Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ellen Kullman - Chairman & Chief Executive Officer

Nick Fanandakis - Chief Financial Officer

Karen Fletcher - Vice President of Investor Relations

Analysts

Frank Mitsch - BB&T Capital Markets

David Begleiter - Deutsche Bank

Amanda Sigouin - Jefferies

P.J. Juvekar - Citi

Don Carson - UBS

Kevin McCarthy - Bank of America/Merrill Lynch

Paul Mann - Morgan Stanley

Mark Gulley - Soleil Securities

Robert Koort - Goldman Sachs

Silke Kueck - JP Morgan

E. I. du Pont de Nemours and Company (DD) Q1 2010 Earnings Call April 27, 2010 9:00 AM ET

Operator

Good morning. My name is John and I will be your conference operator today. At this time I would like to welcome everyone to the DuPont 2010 first quarter investor call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions) 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. Madam you may begin your conference.

Karen Fletcher

Thank you John. Good morning and welcome. With me this morning are Ellen Kullman, Chairman and CEO; and Nick Fanandakis, CFO. The slides for today's call can be found on our website at www.dupont.com, along with the news release 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 the factors that could cause actual results to differ materially.

We will also refer to non-GAAP measures and request that you please refer to the reconciliation to GAAP statements provided with our earnings news release and on our website. Finally, we've posted supplemental information on our website that we hope is helpful to your understanding of our company's performance.

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

Ellen Kullman

Thanks Karen, and good morning everyone. This time last year we were taking aggressive actions to respond to deteriorating market conditions. Our initiatives were aimed and enhancing near term profitability, while preparing to respond to the economic recovery when it came. Today those actions are paying off in the form of streamline business units, a lower cost base, and just as important, much greater customer intimacy, with an ability to respond faster to customer demands.

During the first quarter we delivered strong results of $1.24 earnings per share, more than double the first quarter of 2009, and just $0.07 below the first quarter of 2008. I am very pleased with our performance, the way we responded to changing market demands, and our momentum going forward.

The forecast for 2010, global industrial production is about a 7% improvement, with recovery rates that very greatly by country and by industry. Many of our polymers and chemical businesses saw a strong demand pickup in the first quarter, magnified by the comparison to a particularly weak first quarter of 2009. Because we stay close to our customers and supply chain, we could better anticipate demand signals. In some cases, our management teams made conscious, thoughtful business decisions to take on cost, in order to keep pace with a strong pickup in demand.

Two cases in point; performance chemicals, and performance materials, had volume increases of 30% and 56% respectively. The supply chains were already tight, and these businesses skillfully managed significant challenges to produce and deliver product to keep up with market demand. They were able to, because our customer relationships gave us better visibility into markets and we were able to anticipate demand signals.

We believe we were better equipped to meet demand than our competitors, and in some cases gained market share as a result. Pre-tax operating margins of 13% to 15% in these two reporting units, reflect high operating rates, coupled with the leverage from outstanding work, to take out costs over the past 18 months.

Estimates for 2010, light vehicle production increased since I spoke to you last quarter. In January we expected global production to be up 9%. Our current view is a 13% increase for the year. In the first quarter, vehicle production was up nearly 40%, against a very weak year-over-year comp. The top performance coding stepped up to market demand, and we saw their earnings improve from a loss of $75 million in the first quarter of 2009, to a profit of $45 million this quarter.

With 5% pre-tax operating margin in the quarter, it’s clear that there is still work to do; however, I am pleased with the progress this segment has achieved against formidable challenges. They displayed dedication and determination as they continue to drive this business towards world-class status.

Demand for consumer electronics continued strong heading into the first quarter, which we anticipated. Demand for photovoltaics surged beyond our expectations, driven by new government stimulus programs, advance buying ahead of Germany’s feed and tariff production and pent-up demand from last year. In addition to meeting strong orders, we continue to introduce new products with added value through increased efficiency, enhanced performance and cost effectiveness.

Electronic and communications R&D spend is about 7% of sales, well above the company average, because our product offering, and value it brings to PV differentiates DuPont. DuPont sales in the PV are so strong that we now expect to surpass $1 billion in 2011, one full year ahead of plan.

Our safety and protection segment lagged into the recession, but stabilized during the fourth quarter. We are starting to see these businesses improve. Increases in motor vehicle bills and industrial production supported modest sales growth, with outstanding work by out teams. Global construction markets remained soft and therefore we focused on differentiating ourselves with new products, and increasing market penetration in both developed and emerging markets.

Our global Korean product launches have gone very well and we are actually growing tieback in surface of sales into commercial markets that are still in decline. Overall, new products and applications will help grow sales and safety and protection into the mid in 2010.

Of course another important market for DuPont is agriculture. We have tremendous momentum in our seed business, particularly in North America, where sales in this region popped $3 billion in 2009, nearly doubling in five and three years. Our momentum was hard earned with product performance and investments in R&D and sales and marketing.

