customer service and high value product. It is through market driven science that we work closely with customers on new products and applications that give them a competitive edge.

Just to cite a few recent examples, we introduced new materials that increased the efficiency of photovoltaic systems that meet high performance demands in electronic packaging customers that reduce weight and increase energy efficiency and motor vehicles and enhance the protection of first responders and firefighters. We also launched higher yielding corn hybrids and higher yielding Y Series soybean varieties. And sales of Rynaxypyr insecticide passed the $200 million mark in 2009, its second full year of commercialization.

Another priority for 2010 is industry leading productivity. Specifically, we are targeting $400 million of additional fixed cost productivity this year in addition to the 200 million of incremental benefits above those realized in 2009 from our prior restructuring programs. We will build off of fixed cost productivity momentum from 2009 and each business unit will evaluate its performance against best in class for their industry.

And finally, we're committed to deliver greater than $1.5 billion in free cash flow. That starts with earnings and we're committed to grow earnings per share at 20% compound annual growth through 2012. We will leverage the ground work and momentum from working capital productivity projects in 2009 to deliver an additional $1 billion in working capital productivity over the next three years.

The visibility we have into 2010 is much better and very encouraging compared to the picture we had one year ago heading into 2009. We took decisive and appropriate actions throughout the year to reposition our businesses and we will reap the benefit in terms of accelerated growth and operating leverage. Each one of our business units has clear target. Our leaders understand their accountability and our teams are poised to deliver.

So with that, we'll open up the line for your questions.

Karen Fletcher

Thanks, Ellen. So John, can you give the instructions again for the questions?

Question-and-Answer Session

Operator

Certainly. (Operator instructions) and our first question comes from Laurence Alexander from Jefferies. Please go ahead.

Laurence Alexander – Jefferies

Good morning. First, could you address your – as the cycle turns, your perspective on M&A opportunities, evaluations that you're seeing is in the marketplace and priorities versus other uses of cash?

Ellen Kullman

Certainly, Laurence and thanks for the question. I think very consistent with what we have talked about in the past, we continue to look for opportunities to enhance our very strong positions in Ag & Nutrition, in safety and protection, in alternate energy and that continues to be something that has continued through the global financial crisis and as things come up we'll be sharing them with you as appropriate. But we very much see that in the last few years, some of these bolt-on acquisitions have benefited us and continue to look for opportunities to further strengthen our plans over the next three years.

Laurence Alexander – Jefferies

And secondly, the recovery has been somewhat lopsided regionally. As we get into the January trends, are you seeing any balancing out of the growth dynamics or what's your view on regional trends in Q1?

Ellen Kullman

Yeah. I think they're continuing. I mean, we saw in the fourth quarter that Asia was kind of front runner, followed by continued strength in Latin America. We're seeing sequential improvement in the U.S. and Europe still is lagging. So I don't see any real change. I see it continuing to move forward.

Operator

And our next question comes from Paul Mann from Morgan Stanley. Please go ahead.

Paul Mann – Morgan Stanley

Thanks. Yeah, just thinking about inventory building in electronics and communications, can you quantify that and whether you saw inventory in any other segments?

Ellen Kullman

Inventory – I am sorry, it was hard to hear the question. Could you repeat it, Paul?

Paul Mann – Morgan Stanley

Yeah. So just can you quantify the inventory building you saw in electronics and communications, whether you saw inventory building in any other segment?

Ellen Kullman

Nick, go ahead.

Nick Fanandakis

I think although there was some inventory – well, let me put in this way. Within the whole electronics value chain, there was a very depressed level of inventory. So there was some additional inventory gain during the fourth quarter but still not at the point where I'd say they have a higher restocking level. There's still opportunities for continued movement in value chain. So I don't view it as something where they're overstock right now.

Paul Mann – Morgan Stanley

Okay. Thanks. And just as a follow-up question on Pioneer. Can you just talk about how your order books looking for 2010, how your market share is looking versus last year? I know your target is to gain market share versus last year. Is that still your gain, is that still your target?

Ellen Kullman

Yeah. And I think we're very pleased with how things are shaping up this year. And I think we're very well positioned as we said in the remarks to continue our – improving our share position.

Karen Fletcher

And just a reminder, we said one to two global points of share gain in corn is our expectation in 2010.

