Welcome to the DuPont Second Quarter 2011 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Karen Fletcher. Ms. Fletcher, you may begin.
Thanks, John. Good morning, and welcome. With me today are Ellen Kullman, Chair and CEO; and Nick Fanandakis, Executive Vice President and CFO. The slides for today's call can be found on our website at dupont.com, along with the news release that was issued earlier today.
During the course of the conference call, we will make forward-looking statements. And I direct you to Slide 2 for our disclaimers. 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 refer to the reconciliations to GAAP statements provided with our earnings news release and on our website. And finally, we have posted supplemental information on our website that we hope is helpful to your understanding of our company's performance. It's now my pleasure to turn the call over to Ellen.
Great. Thank you, Karen, and good morning, everyone. I'm pleased with the continued strong momentum from our second quarter results. Sales were up 19% with double-digit increases in every reporting segment and major region. Sales of developing markets grew 29%. Overall, we had excellent pricing performance driven by innovative new products and disciplined pricing actions across all businesses. Volume was up 2% for the quarter compared to 9% in the first quarter.
For the full year, our expectation is for 5% organic volume growth. Factors affecting volume growth specific to the quarter, included the timing of a very strong start to the Ag season weighted towards the first quarter at the expense of the second, as well as the impact from the Japanese earthquake and flooding in the United States, which we will recover in the second half. In spite of these items that were very unique to the second quarter, our volume growth year-to-date is about 5% and we expect that trend line to continue through the second half.
Now I'd like to take a few minutes to walk through what we're seeing in the major markets we serve. Let's start with Agriculture, where we're wrapping up a very successful selling season in the northern hemisphere. In line with our right product, right acre-feet strategy, our sales team deliver a constant stream of new products that optimize [indiscernible] performance and profitability field by field. Broad customer acceptance leads us to expect share gains in North American corn and soybeans is one measure of grower validation this season, and we'll announce those share gains later this summer. Healthy farm economics and high-value product innovations are the backbone of success for both our Seed and our Crop Protection businesses.
Moving to Electronics. Photovoltaics is an important growth market for us. We expect module builds to be up nearly 15% this year, and as we always state, the road is a bit bumpy. In the first quarter, we saw Module inventory build as production outpaced demand. Now this situation continued into the second quarter and led the further increases in inventories, coupled with significant price and margin pressures on the supply chain. While the market has begun to adjust, we expect the correction to continue into the second half. Positive news came from Germany signaling that they will keep their existing subsidy level intact and not make the anticipated cut in July as was once thought.
We expect PV installations to be up significantly in the third quarter as compared to the second, helping to work off inventories and allow cell and module production to pick up again. PV installations in the second half should reach levels of about 11 to 12 gigawatts nearly double the rate from the first half on stronger demand in Germany, Italy, USA and China.
Given silver price escalation and extreme volatility, we've launched a new generation of Solamet metallization paste called Solamet PV17x. Now this front side silver paste is quickly establishing a new global standard for high efficiency in crystalline silicon solar cells, while also reducing silver paste consumption by about 10% on average, a significant achievement given the strong drive to higher efficiency and lower cost in the photovoltaic industry.
Looking at consumer electronics, we see continued strength in smartphones and tablet PCs since both applications use a number of advanced DuPont materials. Demand for plasma displays has been stable. For automotive markets, light vehicle builds were down 1%, about as expected as the world worked through supply chain issues related to the tragic earthquake in Japan. We believe most of the issues are behind the industry now and expect production to catch up in the third and fourth quarters with full year vehicle builds up about 5%.
In terms of market penetration, we see growing demand for vehicle lightweighting as OEMs around the world strive for improved vehicle efficiency. Today, in developed markets, roughly 15% to 18% of the average vehicle weight is plastic. Now this percentage is much lower in emerging markets and we see significant growth opportunities in both markets for lightweighting with the potential for developed markets to reach 25% in the next 5 years. Now DuPont is uniquely positioned with products like Zytel PLUS and strong applications development both in people and facilities. And they're well placed around the world to capitalize on this trend.
Finally, construction markets remain weak and we anticipate housing starts in 2011 to be flat versus 2010. This is another market where we continue to work on opportunities for more energy-efficient materials as well as additional penetration in the commercial market.
Now I'd like to update you on the Danisco acquisition. The acquisition represented about 3 percentage points of our sales growth in the quarter. We're making outstanding progress on the integration, and thanks to a planning process that began in January with the formation of a fully dedicated integration team. They laid the groundwork to prepare for day 1 business continuity, coupled with a detailed engagement plan to integrate the organizations and, most importantly, to deliver on the cost and revenues synergy.
So when Day 1 came, we were more than ready. And the leadership team kicked off a welcome week, we visited innovation centers labs, offices, manufacturing plants across the globe, personally reaching more than 2/3 of the Danisco and DuPont employees who are part of the Nutrition & Health and Industrial Biosciences businesses. Now these townhall meetings were led by Danisco and DuPont executives and conveyed a consistent message of collaboration, innovation and sustainable growth. The integration team is working at day by day, cadence and is on track versus the plan. The goals and synergies are fully transparent and the business leadership is accountable to deliver and build on competitive advantage.