We executed a sustainable business model that focuses on the right product for the right acre, an approach that benefits our customers and translates into greater value for DuPont shareholders. While first quarter results reflect some seasonal shifts between quarters, the outlook for the Northern Hemisphere planting season remained very strong, and we still expect to gain one to two points of global seed market share in 2010.

One final comment on our markets this quarter; company sales in Asia were up 71% to $1.6 billion. Not only was this a record for that region sales in the first quarter, but they were over 20% higher than the prior record set in the first quarter of 2008. There were many standout achievements, including a doubling of sales in Japan and Korea into electronics and automotive markets.

I was in Asia last month, and witnessed our teams intense focus on the customer, and their passion for DuPont’s offerings. I visited our Hyderabad technical center in India, and reviewed several customer development projects, which coupled with out intimate knowledge of local market needs with DuPont innovation.

Regional technical centers like Hyderabad or Shenzhen, China or Paulinia, Brazil provide gateways to local opportunities, supported with the power of DuPont and its R&D engine. That’s one reason sales in emerging markets were up 33% in the first quarter. This success is reflective of a strong foundation, an even important growth market coupled with highly attractive offering, and bodes well for continued growth.

Now I am going to turn the call over to Nick to review our financial performance, and then I’ll close the call with comments on our outlook. Nick.

Nick Fanandakis

Thanks Ellen, and good morning everyone. I am delighted to report to you the DuPont has delivered very strong results for the first quarter performance. As the global economy recovers, we grew volume and price up in all regions. This is an outstanding start to what we expect to be a pivotal year for the DuPont company, as we replace pharmaceutical royalties with growth from all other business units.

By almost any measure, it’s a solid encouraging performance, especially in light of still recovering global economy. Our teams around the world deliver on their commitments to grow revenue and generate earnings, while continuing to drive cost and capital productivity; all the while staying close to customers, their expectations and their changing needs.

I characterize these as encouraging results, because I believe this to be great start to what we all expect to be a very good year for DuPont. I sense a real momentum from all of our business leaders. Given the challenges we faced last year, which I know at times seem very overwhelming, it’s a great feeling to know that this company is emerging stronger, more competitive, and ready to go the distance. We delivered on the first quarter and we are poised for growth throughout 2010.

Now I’d like to review the details of the quarter, pointing out our accomplishments versus goals, as well as how our actions are a continuing transition from a recessionary environment to one of growth.

Let’s go to slide two. It summarizes earnings per share and sales results. First quarter reported earnings per share were $1.24, up more than twice our earnings of $0.54 in the prior year. Consolidated net sales of $8.5 billion grew up 23% compared to the prior year, reflecting a 19% volume improvement, 2% price increase, 3% favorable currency effect, and a 1% reduction from some small portfolio changes. Volume was up in all business segments and in all regions of the world. Local currency prices were also up, reflecting our sustained robust pricing discipline.

Starting our segment review with Ag & Nutrition. On slide three, you see the sales grew 6% to $3.2 billion, and earnings grew 10% to $941 million, resulting in over 100 basis point pre-tax margin expansion, versus the same period of last year. Seed sales in the quarter reached $2.2 billion, an increase of 8%, with 7% U.S. dollar price gains and 1% higher volume.

As Ellen mentioned, the clear driver was a tremendous success we continue to experience in the North America, where sales growth was greater than 15%, underpinned by volume and price improvements. With sales volumes higher by about 10%, we are expecting shares gains in corn, and soybean. The exact share gains will obviously depend on the final acres planted.

At this point in the season, the orders are in and we are working on in-season opportunities. This is yet another example where our direct sales organization and supply chain capability really drives. Our sales forces is out there working with the growers, responding to late planting opportunities, and optimizing inventories, so the farmer gets exactly what he needs.

Turning to Europe, here the farm economy is slow to recover after the global downturn. This is holding commodity prices down and resulting in flat to slightly reduced plantings in both corn and sunflowers, and contributing to intense competition in the market place. All of this, together with a late start to the reason resulted in European seed sales been down significantly in the quarter, the implication being that will see some volume shift into the second quarter.

In Latin America, we captured price and volume gains for the supreme season. Price gains reflected industry leading BT penetration to about 48% of our sales in Brazil. Volume gains, which favored fourth quarter, reflect share gain on slightly increased acreage.

Before turning to crop protection, I want to give you a brief update on AcreMax 1 plans. We don’t have the EPA approval today, but we anticipate a positive EPA decision within a week. For 2010 planning, our objective is to demonstrate the product value with farmers in the fields, setting the stage for a 2011 commercial launch. To that end, we have products in over 2600 plots strategically placed, allowing thousands of farmers to experience the performance during 2010 planting.

Now lets turn to crop protection. In crop protection, product sales were up slightly as favorable currency offset lower volumes in local prices, as well as portfolio change. The anticipated competitive pricing pressure was fairly broad based. The volume decline reflects seasonal timing shifts to the second quarter, which was partly offset by the continued growth of Rynaxpyr. Rynaxpyr growth continues at a fast pace, as we confidently move towards our 2010 goal of $300 million in sales, a 50% increase over that in 2009.