Operator

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

Edward Yang – Oppenheimer

Hi. Good morning and congrats on a nice quarter. Maybe a question for Nick. I thought the comments on the pension fund performance was positive and was wondering if you could elaborate and give us a preview ahead of the 10-K on the level of funded status, on the pension plan and for the OPEB balance as well.

Nick Fanandakis

So – yeah. Let me just talk a little bit, Ed, about the results there and they were very favorable. When we looked at the plan back in November, our expectation was about a 40, $0.41 impact negatively on earnings per share as a result of the accounting portion. Again, Ed, this is a non-cash piece. This would only be at the accounting treatment of it. Due to greater than expected returns on the assets by our DuPont capital management group, as well as a little bit of bump on the exchange – the discount rate, we see the reduction in that expense about $0.10 per share, so very positive results. And I will say that group really outperformed the industry benchmark in that area. Now, as far as the unfunded status, there will be a – for GAAP purposes, there will be a small increase in unfunding status that will show up on the 10-K.

Edward Yang – Oppenheimer

Okay. And as a follow-up question on M&A. Ellen, you mentioned bolt-on acquisitions have been beneficial for DuPont historically and the areas currently look attractive to you. What's your appetite for something potentially larger than kind of bolt-ons? Obviously, the volume recovery is well underway and you're in a stronger financial position.

Ellen Kullman

Yeah. I think that obviously this global financial crisis has affected different companies differently and we continue to track different positions that we think could be beneficial to us and mention the times before, I think each one has to stand on its own merit. I think the bar has been raised in terms of the performance that would be expected coming out of that. But we continue to look for ways to enhance our technology position, our global access position with the right kind of acquisitions many times it's just easier to focus on small ones that you can build out, but it's just an area that we continue to challenge ourselves to make sure we're positioning ourselves in our marks very clearly.

Operator

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

David Begleiter – Deutsche Bank

Thank you. Good morning. Ellen, you have a large business in China. Any views on the recent government actions to perhaps slow growth in that economy?

Ellen Kullman

I know there's been a lot of kind of discussion around in that media of late. Obviously, we've seen very strong results coming through the fourth quarter. What's interesting and what's different about the third quarter is that coming through the fourth quarter, we saw exports pick up a little bit. So just wasn't volume driven solely by internal consumption and so I know there's some concern about where, from an economic standpoint, China will allow growth in 2010, but I do believe that having more than external or export component to that is a positive sign. That's something we've been look for as beg an indicator that the rest of the world is continuing to improve as well.

David Begleiter – Deutsche Bank

Ellen, just on performance coatings, can you discuss your expectations for the margin improvement in 2010 as you head towards the double digit target for 2012?

Ellen Kullman

Certainly. I mean, in – as this business, as the volumes continue to improve and we talked about a 10% improvement in OEM and the continued refinish expansion, we see continued improvements in margin coming through our performance coatings business. I mean obviously, they had a strong fourth quarter ending the year about the 7% range for the year. They were only about two. But I think the fourth quarter is much more of what you can expect in 2010, especially with the improving volumes. The goal there, as we talked about in November is 10 to 12% margins and I think they're on a track to get there.

Operator

Our next question comes from Frank Mitsch from BB&T Capital Markets. Please go ahead.

Frank Mitsch – BB&T Capital Markets

Good morning. In some of the comments already on this segment, you were looking at auto builds off sequentially in the first quarter, but you were talk about it being up 10% for the year. How material do you think it will be down sequentially and what specific regions would you anticipate that occurring.

Ellen Kullman

Well, the fourth quarter was so strong based on stimulus is why the sequential is not going to look as good. I think sequentially it may be down as much as 7%, but I think you have to remember also that if you look at the first quarter of '09 versus the first quarter of '10, it will probably be up close to 30% first quarter over first quarter so. But you can't let that 30% guide you for the year because of the sequential issues. And so we do see it's going to be about 10% for the year. We see Europe to be about flat. North America is going to be up, we think over 20% based on the very, very low numbers that we saw in 2009. So it is going to differ greatly by region.

Frank Mitsch – BB&T Capital Markets

I guess it's a good sign that Ford is rehiring again. And Ellen, in your projections for 2010, what sort of global GDP have you baked into that forecast?

Ellen Kullman

3ish of global GDP. We haven't changed that much since our November event that we had. So it's around 3%.

Operator

Our next question comes from Kevin McCarthy from Bank of America/Merrill Lynch. Please go ahead.