And while the integration work is well underway, we are now reporting combined financials starting with 1 month of sales data in the mix this quarter. Clearly, we're adding 2 very attractive businesses to our portfolio that are consistent with DuPont's growth strategy and squarely in the sweet spot of 2 mega trends, feeding a growing population and reducing our dependence on fossil fuels.
Now let's move to the bottom line for the second quarter. Earnings were $1.37 per share, excluding significant items, up 17% versus last year on an underlying basis. At the segment level, pre-tax operating income was up 20% x items. Earnings benefited from solid segment performance particularly of strong conclusion to the northern hemisphere planning season, as well as price increases significantly outpacing higher raw material, energy and freight cost in our industrial businesses. Furthermore, we remain vigilant with our focus on productivity with respect to fixed cost, variable cost and working capital and are tracking ahead of our full year targets in these 3 areas. So with that, I will now turn the call over to Nick.
Thank you, Ellen, and good morning, everyone. I'm pleased to report that DuPont delivered yet another strong quarter and benefited from the diversity and the strength of our portfolio. This quarter's performance continues to build on the strong foundation that we've laid over the last 2 years, focusing on innovation, productivity and differential portfolio management.
Now I'd like to review the details of the quarter, pointing out our accomplishments versus goals, and let's start with Slide 3, which is the summary of the earnings per share and sales results. Earnings per share were $1.37, as Ellen said, on an underlying basis compared to $1.17 in the prior year. Including significant items relating to the Danisco acquisition, earnings on a reported basis were $1.29 per share. Consolidated net sales of $10.3 billion were up 19% versus the prior year, comprised of 2% volume gains, 11% positive local price, 3% benefit from portfolio changes, primarily the Danisco acquisition and 3% currency benefit. Volume was up in all major regions of the world. Local currency prices were also up in all regions, reflecting our continued strong pricing discipline.
Now let's turn to a corporate view of the second quarter by looking at the earnings per share variance analysis shown on Slide 4. Starting with price and variable cost, the quarter showed a net benefit of $0.34 per share. This reflects the difference between price and variable cost, excluding the impact of currency and volume. Driven by innovation and pricing discipline, we continue to be very proactive implementing price increases. Pricing our new products for the enhanced value they deliver.
Excluding volume, currency and portfolio impacts, second quarter raw material, energy and freight cost were up 13% versus last year's second quarter. For the full year, we expect this to be an increase of about 10% to 12% over 2010 and are expecting prices sequentially to peak in the third quarter and then begin to moderate into the fourth quarter.
Volume improvement resulted in incremental earnings benefit of $0.06 per share compared to the previous year. This excludes the impact of Danisco, which is shown separately. While sales were up 19% this quarter, volume was dampened by a strong Ag first quarter volumes at the expense of the second quarter coupled with the impact of the Japan earthquake and tsunami on the auto supply chains, impacting our Performance Materials and Performance Coatings businesses. We're having good success with DuPont Production Systems capacity release projects. And for the full year, we're anticipating company volumes to be about 5% increase over prior year.
Continuing with our variance analysis, let's move to fixed cost. Again, excluding currency volume and portfolio impacts, fixed cost reduced earnings by $0.19 per share versus last year. This includes our actions in the second quarter to support growth such as our increased investments in Ag or the new Kevlar plant that we've added in Cooper River, the Tedlar expansion at Circleville along with other very specific R&D and marketing initiatives.
As we told you during our Investor Day in December, we will deliver another $300 million of fixed cost productivity in 2011, and we are well on track to meeting this commitment with actual fixed cost productivity of more than $180 million for the first half of 2011.
Year-over-year, currency was a benefit of $0.07 in the quarter and $0.08 for the first half. At current exchange rates, currency would continue as a tailwind for us during the second half of this year. The other category on the waterfall shows a negative $0.02 variance, and this is principally due to the absence of some prior-year asset sales. Included in this variance is farmer earnings, which were $80 million this quarter versus $70 million the prior year. Our full year 2011 estimate for farmer pre-tax is now about $230 million, approximately $260 million less than that which we received in 2010. While second quarter farmer earnings were higher than expected due to some inventory building in the supply chain, we anticipate that the second half of 2011 will return to those lower levels.
Next, on the waterfall, is higher shares outstanding, which reduced earnings by about $0.04 per share. On a fully diluted basis, we had 944 million average shares in the second quarter of 2011. In income tax on the earnings per share waterfall shows a negative $0.03. This base tax rate this quarter was 23% versus 21.5% in the second quarter of last year and our guidance of 20% to 21%, creating a headwind of $0.05 a share versus guidance. We are updating full year base tax rate to the upper end of our previous range, which was 20% to 21%.
