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

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

Goldman Sachs Basic Materials Conference Call

May 21, 2014 11:45 AM ET

Executives

Nick Fanandakis - Chief Financial Officer

Analysts

[No formal presentation for this event]

Question-and-Answer Session

Unidentified Analyst

Yes if we can roll the slides back to the generic one which is I think it’s a material upfront but we are not going to be going through the slides we are going to stick to the fire side chat format here. We are really fortune to have Nick Fanandakis, Chief Financial Officer of DuPont here and keeping with the format issue or keeping it more informal on Q&A and hoping to get a lot audience participation as well. Welcome Nick.

Nick Fanandakis

Thank you.

Unidentified Analyst

It seems like this time a year-over-year there is always a little bit concern around the global economy for one reason and another. It just always seems like our confidence, you we start the year out optimistic, reality sets in by May three times out of four lately it’s been disappointing kind of global growth. But you have such a broad reach of portfolio and broad reach geographically, hoping you can maybe help us to understand what from a bottoms up level, what you are seeing out there, how is demand looking versus how your thought it was at the beginning of the year and what the outlook for the rest of the year from here?

Nick Fanandakis

Sure. Maybe the best way to do that would be to just walk around the road a little bit on it. So if you start here at home in North America, the quarter started out much as anticipated from some of the macro trends that are out there, so when you look at GDP expectation being slightly below 3%, 2.7% GDP growth we are still in line with that in our expectations for the year, industrial production is slightly better than the 3, it’s about 3.2% and it was better than that in the first quarter as we started out. So industrial production index has started out strong.

When you look some of the segments that we are heavily involved in the AG segment. Certainly when you look at prices of the commodity in AG they are of their peak, but I would say they are more towards the normalized levels now certainly at a level where the farmer has still a very attractive economics that they are working under, the levels of the 5 and 12 for soya and for corn and soya are much more in line with normalized levels.

If you look at the automotive segment. In the first quarter, the automotive segment in North America was about a 4%, 5% sort of increases and we're still looking at for the full year being somewhere in that 4% for the full year, so started out good in the automotive segment.

Housing starts is still looking to be strong, about 15%, maybe a little bit under that, but. And that impacts a lot of our businesses, our safety and protection businesses, we have building innovations, would be our TiO2 business as well as our industrial bioscience on some on the carpet applications.

So, North America is starting now to avail this low natural gas prices that obviously help bolster some of the other industrial businesses as well. If you go to Europe, it's kind of tale of two things, you’ve got Western Europe where it's steady and increasing, it isn't going down as it has been. Eastern Europe, still more growth potential. On the automotive side, Europe had about the similar, about maybe a percentage point lower than the North American market, but similar sort of automotive growth.

And some of our businesses there, our materials business and our safety and protection business had double-digit sort of growth. Overall, when you look at Europe for us, we had a 6% volume growth year-over-year, so it was attractive volume growth in the quarter and we see that continue.

In Asia, it's somewhat mixed in developing Asia. It was more growth opportunities, for example in China we grew 12% volume on a year-over-year basis. So we're seeing opportunity still in the China markets. In developed Asia, it was softer, some of that was driven by the currency valuations but softer in that marketplace.

That gives you a sense of the dynamics across the macro sense.

Unidentified Analyst

And then relative to expectations overall to summarize and it seems like fairly in line a little bit of regional…

Nick Fanandakis

In line with the expectations overall; little softer in developed Asia than we had hoped or anticipated but overall in line.

Unidentified Analyst

Okay. And I think the topic we get asked the most about is the TiO2 and for product separation. If you could just update us on how the carve out is going and based on timing of that?

Nick Fanandakis

Well, the separation is very much on track. We're looking at a mid-2015 separation date, which is very in line with other competitive spins of this size, this complexity when we did our benchmarking out there. And we're on track to still completing it in that timeframe. Now of course, we're proceeding down the spin track and all of the work streams go with that, the carve outs; the identifying of the assets; the liabilities going over; the debt structure; the dividend load all those things. And we're identifying the box if you will. And then we'll determine whether we maintain that path of spin or whether there is enough value creation to potentially entertain other opportunities.