This product was the first launch from our reinvigorated crop protection pipeline, and we are making the right decisions to deliver the next blockbuster products such as plain view, a broad-spectrum fair ground weed control or Cyazypyr an insecticide. Our nutrition and health business continued their transformation work of delivering higher value offering, which produced increased sales and earnings from the same period previous year.

Looking ahead to the second quarter for Ag & Nutrition reporting segment, we expect sales and earnings to increase significantly versus the same period in the previous year, reflecting strong performance in all business. Specifically the seed business anticipates a strong finish to the North America planning season, and seasonal shift in Europe. Crop protection also anticipates broad geographic and product volume growth, mitigated in part by continued competitive pricing pressures.

Now lets turn to slide four; electronics and communication segment. Sales of $631 million improved 73%, compared to the same period last year, reflecting 60% volume improvement, and 13% higher prices; essentially all metals pass though. Sequentially revenues were up 8% on strong demand, especially in the photovoltaic ext and semiconductor materials markets.

Pretax earnings of $105 million are $139 million better than the same period last year. This is due to broad based demand increases in all products and all regions, with Asia growing an impressive 131%, and photovoltaic sales growing a noteworthy 147%.

As Ellen mentioned, we expect to exceed our sales goal of $1 billion in PV sales in 2011, a year ahead of schedule. For the second quarter we expect strong broad based demand to continue versus the prior period. Sequentially we expect sales to be inline with the first quarter.

Now lets turn to slide five; the performance chemical segment. Sales of $1.4 billion increased $345 million or 32%, reflecting a 30% increase in volumes, 3% higher selling prices, and a 1% reduction due to portfolio changes.

Sales increase was principally driven by strong recovery that continues in the titanium dioxide business, and the fluoropolymers markets in all regions, and strong demand for all refrigerants, including strong adoption rated for our ISCEON, as a preferred retrofit for our R22.

PTOI was $190 million, an improvement of $146 million, primarily due to these higher volumes. Looking ahead to the second quarter, sales and earnings are expected to be up substantial year-over-year due to the improved economic conditions in most markets.

Sequentially we expect sales to be modestly up, and earnings to be significantly up, reflecting a strong recovery that continues in most markets, and the seasonal up-tick in demand for PTOI 2 and refrigerants, along with very strong demand for ISCEON in the European region.

Now lets turn to slide six, performance coatings. Segment sales of $902 million increased to $170 million or 23%. Sales increased as a result of 17% stronger volumes, as well as some pricing gains. Demand was driven by continued recovery in the global automotive market, as well a strong rebound in Asia Pacific. PTOI was $45 million, up $120 million from the prior year. The improvement was primarily led by this increased volume, lower raw material cost and aggressive fixed cost reductions.

Segment sales in Asia Pacific continued to recover up 45% versus prior year’s first quarter. Global auto builds were up 39%, let by North America, which was up 68% versus the prior year. For the full year we are now expecting global auto builds to be about a 13% increase, and as Ellen stated, this is a increase from our prior estimate of 9%, and inline with the stronger volumes that we saw this quarter.

While auto builds have not returned to the pre-recessionary levels, and we don’t expect them to until 2011, the strength we are seeing in emerging markets is offsetting declines in developed markets.

Looking ahead to the second quarter for performance coatings, we expect sales to be up significantly year-over-year. Demand for OEM paints should improve with increases in global vehicle production. Both OEM and refinished paint products should benefit from continued improvement, and consumer confidents in developed regions around the world, and positive moment should continue in emerging markets. Sequentially sales should be moderately up as a function of higher demand in automotives and refinished paint products.

We expect earnings to be substantially up in the second quarter versus prior year. Lower cost should also have a positive effect. Sequentially we expect earnings to be up on higher sales, as automotives after market momentum continues, partially offset by rising raw material cost.

Lets turn now to performance material segment on slide seven. Sales of $1.5 billion increased $592 million or 63%, reflecting 56% higher volumes, and 7% increases in selling prices. Higher volumes reflect improvements in automotive, industrial, consumer and the electronics markets, with strong recovery in all regions led by Asia Pacific and Europe.

PTOI was $230 million, an improvement of $376 million. We delivered strong volume growth in all regions, as well as margin expansion, with lower raw material cost, higher selling prices, favorable currency and improved fixed cost productivity.

Looking ahead to the second quarter, sales and earnings are expected to be up substantially year-over-year, reflecting improved conditions in most markets. Sequentially we expect sales to be essentially flat, and earnings to be down, reflecting the higher raw material cost.

Lets look at slide eight, and here you’ll see the safety and protection segment. Sales of $789 million increased $71 million or 10%, principally reflecting an 8% increase in volume and 2% higher selling prices. The volume increase was primarily due to recovery in automotives and industrial markets, coupled with moderate strengthening in construction markets. PTOI was $102 million, an improvement of $38 million, reflecting higher volumes and lower raw material costs.

Looking ahead to the second quarter, sales and earnings are expected to be up substantially year-over-year. We anticipate improved demand for industrial, auto and construction markets. Sequentially we expect sales to be up modestly, and earnings to be up slightly, reflecting continued recovery in the industrial and automotive markets.