The last point on the earnings per share waterfall is Danisco, a benefit of $0.01 on an underlying basis. We had previously estimated potential dilution in the full year reporting earnings of $0.30 to $0.45 per share on a reported basis for the Danisco acquisition. With the acquisition now complete, I'd like to update that today. We now estimate that Danisco will dilute earnings per share on a reported basis by $0.18 to $0.29 per share this year, which consists of really 2 pieces. First, we expect the underlying earnings contribution to be $0.05 positive for the full year 2011. This includes additional interest expense and the amortization expense associated with intangible assets acquired as part of the acquisition. Secondly, we expect significant items associated with the transaction and cost to achieve these synergies, of about $0.23 to $0.34 range, which includes the $0.08 per share charge that we took this quarter.
Through the graph depicting sales by region on Slide 5. And if you look there, you see we delivered strong performance in developing markets with sales up 29% in the second quarter as well as year-to-date.
Turning now to the balance sheet and cash shown on Slide 6. Second quarter free cash flow was a $0.4 billion inflow with higher net income partially offset by increases in working capital to support the strong revenue growth and the capital spending for the expansion projects. At the end of the second quarter on a 12-month trailing basis versus second quarter 2010, we were able to increase our net working capital turnover ratio by about 11%. This all excludes the Danisco impact, thus reducing our working capital needs in line with our commitment to deliver $300 million of working capital productivity this year.
Our strong balance sheet continues to serve us well. We value our A, AA credit rating and we work hard to maintain that associated metrics that support that rating. We announced our 428th consecutive quarterly dividend earlier this month. Our long-held strategy has been to maintain a strong balance sheet and to return excess cash to our shareholders unless the opportunity to invest for growth is compelling.
In summary, for the second quarter, the year-over-year volume growth that started in the fourth quarter 2009 continued. This, along with our market-driven innovation, our pricing discipline, and our relentless focus on productivity, delivered strong quarterly results.
Turning now to the second half of 2011. We expect the growth that we've seen in our businesses to continue, but at a more moderate pace than we've experienced to date. As you'll hear from Karen, we continue to see strong demand globally across many of our businesses.
For the full 2011 outlook, DuPont's leadership team remains confident in our business plans and our ability to execute against those plans. Therefore, we are raising our guidance from a range of $3.65 to $3.85 per share to $3.90 to $4.05 per share, excluding significant items. The main driver for the increase in our guidance is the stronger business results especially in businesses like Performance Chemicals, as well as in the developing markets. In addition, we see some benefit from currency with the weaker dollar. With that, I'm going to turn the call over to Karen to review segment results. Karen?
Thanks, Nick. Starting with the Agriculture segment encompassing the Seed and Crop Protection businesses on Slide 7. Sales of $3 billion grew 10%, with 6% USD price gains and 4% volume growth. Earnings grew 11% to $826 million. First half sales of $6.5 billion grew 15% with 9% higher volume, 5% USD price gains and 1% favorable impact of portfolio changes. Earnings increased 16% to $1.9 billion.
Across all regions, our teams executed well, responding to market demands, delivering solid volume growth in Seeds and Crop Protection, good net price realization in Seeds, as well as good integration of our PROaccess strategy.
Reviewing the individual businesses, starting with Seeds. Second quarter sales grew to $2.2 billion, increasing 9% with first half sales growing to $4.9 billion, up 14%. Growth across both periods was underpinned by favorable contributions from volume, price and portfolio changes. While all regions contributed to seed sales growth, right product, right acre strategy in North America clearly carried the quarter and locked in share gains in both crops. The growth drivers in North America corn include the introduction and ramp-up of our newest hybrids and the launch of our AcreMax 1 refuge-in-the-bag product.
To reiterate an exciting data point from the selling season, Optimum AcreMax 1 is on almost 4 million acres this summer. Growers have spoken with resounding endorsement of the product. And remember, this is our first in a line of integrated and reduced refuge products we will bring to the market. Our sales teams place demonstration plots of both Optimum AcreMax and AcreMax XTRA product with key growers so they can experience the product this growing season. We received Canadian approvals last week for Optimum AcreMax making it the first integrated refuge Bt corn product that targets above-ground only pests to receive approval in the North American seed marketplace.
Our next important milestone is EPA approval, which we expect in the third quarter 2011 in time for the 2012 planning season. Growth drivers in North American soybeans are similar to those in corn. We focus on local product development, including new varieties that bring customers higher valued disease-resistant packages every year. Our PROaccess businesses are embracing our products not only converting their line to our products but also growing their footprint.
Moving to Europe. Increased corn sales in the quarter and for the half reflect a nice rebound of the Ag economy supporting net price gains coupled with an early start to the season with sales that significantly favored the first quarter.
Moving to Crop Protection. Sales for the quarter and first half were up 11% and 16%, respectively. In both periods, higher volumes and USD prices more than offset the negative impact of portfolio changes. The business continues its pace to meet or beat industry growth founded on these new product introductions. On a product basis in the quarter, volume was up across weed-, disease- and insect-controlled products. Rynaxypyr continues its climb over $500 million in sales for full year 2011. On a regional basis, sales grew nicely in each region with the exception of weather-related loss cereal acres in Canada.