Kevin McCarthy – Bank of America/Merrill Lynch

Yes. Good morning. Nick, I think you mentioned in your prepared remarks you are seeing a strong start to the seed selling season. I was wondering if you could just elaborate on that in terms of specific crops or what you're seeing volume metrically versus discount levels and that sort of thing?

Nick Fanandakis

We are seeing strong start. And it's too early at this point to really quantify exact what that's going to end up with but we are certainly ahead of last year's pace at this point.

Kevin McCarthy – Bank of America/Merrill Lynch

And just a clarification, if I may, on the bottom of slide three. You're referencing a timing, potential timing shift from 1Q to 2Q. Is that a general comment or are you seeing things specifically in either seeds or crop protection that would lead to you believe deferral might be afoot?

Ellen Kullman

Frank, I think that has to do a little bit with trying to call the season – sorry, Kevin, between the first quarter and the second quarter. So there I think what we're seeing is we may see a little bit in Europe lagging into the second quarter. I think we'll have a better view on that over the next month or two as we see the season really unfolding in the Northern Hemisphere.

Operator

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

Mark Gulley – Soleil Securities

Yes. Good morning. A have a question on cash flow. What should we look for in terms of CapEx for 2010? And given the fact you're looking for free cash flow of 1.5 billion, that's how the dividend runs, does that mean that the net cash flow would be about nil?

Nick Fanandakis

Well, what we're looking for, for CapEx next year is about $1.6 billion and that's off of our – this year of the $1.3 billion to $1.4 billion range that we're shooting for. So we are seeing some increase in CapEx to support the growth opportunities that we believe are available to us. The second part of your question on free cash flow, we believe that our free cash flow will be greater than $1.5 billion and with the dividend being at the $1.5 billion that would certainly continue to support the consistent dividend behavior that we've had.

Mark Gulley – Soleil Securities

And then as my follow up, it seems to me that senior management in both Wilmington and Des Moines face some interesting decisions going forward. During the litigation you've talked about the fact you wanted growers that have choice. So if I'm a grower and I really like Pioneer germplasma, say on the corn side, let's assume for the moment that I also really like the smart stacks trade offering from Monsanto, would I be able to buy that combined product?

Ellen Kullman

So we're a big believer in choice, we've been very clear about that. That is what is going on now in St. Louis court that will give us the right to stack. We've got no agreements with what you specifically said on smart stacks. But again, the choice is once, for instance, the Roundup Ready original trait comes off patent, is for companies to be able to utilize that trait pretty broadly and that's really the focus.

Operator

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

John Roberts – Buckingham Research

Good morning. I believe you've started looking at two-year comps for the business. Compared to the pre-recession levels, are there any areas that are accelerating up besides emerging market in Ag? When you look relative to the third quarter, did any of the materials businesses and so forth do better relative to their pre-recession levels?

Ellen Kullman

So we showed you the fourth-quarter sales and earnings on your charts versus '07, '08 and '09 both in revenue and earnings, so that gives you a good one. I think Electronics, John, may be the area that is really moving forward and a lot of that is being driven by photovoltaics with that market coming back strongly in the second half of the year. I think the other area that is looking very good versus recessionary periods is titanium dioxide. That's one that has come back very strongly through the second half of this year as well.

John Roberts – Buckingham Research

Thank you.

Operator

Our next question comes from John McNulty from Credit Suisse. Please go ahead.

John McNulty – Credit Suisse

Yes. Good morning. Just a quick question on the margins. When we look at some of the segment margins whether it was Performance Materials or Chemicals and even looking at the Safety & Protection margins, they came in the quarter a lot stronger than I maybe would have expected them to and actually they're coming in kind of in line with at least the low end, in most cases, of your 2012 target. So what I'm wondering is, when we look forward to 2010, how should we think about some of the margins in some of these segments that really seem to be running on all cylinders even though the volumes are depressed? Are we going to see a pause in the margins, or will things continue to get better? How should we think about that?

Ellen Kullman

I think if you think about just the fourth quarter and I think it is a good illustration of what to expect, but I think there still will continue to be improvement. If you look at Electronics, I think that will continue to improve. If you look at Performance Coatings, I think they're at about 7%, as I said before and I think that will improve a little bit and certainly there's opportunity there. I mean mix is one aspect of it. The other thing to note is that coming through second half of '10, we're going start seeing raws increase and so that'll have a dampening effect on that versus what you're seeing in the fourth quarter in some of the businesses.