Now lets turn to the corporate view of the first quarter earnings per share variance analysis that you see on slide nine. Looking at price and variable cost, the quarter showed a net benefit of $0.21 per share. This reflects the positive spread between price and variable cost, excluding the impact of currency and volume.

Again, excluding volume currency and portfolio impacts, first quarter variable costs were down about 2%. We anticipate that the full year 2010 variable cost will increase about 5% over 2009, and looking from a quarter-by-quarter perspective, we believe that the first quarter was the final quarter that will see a reduction year-over-year, and we expect the trend to reverse for the remaining quarters of 2010.

Volume improvement resulted in an incremental earnings benefit of $0.57 per share, compared to the same period in the pervious year, in part reflecting the benefits from increased capacity utilization. As I mentioned earlier, this benefit is broadly based across all business and regions, and was particularly strong in Asia, up 65%. There is a graph that you can see depicting sales by geography region shown on slide 10.

Continuing on with variances analysis, lets move to the fixed cost. Excluding volume and currency, fixed cost reduced earnings by $0.14 per share in the quarter. Included in that calculation is an $0.08 incremental pension chare, along with actions in the first quarter to support growth such as targeted increases or contractors as production ramps up, increased investments in seed R&D, and specific marketing initiatives.

Concurrent with the actions that we are taking to support growth, we estimate that DuPont realized about $130 million of savings in the quarter due to our cost reduction programs. In 2010, we have commented to deliver $400 million in fixed cost productivity reductions and $200 of incremental restructuring benefit. We will deliver on these savings.

We use a managing process for which I am personally responsible, that evaluates growth initiatives proposals and tracks progress on cost productivity programs. Clearly with volumes rebounding so strongly, we are adding back resources to support this volume growth, and remain firm in our result to do so thoughtfully, and only when higher volume dictates the need.

Year-over-year currency was a tailwind of $0.10, reflecting an 8% weaker dollar in the quarter. We believe this will turn into a headwind for the second half of the year. In the other category, on the waterfall chart, reduced earnings by $0.04 per share. This includes a $0.02 charge for exchange gains and losses.

$36 million charge was the impact of the Venezuela devaluation, and is included in this exchange gains and loss. Our goal continues to be to achieve zero after tax impact from our balance sheet hedging program. As is typical, the detailed reconciliation is on schedule D, to show you the exact impact our hedging program had on the effective tax rate and on earnings.

This other category also includes a $0.02 reduction in pharmaceutical earnings. First quarter Pharma earnings were $221 million, about $30 million below the same period last year. While pharmaceuticals were below prior year, they were better than expected, and as a result, we are increasing our 2010 range for Pharma pretax earnings to $360 million to $400 million.

We expect the remaining earnings to be spread evenly over the balance of the year. There are assumption and uncertainty to this forecast, such as the generic erosion curve in both the US and Europe, estimated inventory levels and contractual elements.

The last point on the EPS waterfall chart is our first quarter 2010 base tax rate, which was 23.4% versus 23.1%, first quarter prior year, which created a net zero EPS impact. Looking forward, we estimate the full year 2010 base tax rate to be 23% to 24%.

Turing now to the balance sheet and cash on slide 11. First quarter free cash flow was a seasonal out-flow of $1.3 billion. Higher net income was offset by increases in working capital to support strong volume growth. For example our electronics and communications segment had volume growth of 60%, and performance materials volume increased by 56%.

We are also preparing for a significant sale increase in our titanium dioxide, refinished coatings and refrigerant products as we move into their seasonally strong second quarter. As you recall we are committed to a $1 billion working capital productivity gain over the next three years. Based on networking capital levels, we are on track to deliver $400 million of that in 2010. Here again, I am leading a managing process around working capital productivity, to ensure that we deliver on these commitments.

Regarding dividends, with a dividend payment in March, we have paid 422 consecutive dividends. Our strategy has been to drive hard delivering cash returns to our investors. So in summary, for the first quarter, a year-over-year volume growth that started in the fourth quarter of 2009 continued and expanded in the first quarter, exceeding our expectations. This along with our pricing discipline and productivity focus delivered strong quarterly results.

Turning now to the second quarter 2010. We expect the recovery that we’ve seen in our businesses to continue along with projected strength and grow in the Ag & Nutrition Segment, which is underpinned by solid finish to the northern hemisphere planning.

For the full year 2010, DuPont’s leadership team remains confident in our business plans and our ability to execute against the plan. We are raising our guidance from a range of $2.15 to $2.45 per share, to a range of $2.50 to $2.70 per share, based upon the strong results in the first quarter and our ability to execute the very compelling growth plan we’ve laid out for our investors through 2012. The updated guidance puts our earnings per share growth at 20% to 35% versus 2009.

On slide 12, looking strictly at pre-tax operating income excluding significant items, we anticipate more than 20% growth, and if you exclude Pharma from these results, our growth is greater than 50%. In line with our increased earnings, we are raising our outlook for 2010 full year pre-cash flow, to greater than $1.7 billion from our previous outlook of greater than $1.5 billion. This reflects higher cash earnings and continued productivity.