Unidentified Analyst

When you mention other opportunities, does that include keeping in the portfolio or is that…?

Nick Fanandakis

No, it's not keeping in portfolio, there will be the separation. We're going to down the spin path as I say but we are open to the possibility of someone coming in with the potential RMT or even the sale, direct purchase opportunity. I believe there are hurdles in those options that are sufficient that is going to be difficult for someone to offer a value that would make me excited from a proceeding standpoint, but that opportunity exists and is there. It’s going to be of sufficient value though to offset the risk and the uncertainty that we would take in moving forward with that endeavor versus continuing down the spin path.

Unidentified Analyst

What do you think about the, say in particular the industry structure is pretty consolidated you’re the number one player, just thinking hurdles to a combination with an existing player from a regulatory perspective, market concentration, do you think it can be done, other things that could be done to get around that (inaudible)?

Nick Fanandakis

Certainly, strategic player would have to address those concerns and issues. But there are ways to address that. There are remedies that could be put in place to deal with that. I think the more significant hurdle to be honest with you is the fact that I have a very low tax bases of these assets. And if I was to do with sale that would be a significant amount of leakage if you will from the tax consequences of a direct sale versus a spin opportunity that would be taxing free in nature.

Unidentified Analyst

That’s why the RMT would be more attractive [in favor]?

Nick Fanandakis

RMT could another potential avenue which would have the same tax advantages as the spin would with the potential for other synergies that could be created with the player that would be involved in an RMT. But when you’re introducing the RMT or introducing an element of uncertainty and negotiations it could impact the timeline that we’re on. And if it’s going to impact that timeline and if I am going to take a risk to doing something that is going to delay the mid 2015 sort of timeline it’s got to create enough value on the other side for me to take that risk.

Unidentified Analyst

Yes. And thinking about the margins in that business obviously well off of the peaks from a few years ago, do you think that they are at bottom right now and is there a scope for them to improve by mid 2015 such that when you are spinning it’s going to be a much improved business from what we see today?

Nick Fanandakis

Yes. So when you look at the margins of this business there is no doubt that it goes through cycles, right. And where is it today in that cycle what we have seen happen over the last five quarters is increases in volume on a year-over-year basis. So we have seen those volume improvements, last quarter alone we saw 7% volume improvement in these businesses. So you are starting to see that volume pick up.

I think where I would characterize it is, it’s a stable industry right now, it hasn’t yet turned upward. There is from a manufacturer standpoint of TiO2 my believe is there is probably about a 10 days supply of inventory on hand and what this volume year-over-year increase that we are seeing is obviously going to impact that in a favorable way and reduce those levels and it is a pure commodity, supply-demand economics are going to drive it here and once they reach a certain point there will be upward pressure on pricing at that point.

Unidentified Analyst

Okay. And then the journey that DuPont’s been on over the last 20 years and a lot of portfolio moves, you’ve got Conoco or Pioneer more recently got out of the auto (inaudible) Axalta and now with a TiO2 separation, it’s going to be a much different company than it was 20, 30 years ago, is there a sort of overarching vision or theme driving all of this and kind of where do you want to have DuPont tradition going forward, where you think it will be in a couple of years?

Nick Fanandakis

Yes. So most definitely there is a overarching theme and a strategy that we are executing against. When you think about it we have three strategic priorities that we are driving in the company, it’s around maintaining that leadership position we have in the AG and nutrition segments and continuing to develop and build upon that. It’s around continuing that historical leadership position we have had in advanced materials and bringing new product opportunities into that space that will allow for continued value creation. And it is becoming that leader in the industrial bioscience side of the house.