Looking ahead to second half for the Agriculture segment. We expect sales growth of about 10% and modestly larger earnings losses as compared to same period previous year. Second half sales outlook anticipates a solid southern hemisphere season in both Crop Protection and Seed. Also considered in our updated outlook, are investments supporting increased marketing efforts, R&D buildout and the registration and launch preparation of other new products from our robust pipeline, as well as the absence of sales and earnings from the April 2011 divested business in Crop Protection. For the full year, we anticipate our execution against the plan, will deliver low-teens sales growth and 17% to 18% earnings growth. Our customer-focused, innovation-centric plans will continue to underpin growth for the rest of 2011 and beyond.
Now let's turn to Slide 8 in Electronics & Communications segment. Sales of $891 million improved 36% compared to the same period last year, with 9% volume improvement and 27% higher prices primarily metals pass through pricing. Pre-tax earnings of $103 million are $5 million lower than the same period last year. The segment had a onetime net cost in the quarter of about $20 million, associated with rapidly increasing metal prices that were not passed through. PV sales were up significantly and strong demand for smartphones and Tablet PCs also contributed. However, we did see PV sales soften toward the end of the quarter from channel inventory buildup as module production outpaced installation. The business continues its investment in capacity expansions and new products with the focus on innovation in the PV market.
For the second half, E&C sales are expected to be significantly above prior year, driven by the demand in PV and consumer electronics with earnings up moderately. We continue to anticipate PV market growth of near 15% for the full year with growth stronger toward the end of the year as the inventory of PV modules is expected to decline in the third quarter and stronger growth is expected in the fourth quarter.
Now let's turn to Slide 9 in Industrial Biosciences. Segment sales of $123 million reflect the acquisition of Danisco's enzyme business in late May and 3 months of DuPont's commercial biomaterials businesses, which includes Sorona and Bio-PDO. This segment had pre-tax operating income of $10 million this quarter, including about $2 million amortization expense associated with the acquisition. As a reminder, earnings include DuPont's relatively new biomaterials business, which is expected to grow towards our previously stated goal of 15% PTOI margin while continuing to invest for growth and Danisco's well-established, high-margin enzyme businesses.
Danisco's businesses include Grain Processing, Animal Nutrition, Fabric & Household Care and Food Enzymes. We expect the combination of these businesses net of the amortization of purchased intangibles to produce low-double digit margins on sales of about $600 million for the second half of 2011.
Turning now to Slide 10 in our Nutrition & Health segment, which encompasses Enablers, Bioactive and Solae soy ingredients. Sales of $486 million grew 64%, reflecting organic sales growth of 6% and the acquisition impact from the Danisco specialty food ingredients business. Earnings of $38 million reflected higher sales, more than offsetting higher cost, including about $7 million amortization expense associated with the acquisition. The newly formed segment has a leadership position in the specialty foods ingredient industry. The team is well on its way to integrate, streamline and transform.
As an example of the progress towards their goal, Solae continues to improve productivity and enhance the product mix towards specialty products driving sales, earnings and margins higher in the quarter. As we look to the second half, the business has 3 key goals: First, to continue progress with sales and margin gains across the business; second, to continue focused integration efforts to execute on cost and sales synergies as we merge the businesses; and third, to utilize strong technology position to create growth through new products and applications.
Delivering against these goals, we anticipate second half sales of $1.6 billion to $1.7 billion. Our ongoing expectation for top line growth of the combined segment is high-single digits. Second half earnings will increase with higher sales, offset in part with raw material increases and about $45 million amortization expense associated with the acquisition, in addition to growth investment and other onetime associated with the integration. Pre-tax margins will be mid-single digits inclusive of purchase accounting.
Now let's turn to Performance Chemicals on Slide 11. This segment delivered $2 billion in sales this quarter, an increase of 27% due predominantly to price and robust demand for our offerings. Pre-tax earnings grew 84% to $503 million with margins expanding by an impressive 780 basis points. This performance has delivered despite weather-related supply disruptions for industrial chemicals due to flooding in the Midwest early in the quarter.
As we've described in previous quarters, this is a broad-based story that includes not only TiO2 but also refrigerants, fluoropolymers and industrial chemical. For example, we saw tremendous demand for our fluoropolymer materials in cabling and electronics, as well as industrial chemicals like cyanide for precious metal mining. Likewise, the market's strong demand for TiO2 continues, driven by robust growth in developing markets particularly Asia. As a result, we continue to sell every pound of TiO2 we can make and we're proceeding well with our 350 kilo ton capacity expansion that we announced in May.
For the remainder of the year, we see no let up in demand for this segment. Even with normal seasonality in products like refrigerants, Performance Chemicals sales are expected to be up significantly year-over-year and earnings up substantially. Given tight supply in certain product lines, our operations' teams have been working relentlessly to deliver uptime improvements as we find ways to produce additional product.