As I said at the start, we have a plan for 2010, and we will execute against that plan, which is in short grow our business across the globe and expand our margins. We are off to an excellent start, to what should be a great year for the DuPont Company.

With that, Ellen I’ll turn it back to you.

Ellen Kullman

Great, thank you Nick. I’d like to reinforce what Nick just said. When we met with investors last November, each one of our reporting units outlined its business mission, priorities and growth targets through 2012. Our plan is working. Result so far reinforced our confidence that we can meet or exceed our 2012 goals.

$1.24, first quarter earnings per share was not the product of this quarter alone. It’s the result of the last six quarters worth of efforts in terms of restructuring, fixed and variable cost productivity, working capital productivity, and most importantly, staying close to our customers and markets. We’ve effectively can reposition the company for the recovery that’s underway right now.

As for Ag business you can expect continued growth and margin expansion. We remain committed to deliver 15% segment earnings growth, compounded annually through 2013. Of course, half of our sales for this segment are in seeds, where we see the biggest growth opportunity.

The Pioneer North American Leadership team has successfully implemented its reinvestment strategy, building a sales and agronomy force, numbering more than 4,000 strong, complemented by an industry leading of portfolio products. We have a track record of growth in international seed as well, and continue to building on that position.

We have a strong R&D pipeline, and are committed to pricing for value, supported by growers who have benefited greatly from our product innovations, tailored to their needs and local conditions. In the end the strategy has delivered volume and price gains, which resulted in strong earnings growth, and will continue to do so.

Please turn to slide 13. In summary, we remain focused on execution. Our priorities are outlined on this slide in the form of directives, which are broadly shared with employees. We have a high degree of confidence in our playbook and in the leaders of our 13 business units, who are accountable for delivering the results.

The first directive is superior revenue growth. Our 2010 target is more than 10% increase versus 2009. An important foundation for our growth continues to be market driven science. In the first quarter we introduced 502 new products, which compares to 501 in 2009. This is an outstanding start to the year, considering that last year we set a record for new product launches in a single year.

Another measure of innovation productivity is the percentage of sales from new products. Our target in 2010 is 30% sales for products that have been launched within the past four years. Recognize that this is a change from our traditional metric, where we used to define products as having been launched within the past five years.

The intention behind the newly defined metric is to push for faster, broader product launches, a maximum value and return to both our customers and our shareholders. At the same time, we’ve been honing our product launch processes to make them more disciplined and more market focused.

Productivity remains a corner stone of our playbook, and as Nick said, we’re on track verses productivity goals; and finial, our improved outlook in earnings translates to an improved outlook for cash, and we expect more that $1.7 billion in free cash flow in 2010.

While the first quarter recovery looks healthy, we realize there could still be a number of market scenarios that play out for the remainder of the year. Recognizing this, our business leaders have alternate business plans, and a number of tactical earnings levers that they will adjust to changing market conditions, both positive and negative, and we will deliver strong results.

We will continue to focus on executing the three-year playbook outlined last November, and will do it one quarter at a time, working towards our 2012 goals with discipline and agility. At the same time we’re laying groundwork for additional growth beyond 2012, capitalizing on the mega trends that form the backbone of today’s plan.

We have a terminuses opportunity for investors to view first hand the progress for making in one of those growth areas. In two weeks, on May 11 we are hosting an event in Knoxville, Tennessee, which will be entirely focused on our applied biosciences platform. I hope that you will join me for the day. We are meeting in location in Tennessee, so we can showcase two important facilities.

First our cellulosic ethanol demonstration plant, and second our production facility where we make propanediol from corn or what we call bio PDL. We will take you on tours of both facilities, and our business leaders will talk about the opportunity we see, and the progress we’ve made since we last updated investors two and a half years ago. I look forward to seeing you there.

Karen, I think we are ready to open the line for questions.

Karen Fletcher

Okay great. John if you will open the lines and remind folks of the procedure.

Operator

Thank you, we will now begin the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Frank Mitsch from BB&T Capital Markets; please go ahead.

Frank Mitsch - BB&T Capital Markets

Good morning everyone, and nice job in the quarter obviously. Ellen, I’m trying to remember this correctly and I’m not sure. You obviously had a very nice start in the year on the Ag side in terms of growth, and I though that the last quarter you talked about, the expectations was that Q2 might show better growth year-over-year than Q1 on the Ag side. Does that still hold correctly and am I remembering that correctly?

Ellen Kullman

Yes, basically I think that’s going to a hold late start in Europe. I think it’s going to be one of the drivers there, so we still see the second quarter being stronger.

Frank Mitsch – BB&T Capital Markets

All right, terrific, and then as you look at the electronic segment, obviously a terrific recovery under way there, yet you were talking about flat or Nick was talking about flat growth in the second quarter verses the first quarter. What would be the factors behind that? Why would you know anticipate a continuation of the recovery there?