And if you think about those three strategic priorities and you now go back and recap some of those large portfolio transitions that we have made very much aligned around those three strategic priorities and the direction we are going in addressing some of those market needs that we talk about all the time around the distant continuities that exist in the market places.

So the Danisco acquisition was certainly a step in that direction brought with it a lot of capability around the enzyme technology and brought additional leadership position around the food market space for us. But coating separation that we had very much aligned with concentrated and focusing our efforts where science is going to make a difference.

And where we can see the leverage of our science in those product offerings, in those businesses, those are the places we want to focus, there wasn’t that opportunity in coatings. And even with the chemicals now when we are looking at the span and separation that we are doing, the same sort of logic is driving that. If you look at the ability to leverage the science into those businesses, it was limited versus other places within DuPont company.

So I think we are certainly executing well against the strategic direction were going and I feel very good about the active portfolio management that we have been able to, to be able to do.

Unidentified Analyst

And if the coating or the TiO2 transaction and ends up being one where you do get a large amount of cash inflow, something, but it would be the spin on that case would be something different. But would you look to redeploy that by getting bigger in some of your existing markets, do you see opportunities that would require capital to try and get into a new market you’re not already in or would you simply kind of look to return that to shareholders?

Nick Fanandakis

So, you said something about a spin, not having that. The spin will generate a lot of cash internally as well, because as we put the debt load on the spun entity, we would look to dividend back that cash to DuPont.

And so the spin itself will have a significant amount of cash in flow to the company as well. There will also be the opportunity with the spin that will be putting the some of the dividend load on to these spin co as well. So, that's some of the cash usage on a year in and year out basis that would also be moving over. So, there are significant cash implications back to DuPont parent even with the spin option. Now I grant you that a sale or some other things might have even greater impact, but there will be some even with that.

And so what we will do with that cash? Well, we've always said that our position around that topic is we want to maintain a strong balance sheet first and foremost and the strong balance sheet for us is maintaining that AA2 sort of rating. We then look to return excess cash to shareholders, unless we have a compelling investment opportunity and that could be potential acquisitions, that could be other capital investments, that could be a lot of different things that’s going to generate significant amount of value for the shareholders by reinvesting in the company as well.

So, we’ll use all the tools, is the point. We'll reduce potential around share buybacks, potential around acquisitions or other capital uses.

Unidentified Analyst

Okay. And then the [topic is really] the cost comes up every time there is one of these portfolio and there is a separations and I think there is a fair amount it when you've got out of auto coatings business.

Nick Fanandakis

Coatings business, yes.

Unidentified Analyst

Even working on pulling those out with the separation of TiO2, there is another opportunity to just look at how the business is run, ways to make those, back office function is more efficient. Is that something that you're taking a bigger look at now and is answer to that is part of the carve out move and how quickly do you think you could execute that just to pull any [community cost out]?

Nick Fanandakis

So, we're doing that and more I guess is the best way to answer it. So you're right when we did the coatings separation the sale there, we looked at the residual cost that was going to be trapped if you will in the company and we put a very active effort in place to eliminate that cost within that first year after the transition. We were successful, we did it earlier than the first year and we did it for a greater amount. So that part was very successful.

With the spin, we're looking at it differently. We're saying yes, there is going to be that element of residual cost that we're going to have to deal with, but we're going far greater than that. We're saying that this is 18% to 20% of the company's revenue base that's going to be leaving.

And so we're taking a really fresh look at the cost across the whole company, all of the functional costs in support of the company and saying with 20% less revenue base, how do we do things differently, what are the things we could be doing differently that could simplify, standardize, reduce the complexity and cost levels within these functional support organizations. So, we're going to look at this as very much an opportunity to make some additional moves in the way of reorganizing, restructuring the company such that we’ll be able to support the new DuPont in a much more efficient and effective way.