Now let's turn to Slide 12 in Performance Coatings. Segment sales of $1.1 billion increased by 15% on 14% stronger pricing and 1% higher volume. Including currency benefits, the segment achieved double-digit pricing increases in all of its major market segments. Sales volumes were up in heavy-duty truck market in North America and other industrial market. Pre-tax operating income was $73 million, $2 million below prior year with benefit from stronger sales offset by 19% higher raw material energy and freight costs.
For the second half, we expect segment sales to be up moderately year-over-year with earnings up modestly. While auto builds were down 1% in the second quarter, builds are forecast to be up 6% in the second half with full year global builds expected to be up about 5%. This segment anticipate continued raw material price pressure with actions in all market segments to maintain and improve margins.
Now let's turn to Slide 13 in Performance Materials. Segment sales of $1.7 billion were up 11% on 14% higher prices, offset by volume and a 2010 portfolio change. Pre-tax earnings of $254 million decreased 3% due to the impact of the Japan disaster, as well as the absence of a $27 million benefit in 2010 from a gain on the sale of a business and an insurance recovery.
Excluding the 2010 onetime benefit, pre-tax operating income was up moderately despite higher raw materials. Performance Materials key markets in automotive, electronics and packaging provided much of the lift for the quarter. Our lightweighting value proposition in automotive is resonating well, with our customers who are seeking to reduce weight and improve fuel efficiency with high-performance plastics like Zytel PLUS.
Meanwhile, supplies remains tight for our other Performance Polymers, which go into packaging and infrastructure application. But for the second half, we expect modest sales growth with essentially flat pre-tax earnings. As a reminder, there was a $31 million benefit in the fourth quarter of last year related to an acquisition and early termination of a supply agreement.
We see automotive builds recovering from the second quarter and stabled packaging market. Overall, while raw material costs will remain elevated, we expect some moderation in the rate of growth. Using DuPont Production Systems to enhance asset productivity remains a key focus for this segment.
Finally, let's move to Safety & Protection on Slide 14. Sales of $1 billion represented 21% growth with 8% from the MECS acquisition, 7% increased volume and 6% higher selling prices. On the earnings side, pre-tax operating income increased 18% to $143 million inclusive of growth investments in the quarter.
Diving into the details, organic sales growth came from our market-leading Kevlar, Nomex and Tyvek products going into industrial and public sector markets around the world. Our safety consulting business also continues the integration of MECS and I'm pleased to report that the acquisition is performing in line with our expectation.
Moving to construction. The market for both residential and commercial remains weak overall. Despite U.S. housing starts above consensus in June, there's little sign of a sustained recovery for now.
Turning our view to the second half, we expect sales to grow modestly with pre-tax operating income increasing substantially. Our industrial markets continue to recover. As a result, profitability climbs because our leverage improves. Additionally, we have accelerated our progress on our light [indiscernible] Kevlar capacity in South Carolina. The team at Cooper River is now ahead of schedule in producing our most advanced Kevlar for customer qualifications. This positions us very well for an end of year commercial startup and a strong sales momentum heading into 2012. Ellen, I'll turn the call back to you.
Great. Thanks, Karen. We've raised our full year guidance, increasing the midpoint by $0.23, and I just wanted to take a minute to emphasize a few key points about our outlook. First and foremost, DuPont's executing well. We continue to deliver innovation and value in new products, manufacturing processes and our productivity work. We constantly check our progress against the competition with the intent to outperform.
Second, we continue to stay close to our customers and markets. Markets were always dynamic and we're seeing mixed signals at this point in time. An example is China. China markets are expected to slow in response to tightening fiscal policy measures taken by the government. And as a result, we expect DuPont sales growth in China to slow to about 20% in the second half compared to 30% growth in the first half. On the other hand, we expect recovery in automotive markets with light vehicle builds up 6% to 7% in the second half. The key is to anticipate changes, continue to innovate and deliver value to our customers, and be very disciplined about our execution.
Finally, we're excited about the Danisco acquisition and are well on our way to a very successful integration. We've outlined our expectation for about $0.05 benefit to underlying earnings for the full year, and we'll come back to you with our 2012 expectations as part of our total company story at our Investor Day, which is planned for December 13 in Wilmington, Delaware. And we hope that you can join us then. So with that, Karen, back to you.
All right, John, let's open up the lines for questions.
[Operator Instructions] And our first question comes from Kevin McCarthy from Bank of America.
Ellen, titanium dioxide has benefited from volume strength but also a number of price increases that seem to be accelerating in terms of frequency and magnitude. Can you address that market in terms of realization on those increases and netting out what I would assume to be inflationary or another input cost? What would you expect margins to look like in the back half of the year there?