Ellen Kullman

Well, we had a tremendous first quarter, and the growth there has been largely driven from photovoltaics. We are not seeing restocking in the first quarter, so you are not going to have that in the second quarter. So I think sales we see as remaining strong, but by and large on a sequential basis we’ll be pretty flat. Its not going to be kind of any diminution, it’s going to be continued strength in the electronics market, really drive off photovoltaics. This year we see probably about 50% increase in our revenue from PV

Frank Mitsch – BB&T Capital Markets

All right, so I guess the way to think about it is that the first quarter saw some restocking as well as pick-up in demand, whereas in the second quarter you are going to see that underlying demand pick up without the kicker of restocking.

Ellen Kullman

Exactly Frank, thank you.

Operator

Our next question is from David Begleiter from Deutsche Bank; please go ahead.

David Begleiter – Deutsche Bank

Hi, good morning. Ellen on AcreMax, are you expecting the approval at 10% refuge reduction, and are you actually selling AcreMax this year, or are you just in some test class performers. Tell us what’s happening with the 2600 test plots out there?

Ellen Kullman

Sure, thanks David. The EPA has not announced their decision. We haven’t seen the registration. We do expect it with the next week. The discussions have been very consistent and positive, supporting both refuge in a back, and refuge reduction. So it’s a convenience factors in there as well.

Now if I were to get and anticipate based off the discussions, I’d call it at a 90/10 product. Those products yield very, very well versus their conventional counterparts. So we are going to have it out, and demonstration plots, probably around 2600 plots this year, so that farmers can really understand the yield and the capability of this product. So we are very excited about it.

David Begleiter – Deutsche Bank

And lastly, your competitor has announced their intention to lower pricing across the entire seed portfolio for 2010, what will your competitive response be in pioneer to that?

Ellen Kullman

Well, we’ve always had a strategy of value pricing, right product, right acre, that has worked very well for us, it’s a competitive market out there, but I think our direct-to-farmer model, our value based pricing continues to be our strategy and I think that will serve us well this year and in the future.

David Begleiter – Deutsche Bank

Thank you.

Operator

Your next question is from Laurence Alexander from Jefferies; please go ahead.

Amanda Sigouin – Jefferies

Good morning. This is Amanda Sigouin on for Laurence this morning. First off, a question on the seed business; does DuPont have firm market share targets that its plans to defend if compotators become more aggressive in going after share.

Ellen Kullman

Well, this year is pretty much played our. Have the seed is in the ground in corn, and farmers have pretty much made there decision. So we see that this year is going to continue to progress the way it has. We have to predict 2011 will bring, because that basically that basically has stilled of what happens in 2010.

So we are sticking to our playbook; right product, right acre, the penetration adding, we expect to see one to two points in share gain globally, and we think that based on what we’ve seen so far in the year, we are still confident about that.

Amanda Sigouin – Jefferies

Okay, and then just a follow-up. Could we please revisit the trajectory for the pharmaceuticals business, particularly how fast earnings are expected to decelerate in 2011 and 2012?

Nick Fanandakis

Let me handle that one. As you know, we are now saying that Pharma is going to be about $360 million to $400 million impact for the full year, and we saw $221 of that in the first quarter. So the reminder will be split evenly over each of the remaining quarters. So a third in each of the remaining quarters is our expectation. As you know, Pharma was down about $0.02 year-over-year in earnings per share in the first quarter.

Now for the full year, we had about $1 billion in prior year, and as I say, we are expecting about $360 million to$ 400 million this year. So you can see the impact is about that $600 million for the full year. Then as you go forward into 2011, you can take the number that I’m talking about now and you can go by about half, and then in 2012 by about half again.

Amanda Sigouin – Jefferies

Great, thank you.

Operator

Our next question is from P.J. Juvekar from Citi; please go ahead.

P.J. Juvekar – Citi

Yes hi, good morning.

Ellen Kullman

Good morning.

P.J. Juvekar – Citi

Just quickly on acre and just a follow-up; with all these extra 2600 plots that you are demonstrating your technology, and you’ve got an extra year to prepare, which is 2010, how big would your launch be in 2011 for AcreMax?

Ellen Kullman

I think that we’re not going to predict that at this point. Our goal this year is to really allow thousands of farmers to see the yield and the productivity that AcreMax 1 provides, and I think that is really going to build the excitement around what we can do in 2011. Thanks P.J.

P.J. Juvekar – Citi

Just on M&A that now some of these businesses have rebounded strongly, would you expect divesting some of the more commodity oriented businesses to move the portfolio up the value chain?

Ellen Kullman

Nick would you like to?

Nick Fanandakis

P.J. let me address that. Thanks for your question. When you look at our M&A strategy, really it remains very consistent. From an acquisition standpoint, when we look at the opportunity for acquiring potential businesses, we stay along the lines of -- an acquisition would be for some thing really of providing significant strategic value, either technology, a value chain, etc., it’s not for just bulking up.

On the divestiture side, which is really I think the harder your question, we put a lot of effort, time, and money into restructuring these businesses, and we really believe that right now is the time where we can extract a lot of that value as we move forward. I would really not want to give up on that opportunity and that value that we can create now with those businesses.