Unidentified Analyst

And then just talk about the Ag business a little bit and highlights for the last couple of years, this year the weather caused a little bit of havoc in the Latin America, plus North America delayed some plantings, I think also we saw some shifts from corn to soy as a result of the tighter planting window. Could you give an update on, a lot of the seeds that have been planted, how do you think the year shaped up and your expectations in that business you talked about little bit upfront, but drilling down just to the AG business had some successful commercial launches insecticides, herbicides but also just how is the season in the planting gone and pricing as well?

Nick Fanandakis

Sure. The plantings at this point in time are certainly above last year levels. But they’re in line with about the five year average, both in corn and in soy, maybe slightly better but they’re in line with the five year average. What we’re seeing from our position is continued value being created through the innovation we’re bringing into the marketplace. So, prices for us are growing up modestly 4% to 7% sort of price increases and that’s driven by the value around the product innovation that we’re bringing into the marketplace.

For example, if you look at our AcreMax product, represented about 40% of our offering last year, this year is going to be about two thirds of our offering in the marketplace; our AQUAmax drought tolerance going to be on 10 million acres this year; our T-series for soy is going to be on a third of our acres this year. So you can see the significant traction we are gaining around the product offerings which is allowing us not only to get the volumes that we want to get there but also pricing value through the innovation that we’re bringing.

Unidentified Analyst

And as you look at the soybean platform you move to license in around really two products has that competitively changed your ability to go out there in market. I mean you have great varieties I think to the [germplasm] there, genetic breading is phenomenal with the T-series as you said, you were probably a little bit disadvantage in the trade package before, but just having that now make you even more competitive in the market?

Nick Fanandakis

It opens up more optionality for us. So it gives us the ability to provide the farmer with the best products that would be available and we can take that product, we can stack it with other things we can provide the farmer the seed and the product that’s going to give them the most productivity. So it really opens up our optionality within the company by having that license arrangement in place. It’s a small piece of our overall soy business right now, probably in the 5% range at most but it is, it does provide the optionality for further opportunities for growth in providing the farmer the best products available.

Unidentified Analyst

We will open up to the audience for any questions. Maybe sticking with that you could talk about precision, planting even broader than that you have branded the opportunity called Encirca the business that you have, you could talk a little bit about that potential opportunity. What kind of value you are bringing to the farmer there and business model point of view how is that different from your traditional AG businesses?

Nick Fanandakis

Sure. Here is an area where we have been a player for quite some time. We have developed a strong leadership position in this space. We have a collaborative effort that is been in place now for a while in DTN where they provide the weather stations at the farm that would help monitor not only the weather patterns. And we have changed our offering, enhanced our offering overtime. We have plotted over 20 million acres already, both harvested and planted acres, and the offering continues to develop and continues to improve and we have change how we are going about it. So now it’s a service offering where someone could, just have to be buyer of our seed in order to subscribe to the service.

If something that is going to continue to grow and develop, it’s not going to move the needle today, but it has potential over the -- as we enter into the next decade to be approaching $0.5 billion range in the way of our top line growth. So it’s something that could be a significant needle mover in the future just not right now. But it’s an area where we have enjoyed the leadership position and it’s when we are going to continue to develop and invest in as we go forward.

It only strengthens the already strong position we had in some of the other areas. So when you look at our channel access and how we go to market we call directly on the farmer, we are not going to retailers, wholesalers. And that relationship, that confidence is what allows us to build on this offering with the farmers and gives them the confidence to deal with us and have these subscriptions in place and to work with us in this space.

Unidentified Analyst

Is that direct sales in marketing approach that you have helped to get the word out and get people familiar with the product.

Nick Fanandakis

Yes, most certainly it has helped in that regard and that relationship already being there existing has only furthered the opportunities. And like I say, it's that relationship that builds that confidence in the farmer to having us have access to that data and provide that services to the farmer.

Unidentified Analyst

And that's something that I don't know that we don't talk about a lot or maybe people don't appreciate, but how is the farmer view his own data, is that an asset to him, I mean does he have -- how does he decide who he is going to partner with and share that data with?