So that market is continuing to progress as we discussed in earlier quarters. Volumes are still -- the market is still very positive from a volume standpoint. The market is still very, very tight. Obviously, with our announcement of our capacity release in the new line was received very positively by the market. We expect volume to be up about 4% in 2011, overall. Second half I think will continue. We're seeing increasing cost, but obviously, the ability to pass that along with the tightness of the market has been established. But as always, market dynamics dictate what the future looks like. We still are very committed to that market. We believe our technology advantage in manufacturing is very helpful to us both in moderating kind of the ores' impact because of our ability to utilize many different kinds of ores. So we still see continued momentum in that marketplace as we ream out capacity and bring the new line on in a couple of years.
Our next question comes from Mark Connelly from CLSA.
This is Nils Wallin sitting in for Mark. Another slightly different question on TiO2. Currently, given the earnings and the growth outlook for TiO2 as well as pricing, do you see any other participants looking to debottleneck or increase capacity? And what are the constraints given to do that, given or -- as well as chloralkali or other raw material inputs?
Yes. Actually, I haven't seen much in the way of announcements from our competitors about what they're going to do. I mean you see all of the stuff from the ore guys and what they're projecting. So I don't know. Have you heard anything about that? I mean, from a capacity release standpoint, I haven't heard a thing.
All right. Well, we haven't heard that much but certainly, with the prospects you would expect some growth from others. Just on the fixed cost side, certainly, your sales have been up much more than fixed cost, and obviously, you've been also investing in the fixed in certain areas in terms of R&D as well as other areas. So would you help us understand in the future, do you see a deceleration in fixed costs so that your fixed cost productivity will improve? Or do you continue to believe that you'll invest in fixed cost and it will simply be not growing as fast as the top line?
So I think you've got to separate that into 2 areas. One is productivity. We're committed from a productivity standpoint to really drive through DuPont Production Systems and DIBM to continue to drive productivity. Then there are the growth programs. And every year, we make a decision coming up here through the fourth quarter about the investments for 2012 and the future. And so we look at that in both ways. Certainly, if we have very compelling growth opportunities, we have to take that in consideration. Now our target, if you look ahead in 2012, is to bring it in around 39% of sales fixed cost. So we do look at that very aggressively, but we've got to balance that investment for growth with the productivity. And we try to separate them and be very clear about our expectations on each.
Our next question comes from Jeff Zekauskus from JPMorgan.
Jeffrey Zekauskas - JP Morgan Chase & Co
I noticed that your shares moved up sequentially from 941 to 944. Is there going to be any check on the share creep? Or do you expect shares to continue to creep their way up this year?
Yes, Jeff. And Nick why don't you take that one?
Sure. Jeff, when you look at share dilution that results from employee compensation, our policy is pretty straightforward and we've certainly lived up to this policy over the years, and that is we look to mitigate any share dilution that occurs from compensation shares that are issued. And if you look historically, Jeff, we've done just that. In fact, even in the recent past, when you look at the fourth quarter of last year, we bought back 5.4 million shares. In the first quarter of this year, we bought back another 5 million shares. And I think I've always said, Jeff, it's not a 1 for 1. It's not today, the day it happens, I have a buyback. But over a period of time, you'll see that we mitigate any dilution that occurs from that from the issuance of stock relating to compensation. And that practice will continue as we go forward.
Our next question comes from Mark Gulley from Ticonderoga Securities.
Mark Gulley - Ticonderoga Securities LLC
DuPont is sort of interesting in the supply chain for paints and coatings in the sense that you provide a key raw material TiO2, but you're also a $4 billion Coatings business. So my question is, are you seeing demand destruction, yet, in your own Coatings business as raw materials rise. You noted in the discussion of that business that rising raw material costs are putting a lot of pressure on margins?
Yes. And I think you have to look at the segments that we operate in, in the Coatings segment with OEM and refinish and industrial aren't big-loaded TiO2 segments, right? So obviously, OEM Coatings is up with -- moving with the demands in the OEM market. Refinish is moving around, and industrials is coming back pretty strong, very heavily. So from our segment standpoint in Coatings, I don't see demand destruction based on raw material input. As you see, we've worked very hard in those segments to get price. And you see that in our segment reviews that Karen talked through to recover the raw materials, and it's much broader than TiO2. All the raw materials, resins, everything are up heavily in the Coatings industry. TiO2 is but one of a number of them that are increasing.
Yes. And as a reminder, Mark, not a lot of TiO2 goes into auto coatings. Architectural and Industrial Coatings are much bigger users in general.
Mark Gulley - Ticonderoga Securities LLC
Thanks for that clarification. And then on the raw material side for TiO2, with your big increase coming on in late '14 and with tightness in ore, Ellen, can you talk about your access to raw materials to support that big expansion?
Yes, I think it's pretty much the same as we talked about it last quarter. Since we have the ability through our production technology, we have the ability to utilize a very wide range of feedstocks from very low end to the very high end. And so that gives us the ability to move in the market where the feedstocks are. Now we also have 10% of our ore coming from our own mine in Florida, which is a help. We do tend to operate with long-term ore contracts, and that protects us from that standpoint. So I think given our strategic nature of our buys, given the flexibility in our manufacturing and understanding the cost of producing ore from our own mine, I think uniquely positions us to do very well from a sourcing standpoint.