John McNulty – Credit Suisse

Okay. Great. Thanks for the color.

Operator

Our next question comes from P.J. Juvekar from Citi. Please go ahead.

P.J. Juvekar – Citi

Yeah. Hi. I wanted to follow up on seed pricing in North America. As farmers (inaudible) purchase here, are you seeing more competition in pricing than last year or less competition?

Ellen Kullman

Yeah. I think we're seeing some pretty aggressive actions in the marketplace from a discounting standpoint competitively. I think that right product, right acre strategy that we've been focused on is very much helping us and why we see the anticipated continued improvement in our share position.

P.J. Juvekar – Citi

So are you seeing more competition this year?

Ellen Kullman

Yeah. Absolutely.

P.J. Juvekar – Citi

Okay. And then on Safety & Protection, your sales declined. You mentioned this is a late cycle business. How do you see those trends unfolding in 2010? Do you still think it'll be a lag in 2010?

Ellen Kullman

It's kind of behind and I think it'll be behind all year, but improving every quarter as things like construction, if we get the housing starts that the forecasts are indicating as some of the late cycle businesses that go into transportation and first responders improve. And then you couple that with getting additional benefits from the restructuring that they put in place in the second half of the year. So I think from a – you'll see improvements of top line and the bottom line as we continue to curve.

Operator

Our next question comes from Jeff Zekauskas from J.P. Morgan. Please go ahead.

Jeff Zekauskas – J.P. Morgan

Hi. Good morning. I think DuPont's been expecting some approvals on refuge reduction in corn in the United States for maybe six months that haven't yet come through. Have you changed your attitude toward the probability of being granted the reduction or is there some change in your refuge reduction strategy going forward?

Ellen Kullman

There's no change in our strategy going forward, Jeff. We expect – as you know and I've stated that I personally, as I've analyzed it, remain confident that we will bring it into North America this season. The EPA has indicated support for refuge in a bag. Now, what number they come out with we'll see, but I remain positively disposed in terms of the way the discussions that we've been having with them. So while we're not going to speculate on it, I remain confident in it.

Jeff Zekauskas – J.P. Morgan

And then, do you expect market share gains in corn and in soy in North America for 2010 and how much do you expect?

Ellen Kullman

Yeah. We do. We are on a track and I think we have good momentum into the marketplace. And so I think we've talked about this and the standpoint of corn and soy continued improvement there.

Operator

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

Mark Connelly – Sterne, Agee

Thank you. Ellen, you've talked a fair amount about Ag and you've had some commentary on raw materials in terms of raw material pass-through environment. I wonder if you could you put some color around pricing power in the other performance businesses assuming that raw material prices do continue to move up? A sense of whether customer inventories are low enough that you have confidence that rising raw materials can be fully passed through there.

Ellen Kullman

Well, I think that if you take a look at what we saw in the fourth quarter, it was a lot around Performance Chemicals in terms of pass-through in raw materials, that was the majority of that. I still go back to the over 1,400 new products that we introduced in 2009 and positioning us very well with customers. I know every new product we introduce allows us to reengage with the customer on their value proposition, on the value that product brings them and that's where we get a lot of our momentum around price, as opposed to just necessarily raws. Raws will certainly impact the more commodity aspects of our chemicals businesses and things like that. But we are driving for those new products because we expect that to be able to deliver for us those improvements.

Mark Connelly – Sterne, Agee

Okay. And a follow up for Nick. When we look at working capital, you made big promises, you've more than delivered on them, inventories are down even more than last year. Should we assume that working capital is probably as good as it gets at this point with raw material pressure starting to push it back up?

Nick Fanandakis

Well, let's think about working capital this way. As you said, we made great strides with our productivity improvements, over a billion dollars of work capital improvement in those areas. For next year, we have continued objectives and goals in place to improve working capital by yet another $400 million, so our work in this area is going to continue. We're going to continue to drive working capital down within the organization. Now, saying that, in the same time period, we're obviously going from a recessionary period to one of expansion and there'll be a need to support that growth with additional working capital.

Operator

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

David Howard – Goldman Sachs

Hi. This is David Howard [ph] sitting in for Bob Koort. I just wanted to know a little bit about your Performance Chemical segment. Given that's your new segment, how should we think about that going forward on the pricing side? In particular, what is best for [ph] seasonally into the first quarter given the paint season supply chain this would suggest inventory builds ahead of spring? And then kind of a second to that would be, I know that you saw some pricing erosion in TiO2 this quarter, but what should we think about going forward for that?

Nick Fanandakis

So think about the Chemical segment this way. When you look at the pricing decline that occurred there it's really being driven by the raw material pass-throughs within the chemical segment. When you look at TiO2 what you're seeing there actually is sequential increase in pricing quarter-over-quarter. So – and I'd add one other point. When you're looking at that pass through you're obvious – you're also at the same time increasing margins in the business, so pricing discipline, raws going down, able to retain some of that decline and improve margins in that area.

Operator

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

Don Carson – UBS

Thank you. Ellen, you've had some real success on the seed germplasm front with market share improvements both in North and South America, but you've had some set-backs on the optimum GAT front. Is there – have you rethought your whole approach to trying to develop your own traits or you're more interested in being a licensee of other traits and is there any change in the amount of money that you're willing to spend on biotech R&D?

Ellen Kullman

Yeah. Thanks, Don. So we do license, we do develop our own traits –marketplace you have to have both. You have to have a currency to be able to have something to trade with to get the licenses. So I do think it's important that we continue to focus on the appropriate biotech traits and this industry is in its infancy. I think we have a long way to go. I also think in addition to the traits there are other things like capabilities and things like that that we can continue to improve upon that will help us in terms of dealing in this area. We are maintaining R&D at 12% of sales, which means that our revenue increases were increasing R&D. And I was out on Pioneer two weeks ago and did a full review of their biotech programs for 2010 through 2012 and I get excited when I get out there and sit with them and talk through the specifics with them, so I would not count us out on that report.

Don Carson – UBS

A follow up for Nick. You mentioned the FX hit to Pioneer around $115 million in 2009. What was the overall Ag FX hit? And with the dollar/euro strengthening, are you still expecting to get most of that back or are you most cautious on what FX recovery you might see in the overall Ag platform in 2010?

Nick Fanandakis

I think the overall Ag exchange shift for '09 was about $300 million. And the second part – I'm sorry, Don? Well, for the outlook, we're seeing the – it's tough to forecast the currency on the outlook piece, but we had in our projections $1.45 exchange rate, I believe, back in early November. There's potential for a slight tailwind there, but it's tough to forecast that at this point.

Operator

Our next question comes from Sergey Vasnetsov from Barclays. Please go ahead.

Sergey Vasnetsov – Barclays

Good morning. You've been showing very strong Asian growth, what's the expectation for 2010? And also, what percentage of that growth is supplied by local production versus the exports from other (inaudible)?

Ellen Kullman

I'm sorry, Sergey, I couldn't get the first part of your question. Could you repeat it, please?

Sergey Vasnetsov – Barclays

Your expectations for the Asian volume in growth in 2010?

Ellen Kullman

Yeah. Our expectations are for – well, okay, so we had a tremendous end of the year in Asian growth and we continue to watch that. As we take a look, our firm has predicted their growth's going to be about the same in 2010 or China's going to be about the same in 2010 as it was 2009. Asia GDP's probably going to be about 4.85% in 2010, so I think that we'll continue to see improvement, but more broad based with Indonesia, with Korea, Japan, with all elements of that really participating in that volume progression. So there is – we watch that very carefully, we look at it. But our heads of East Asia and China were in last week and we sat down with them to talk about their progression from the fourth quarter and they remain optimistic.

Karen Fletcher

John, I think we're about out of time. We're at the end of the hour. We're going to bring this call to a close. I'm just going to give it back to Ellen, one last chance for some closing comments.

Ellen Kullman

Great. Thank you, Karen. And I tell you, a year ago as we put forward the plan, there was a tremendous amount of uncertainty in the marketplace and I couldn't be prouder of the team of people that really stepped up with not only restructuring but reorganizing the company taking a layer out, getting closer to our customers and really focused on delivering, not only the number of new product that we did but the productivity we done in fixed and variable and in working capital to really deliver the cash you saw in 2009.

So I am very pleased with the team and the entire company and how we responded and I'm looking forward to building off of that momentum as we come through 2010. So thank you all very much for your time today and I'll look forward to interacting with you as the year goes on.

Operator

This concludes today's DuPont 2009 fourth-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 and Company Q4 2009 Earnings Call Transcript
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