Nick Fanandakis

Yes. So, he shares -- that's an asset to him. It helps him around the planting, the yields, the treatment of the fields, the type of seed that should be planted in that acre of land, the right product for the right acre.

We have an arrangement with John Deere where the wireless sort of connection of the equipment to the database. And so all of that is in place that helps drive the ability to accumulate and then analyze that data. And then obviously part of our services is helping to interpret and advice in that area.

Unidentified Analyst

Nick, I'm wondering on the bio-fuel side, the changes in the renewable fuels legislation, has that changed the NPV of your enzymes and plants and cellulosic? And secondly what has to happen to make butanol a major commercial reality.

Nick Fanandakis

To make what?

Unidentified Analyst

Butanol, biobutanol?

Nick Fanandakis

Butanol. So the RFS that you are referring to, there are some discussions around changes there, there were some changes to the RVOs this year. But those numbers actually for cellulosic ethanol went up. It was the only category out of olivine that actually increased and increased to a level that's in line with kind of the capacity that's coming on line this year.

We're very excited about our progress in that space. We have the facility coming on line the end of this year, 2014 in Nevada, Iowa. This will be a 30 million gallon facility will allow us to truly prove out the technology. We’ve proved the technology in a smaller scale pilot facility, but this now will allow us to do it in a much larger scale and then open up the opportunity for licensing and material sales, not only here in the states, but abroad as well.

So I think the RFS is working, I it think it continues to have support from a current administration and. I think it’s something that we'll continue on an ongoing way. Biobutanol is about one year behind the ethanol progress that we've made; it's on track as well, it's always been slated to be one year later. So by the end of 2015, we’ll have that first biobutanol facility in pace. It brings with it is, I think you know Bob, a lot of additional value creation opportunities with the biobutanol that ethanol in and of itself doesn't have. It's got a higher energy density. So brings more value to the users in that regard, it can use existing systems, because it doesn't have that same affinity for water, so you can use existing distribution systems, it got a wafer pressure, so you’re not limited to the time of year in the mixing.

So it brings a lot of value and what you're going to see there more than anything else is probably retrofits of conversions that will take place versus on the cellulosic ethanol those will be Greenfield facilities that will be built with the technology being used.

Unidentified Analyst

Nick along the lines of the spin-off of the TiO2 business. What -- can you explain to us what the strategic rationale for targeting having a low BBB rating for the spin-off, because it's -- a lot of the peers seem to be high yield rated, so it would allow Dowe to or I am sorry, not Dowe, DuPont to extract more value from the spin off in a case that it was you’re able to add more leverage?

Nick Fanandakis

Yes, great question. So, we haven’t firmed up or decided exactly where we’re going to come up. We’ve talked about a low investment grade BBB minus sort of rating right now. But we haven’t landed the plane on that one yet. It could be that it’s a notch below that which would be more of a high yield below investment grade. And as you’ve pointed out when you look at the competitive set much of the competitive set that Spinco would be dealing with is in fact at that lower rating. And that does provide the opportunity for additional value in the way of cash to come back to DuPont because debt load would be greater. But that’s one of the variables, there is all the other variables that have to come into play around not just the debt load but the dividend load, the liabilities we’re putting on the entity and other things that are going to play into that rating position.

But your point is right on and we haven’t yet firmly committed to exactly what that rating is going to be. We’ve talked in the concept of a low investment grade but it’s not absolute at this point.

Unidentified Analyst

I think we’ll have to end it there.

Nick Fanandakis

Okay.

Unidentified Analyst

And for everyone who hasn’t already grabbed launch, grab it outside, we’re going to be back in three or four minutes with our panel discussion on prospects for our U.S. manufacturing renaissance.

Nick Fanandakis

Okay, great. Thank you.

Unidentified Analyst

Okay.

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 (DD) Presents at Goldman Sachs Basic Materials Conference (Transcript)
This Transcript
All Transcripts