Our next question comes from Ashton McNulty from Credit Suisse.
Abhiram Rajendran - Crédit Suisse AG
This is Abhiram Rajendran calling in for John McNulty here. In your solar paste business, could you talk a little bit about what kind of pricing trends you're seeing in that business, excluding the changes in metal pricing and what the pricing strategy might be for your new line of products?
So it's interesting. If you carve out the metals movement, it is about efficiency and the ability to utilize those paste to generate higher efficiency cells. So the positive pricing would underline that comes from the innovation, like with our new Solamet paste PV17x. I love the way they name these things. But it really is the innovation around the paste itself that provides the support for higher pricing because the module manufacturers receiving and users are receiving better benefit at it. So we focus on the innovation part of it.
Abhiram Rajendran - Crédit Suisse AG
Great. And then just a quick follow-up staying in electronics. Could you talk a little bit about whether you're seeing any signs of a slowdown or pause in the semiconductor market and what your outlook might be for the second half of the year?
No, we're not really seeing much in the way of a pause in the semiconductor market. We see continued progression in terms of having -- moving that market. So I mean the PV, obviously, is going to recover in the second half with tablets and PCs are going well. Even plasma displays are continuing to, they're steady. And so we see a very positive outlook in the electronics from a market standpoint as we look going forward.
Our next question comes from Bob Koort from Goldman Sachs.
Brian Maguire - Goldman Sachs Group Inc.
This is Brian Maguire on for Bob, actually. Just a question on the Safety & Protection business. Margins were down there year-over-year. I understand you're doing some groundwork building the new facility for Kevlar. But just trying to get a sense of -- I always thought of this as more of a later cycle business and with the thought that it would be starting to really ramp up the growth rates and starting to get some leverage off of that now. Should we still be expecting the longer-term targets you've laid out there? The 23% to 25% to be achievable? And is it just going to take a little bit longer to get there than we thought initially?
Yes. Yes, we're committed to those targets. If you take a look at the quarter, I pick from a late cycle business. Sales were up 21%, 7% of that volume. Now some of it was due to the MECS acquisition, PTOI was up 18% in the quarter. Now if you look at it from a margin standpoint, currently, you've got all the costs of that Kevlar plant coming into our income statement and you have none of the benefit of it yet. So we're in qualifications, and so all of that is not running through inventory and none of the cost is running through inventories. It's all coming into the income statement in the current period. And we've accelerated that. So we'll start to see benefits from that line in the fourth quarter. So I do expect to see like 200 basis points improvement for the year, and I think as we come through the second half of the year that we're going -- that you'll be able to see that.
Brian Maguire - Goldman Sachs Group Inc.
X the spending for the new Kevlar plant, the margins would have been up there year-over-year?
Brian Maguire - Goldman Sachs Group Inc.
And then just one quick follow-up. On electronics and communications, I guess, you mentioned that you expect sales to be up pretty significantly but the PTOI only up moderately. So are you just continuing to face a lot of cost inflation there and a little bit of difficulty in passing that on as well as maybe some lower prices due to some subsidies expiring?
This is Nick. I think when you look at the electronics, there's certainly an element of the metals pricing. And when you exclude the metals pricing from the equation, you actually see PTOI margins up about a point versus where they were prior year. They come to in about 17% when you exclude the metals impact from the results in the quarter. So when you look at the underlying drivers in the business and the strength of the business, I'm actually very happy with where they are performing right now.
Our next question comes from David Begleiter from Deutsche Bank.
David Begleiter - Deutsche Bank AG
Ellen, I'd like to talk about the world slowing over the last couple of months. Where did you see your businesses that were slow in June and July?
It's still July but I can comment on June. So interesting, in June, very typically, we see the end of the Ag season so that impacts the June numbers. We talked about in Electronics & Communications the PV correction. But we see auto improving as the supply chain's starting to recover and starting to build momentum through the third quarter. Industrial, we're still seeing slow steady recovery. So I think you have to take it market by market. But when we integrate it, I mean as we integrated it, we looked at it month by month and that's where we came up with our forecast for the second half of the year.
David Begleiter - Deutsche Bank AG
And Ellen, just on corn seed, you're claiming share gain as are Monsanto and Dow. Is it all coming from the smaller regional producers and how much more shares do they have to give up?
Well, so we'll figure out a lot of that when you look at the -- when we get the final acres here in North America but each region has its own mix associated with it. We're very confident in our volume and that, that will mean share gains for this season. And independents are what? About 20% of the market. We'll have a lot more insight on that as we finalize this season and come through it in the third quarter. But we're pretty confident as we look at our numbers.
Our next question comes from Laurence Alexander from Jefferies.
Laurence Alexander - Jefferies & Company, Inc.
Just a follow-up question on the Electronics & Communications segments. With the inventory correction that you're flagging for the second half, it sounds, according to other companies in the industry, that it will be a fairly sharp correction in Q3. How do you see the sequential volumes playing out across the segment given photovoltaic's presence within the overall segment? I mean, it's only one fraction of the total segment?