So I really believe that from this point, from my advantage point, looking at those, we create the greatest shareholder value by continuing to run those businesses and take advantage of the leverage that we have created.

P.J. Juvekar – Citi

Thank you.

Operator

Our next question is from Don Carson from UBS; please go ahead.

Don Carson – UBS

Yes, thank you. Just a question on some of these assumptions behind your guidance. I mean clearly you’re going to exceed your 10% revenue growth target. I’m just wondering what revenue growth is implicit in in your new guidance, and with raw materials rising, do you have the pricing power to maintain increases in variable margin, or is this earnings growth still going to come primarily through operating leverage?

Ellen Kullman

Yes, Nick you want to help Don with that one?

Nick Fanandakis

Yes Don, let me try and answer that one. Certainly we have had a great first quarter, and we are at a rate that’s far greater than the 10% sales growth that we talk about.

When you look at quarter two, we have very good visibility towards quarter two, and we are expecting as we mentioned, continued strength in the second quarter. Beyond that, the third and fourth quarter, it’s not as clear obviously, as to the top-line growth and what we are going to see within the market conditions.

We don’t anticipate any major softening. We have some very good bellwether businesses within the corporation, like our TR2 business, and it’s operating very strong. Not only is our business operating strong, but the whole industry is. So we are anticipating a continued strong economy, but the visibility beyond the first half is a bit hazier. So at this point in time, I would stay with our greater than 10% top-line growth in the year.

Don Carson – UBS

And just a follow-up on price variable cost, you really have pricing up despite costs being down. I know TiO2 is pretty tight, but what is sort of the general pricing power within your businesses, or is it just doing more to your continued focus on the DuPont pricing model?

Nick Fanandakis

Well, certainly it’s a combination. I mean, we instituted pricing per value for some time now, and we have that discipline institutionalized through all of our businesses, so we really do take advantage of that and make sure we get the value for the innovation that we bring in to the market place, so there is certainly that component of it. Then there are businesses that are very tight right now. If you look at our TiO2 business, very tightened capacity, our polymers business, our refrigerants, all those have a very high [Inaudible] right now.

Operator

Your next question is from Kevin McCarthy from Bank of America/Merrill Lynch; please go ahead.

Kevin McCarthy – Bank of America/Merrill Lynch

Yes, good morning, how are you? Nick I understand the acreage numbers are still to be seen, but with half the crop in the ground and the seed selling season down, would you care to hazard an estimate on your share gains in the US markets for corn and soybeans?

Ellen Kullman

I mean that’s still paying out as we speak. I mean, we feel it looks like corn will probably play a little more this year than maybe we had estimated earlier in this year than maybe we had estimated earlier in this year, and soy will come in late, but I think that we are on track with what we had predicted at what our estimates were this year, and I really think that globally we do see that 1% to 2% points of share come in our direction.

Kevin McCarthy – Bank of America/Merrill Lynch

Then to follow up on optimum incremax; one just to clarify, would you intent to go to a refuge in the bag delivery system at a 10% refuge level, and if so, when might you be in a position to start sales in a rib mode?

Ellen Kullman

When we get the registration from the EPA, which we expect in a week, our expectations or discussions with them indicate that the 90/10 is probable; at least in the way I’m calling it now. So that’s the product we will getting out in the bag, into the market place, and get those demonstration plots in this year. So that’s going to provide us with the opportunity to show the real value to the growers, not only its yield, but its convenience that will be used to greatly support our 2011 commercial launch.

Kevin McCarthy – Bank of America/Merrill Lynch

Thank you very much.

Ellen Kullman

Thank you Kevin.

Operator

Your next question is from Paul Mann from Morgan Stanley; please go ahead.

Paul Mann – Morgan Stanley

Thanks. Yes, its quite clear the recovery is significantly stronger than anticipated in November. You brought forward your affordable revenue targets from 2012 to 2011. So how do these results make you reflect in your 2012 targets you put out in November.

Ellen Kullman

Yes, one quarter we were very excited about what we have been able to deliver in the quarter, both from a volume and from a productivity side, but I think we need to see a little more play up this year before we adjust the targets that we put out in November of 2009. We will probably be getting together with you guys in the fourth quarter like we do every year, and at that point I think it would be very appropriate for us to give you our thinking then.

Paul Mann – Morgan Stanley

The only division where margins were slightly weaker than what we anticipated were robust performance coatings, we are just going to mark a target of 10% to 12% in 2012, and it's still early days. Were the margins this quarter more a mix effect, in terms of more OEM refinished? Do you feel you're on track for the 10% to 12% margin still?

Ellen Kullman

Yes, Nick do you want to…?

Nick Fanandakis

Paul, thanks for your question, this is Nick. When you look at that business and the slight drop in margin that you saw in the quarter, its really due to mix that you said, the refinished versus the OEM mix, and its also due to some of the raw material increases that they started to experience already in the quarter around monomers and solvents of that nature. So they are starting to see some of that compression occur in the first quarter year.

Paul Mann – Morgan Stanley

Okay, thanks.

Operator

Your next question is from Mark Gulley from Soleil Securities; please go ahead.