So you're looking at second half or third quarter versus fourth quarter?
Laurence Alexander - Jefferies & Company, Inc.
Particularly, like how much of a downdraft in Q3 and would you have any fixed cost absorption issues?
If we take a look out, I mean, they're clearly going to be some correction in the third quarter. I'm not sure it's going to be as severe as you're suggesting. Overall, we still expect to see our margins improving in the second half versus where we are today and sales being up for the entire quarter. We talked about PV growth in about the 15% on a full year basis. So I think that it'll play out, it will dip a little and come back in the fourth but I'm not sure it's going to be as severe as you're suggesting.
And keep in mind the rest of the market for electronics outside of PV is still in a strong stable position.
Our next question comes from Don Carson from Susquehanna.
Donald Carson - Susquehanna Financial Group, LLLP
I wanted to follow-up on Ag. And I know there's a number of things you have to do before you can give seeds share, including the USDA figuring out how much was planted. But as you look at your seeds share gains, how much do you think is organic versus what you're thinking up from PROaccess? And this would apply both to corn and soy. And then as you look out to next year, you've got -- just wondering what your pricing view is both in terms of you've got a very strong commodity markets but you've got some cost push as well in terms of what you're going to have to pay the growers as they grow that seed for you? So I'm just wondering on kind of your price margin comments in seed for next year as well?
You broke up on the second part of that, Don. Would you mind repeating it?
Donald Carson - Susquehanna Financial Group, LLLP
Yes. For 2012, you're about to set pricing for that season. What's the outlook on pricing between how much you can get with the rise in commodity environment versus how much you need to get just to offset higher costs?
So first, your question about PROaccess and what that's contributing to share gain this year versus our historic channel. When we get the details later, know the acres, we're going to be able to dissect that and give you a better view to that. So it's probably better not to just speculate on it at this point in time. As far as next season goes, you got to look at a couple of the basics. Farm income remains strong. There's new product opportunities with the new hybrids and varieties that are coming on. We have Optimum AcreMax 1 and the pending EPA approval on AcreMax and AcreMax XTRA. At this point, we're about 30% converted from triple to AcreMax 1, next year will probably come in around 55%. So I think that the innovation continues, the progression continues and I think that next season will be good.
Our next question comes from John Roberts from Buckingham Research.
John Roberts - Buckingham Research Group, Inc.
Ellen, we now have 8 major operating segments plus farmer plus other -- plus you probably have some other corporate reports coming in to you. Is it becoming a little bit too complex? Do we need a simplification of the structure? Or do you need this granularity to be able to get at cost and managed the transition with Danisco coming in?
I got a lot of energy, so I'm not sure as I'm the barrier. So you know me. I committed to you guys a level of transparency consistent with our competitors. So you look at Coatings versus their competitors. You're going to look at Nutrition & Health versus their competitors, production Ag versus their competitors. So if I'm listening to Karen talk through all the segments, I just say wow, we have grown here. And I think that in that transparency there becomes more simplicity in terms of understanding the real drivers of our growth, the real innovation impacts that are happening, the real productivity that's happening. At the end of the day, I'm a big believer that we've got to execute, and I think that your confidence in us and our shareholder's ability to really understand what our future looks like, which I think is just great, is built off of that kind of level of transparency. So if you have any ideas about simplifying it, then let us know. But I really believe that the strength of the company is in delivering against the segments.
Our last question comes from P.J. Juvekar from Citi.
P.J. Juvekar - Citigroup Inc
Ellen, do you believe that the Crop Protection market has finally turned after the years of slow growth and no pricing?
Well, I do think that innovation is going to have a large impact on the Crop Protection market. I don't think it's about the generics and things like that. Every season is going to bring its own challenges, whether it's around weeds or disease or insects and what kind of pressures they feel. I think that things like Rynaxypyr show us that the marketplace globally responds to innovation where there's higher efficacy, where there is lower impact on the environment, and we're going to hit $0.5 billion in revenues this year on Rynaxypyr. So I think the fundamentals are there and with innovation I think it can be very exciting marketplace.
This concludes the Q&A portion of the conference call. I will now turn the call back over to Ms. Kullman for closing remarks.
Great. Thank you. And just in summary. DuPont delivered a strong quarter earnings up 17%. We exceeded Street estimates by $0.03 in the quarter. We're raising the midpoint of our full year guidance by $0.23. We shared our expectations for volume growth at 5% to 6% for the full year. And that, coupled with the outstanding price discipline, we continue to demonstrate year-to-date, I think it bodes well for the strong finish to the year. the Danisco integration is going extremely well, and we share our expectations for a $0.05 full year benefit to underlying earnings. And I'm pleased that at this early stage, we're exceeding our targets for this important transaction. So DuPont is executing well. Innovation and customer focus are driving our sales growth. Our margins remain strong, and we're focused employees to perform well on the second half of 2011, while laying the groundwork for 2012. So thank you very much for joining our call today.
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