Mark Gulley – Soleil Securities

Yes, good morning. Here are my two questions. First of all, with respect to the competitiveness in the seed business, we have certainly talked about it a fair amount, and yet you saw a 5% increase overall in this segment. So how does that square up with the competiveness. Then second, Nick I have a question on continued pinch in contributions, both this year and perhaps even next year. Thank you.

Ellen Kullman

Yes, thanks Mark for the question. On competitiveness in seeds, we have seen the first quarter start. It’s based off of a strong North American opportunity, and weaker Europe opportunity than we had projected early. Europe will come in strong in the second half and we’ll have a strong finish to North America. So I think you will see a second quarter strengthening in seeds as we have discussed earlier, and I think that that’s consistent with what we are seeing playing out in the planting today.

So, I think that the overall production agriculture is always a first half story, and its always difficult to call first quarter, second quarter, and I think you will see from our first half standpoint a very strong positioning for us.

Nick, you want to take up the pension question?

Nick Fanandakis

Yes, thanks. On the pension, let me just refresh everyone’s memory. The $400 million that we are taking to earnings this year in the way of pension is not a cash impact item, it’s just an earnings impact item.

For cash impact or cash contributions this year to the pension plan, our preliminary estimates when we look at the funding requirements needed by the pension protection act of the 96% level, we believe we will be meeting that level without having to make any cash contributions within the US plan. Outside of the US plan, we still have about $300 million of cash contributions to those plans.

Ellen Kullman

John, next question?

Operator

Your next question is from Robert Koort from Goldman Sachs; please go ahead.

Robert Koort - Goldman Sachs

Thanks very much. I was wondering a little bit; you made some positive comments about safety and protection maybe starting to turn the corner a little bit. What would you expect through the incremental margin rate as you go back up the slope, and how long might it take to get back to that $ 1 billion revenue run rate; quarterly I mean?

Ellen Kullman

If we take a look at facing protection they were laid in, they were late coming out, albeit we are still seeing improvement sequentially quarter-by-quarter. In 2012, we put targets in the low 20s for their margin. I see that no reason to come off of those estimates.

You know military, which is about 10% of the revenue is lumpy. It comes and it doesn’t come depending on a lot of different factors. So when we integrate that all together, plus construction is going to be stronger this year than last year, but certainly I would not call it anywhere near robust.

So we are confident in our products, and in the new products that we have introduced in the last year to continue to aid us in penetration of those markets globally, and I think that as we say, the focus is on getting back to those margins in the 2012 timeframe.

Robert Koort - Goldman Sachs

If I look towards that business, it sort of peaked out a few years ago. It looks like the revenues were up maybe $270 million or $300 million or $175 million higher, but so was the profit level. Given all this stuff you’ve done internally, would you expect the margins if you get back to that same revenue base would be meaningfully higher or no?

Ellen Kullman

No, I think that if you take a look at it there, the mid 20 margin levels are what we are focused on for the 2012. The mix is going to be very different as we come through the next two years, and I think that’s a very healthy margin and one that with our advanced products and the new technologies we are bringing forward, that we can focus on.

John, we are nearing the end of our time, how about one more question?

Operator

Your last question is from Jeffrey Zekauskas from JP Morgan; please go ahead.

Silke Kueck – JP Morgan

Good morning its Silke Kueck for Jeff, how are you?

Ellen Kullman

Good.

Silke Kueck – JP Morgan

Do you have any targets to employ those free cash outside of paying dividends?

Ellen Kullman

Nick, would you like to comment on our cash?

Nick Fanandakis

Sure. We have a dividend policy, which is fairly well articulated, and known. We return our excess cash to our shareholders, unless we have a compelling investment opportunity. Our dividend issuance, we have a range in about 25% to 45% of our cash flow from operations. We would like to stay within that range. Ultimately, obviously the dividend policy is a board decision.

Outside of dividends, we look at the growth opportunities that we have within the corporation and you look at the opportunities that we spent some of our fixed cost on, our cash and capital dollars on this year, this quarter. It’s reflective of the tremendous growth opportunities we have, so I believe the cash will be put to tremendous use.

Silke Kueck – JP Morgan

Okay, and just to follow up, if it were the case that currencies stay where they are today for a longer period of time, would that in anyway impair your 2012 earnings guidance or are the underlying operations strong enough to absorb that?

Ellen Kullman

I think that we are anticipating a little bit of a headwind for currency in the second half of the year.

Nick Fanandakis

From this point on, we are actually anticipating a headwind in the currency. The currency right now, and the euro for example is 133, and our assumptions are in the 134-ish range, so we are seeing some headwind for the rest of this year. It’s difficult to project that out beyond, it’s difficult to project it even for the rest of the year, let alone into 2011.

Ellen Kullman

Okay, so that brings us to a wrap. Thank you everybody for joining us this morning and we are anxious to answer your questions that you have in follow up.

Operator

This concludes today’s DuPont 2010 first quarter investor call. You man now disconnect your lines at this time, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: E. I. du Pont de Nemours and Company Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts