E. I. du Pont de Nemours and's CEO Discusses Q1 2012 Results - Earnings Call Transcript

 |  About: E. I. du Pont de Nemours and Company (DuPont) (DD)
by: SA Transcripts


Good morning. My name is John, and I will be your conference operator for today's call. At this time, I would now like to welcome everyone to the DuPont First Quarter Investor Call. [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. Karen, you may begin.

Karen A. Fletcher

Thanks, John. Good morning, and welcome. With me this morning are Ellen Kullman, Chair and CEO; Nick Fanandakis, CFO; and Jim Borel, Executive Vice President. The slides for today's call can be found in our website at dupont.com, along with the news release that was issued earlier today.

During the course of this 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 ask that you refer to the reconciliations to GAAP statements provided with the earnings news release and on our website. As a reminder, our comments on today's call regarding segment earnings are on an underlying basis. And finally, we've posted supplemental information on the 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.

Ellen J. Kullman

Great. Thank you, Karen, and good morning, everyone. DuPont delivered strong results in the first quarter in line with our expectations at a time when markets were mixed.

Sales were up 12%, with 5% organic growth and 7% from acquisitions. We had excellent price performance in the quarter, driven in part by new product introductions, which were up more than 50% versus prior year. Not surprisingly, Pioneer had one of the largest year-over-year increases in its area. Productivity projects are tracking well across our businesses. The strength of our portfolio, coupled with very sharp execution, drove double-digit growth in sales and operating income this quarter.

With respect to key markets, Agriculture is strong, with favorable farmer economics, increased corn acres in Europe and North America and outstanding momentum from our business in 2011 carrying into this year. Global auto builds were up 4% in the quarter, with North America builds up 17% according to the third-party market data that we used.

In photovoltaics, we expect destocking to end in the second quarter, and the industry will resume a more balanced production schedule. Consumer electronics is improving, and growth is very much a function of new application introductions, such as next-generation smartphones and tablets.

For industrial markets, our Performance Chemicals, Performance Materials and Safety & Protection segment volumes were down versus very strong comps in the prior year. Sequentially, volumes improved even when adjusting for seasonality now indicating -- I think this indicates a positive shift in momentum, and we anticipate these segments will return to year-over-year volume growth within the next 1 to 2 quarters.

We continue to win in our markets through innovation. Our customers are benefiting from DuPont's valuable and meaningful product differentiation that enables them to serve their own end markets better.

Here are just a couple of examples of DuPont's latest value-added innovations: an expanded offering of Optimum AcreMax insect-resistant corn hybrids for our farmers this season; and a next-generation metallized paste that improves efficiency of a solar module. And we've had overwhelming response to our recent introduction of Solamet PV17.

I was in India last month and met with several customers, and I also had the chance to tour our research and development laboratories in Hyderabad and the newest DuPont innovation center in Pune. Like our other innovation centers, this one engages our customers and allows our teams to truly engage in meaningful product and design opportunities to help differentiate them in their markets. And in turn, DuPont's rewarded with a premium market position and greater customer loyalty.

What you should take away from the first quarter is that we're off to a good start for the year. We expected slow sequential improvement, and that is what we're seeing. DuPont's well positioned in our markets, and we're executing with focus and discipline. Despite challenging conditions in certain markets, we delivered 12% growth in operating income this quarter.

I'm now going to turn the call over to Nick for more detail on the quarter, and then I'll elaborate on my expectations for the year ahead. Nick?

Nicholas C. Fanandakis

Thank you, Ellen, and good morning, everyone. DuPont delivered a record first quarter, with underlying earnings per share of $1.61. Our strong performance reflects discipline and focus on innovation, productivity and differential management in spite of volatile macro conditions.

I'd like to review the details of the quarter, starting with Slide 3, which is a summary of sales and earnings results. Total segment PTOI on an underlying basis increased over $250 million or 12%, overcoming headwinds relating to currency, higher pension costs and a decrease in pharmaceuticals income. Excluding pharmaceuticals income, this is the 10th consecutive quarter that we've been able to deliver double-digit increases, and this outstanding performance demonstrates the diversity and strength of our portfolio.

Underlying earnings of $1.61 per share increased 6% compared to $1.52 in the prior year as the strong operating results were partially offset by $0.10 of headwinds relating to taxes and exchange gains and losses. Consolidated net sales of $11.2 billion were up 12% versus the prior year. Local selling prices were up 8%, with increases in all regions and all segments, reflecting our continued strong discipline to price per value. Portfolio changes, principally the Danisco acquisition, added another 7% to sales.

Volume was down 2% from the near peak level in the first quarter of 2011. This decline is consistent with the market environment that Ellen just described. Sequentially, volumes improved, indicating a positive shift in momentum as we head into the second quarter. An example of this is in China, where volumes grew each month during the first quarter. Even with the Chinese Lunar New Year, volumes were up approximately 10% versus the fourth quarter, and we expect this positive trend to continue into the second quarter.

Now let's turn to a corporate view of the first quarter, looking at EPS analysis on Slide 4. Starting with price and variable cost, the quarter showed a net benefit of $0.45 per share. This reflects the difference between price and variable cost, excluding the impact of currency and volume. Driven by our innovation and pricing discipline, this was the ninth consecutive quarter in which we successfully implemented price increases on a year-over-year basis. Excluding volume, currency and portfolio changes, first quarter raw material, energy and freight costs were up 7% versus last year's first quarter.

This cost increases have moderated from the fourth quarter. And for the full year, we now expect an increase of about 3% versus our previous assumptions of 4%. The one percentage point improvement is primarily a result of lower natural gas and ethane cost, along with a more advantageous mix of ores in our titanium dioxide business. Excluding the impact from portfolio changes, volume declines resulted in an earnings hurt of $0.01 per share.

Let's move to fixed cost, which reduced earnings by $0.20 per share, excluding volume, currency and portfolio changes. This was mainly driven by actions in the first quarter to support growth, such as increased investments in ag, higher cost associated with operating our annual Kevlar plant at Cooper River and TiO2 capacity expansions, as well as R&D and specific marketing initiatives. These investments and the available capacity at the -- at a time when existing plants provide us with ample opportunity for growth and further penetration in the marketplace. I'd also like to note that the $0.20 includes a $0.04 higher non-cash pension cost.

Concurrent with taking actions to support growth, we delivered approximately $100 million of fixed cost productivity in the first quarter. We're well on our way to delivering against our commitment of $300 million for the full year. Year-over-year, currency was a negative $0.06 in the quarter. At current exchange rates, we expect a $0.20 to $0.25 headwind for the full year. For the second quarter, the stronger dollar is anticipated to be about an $0.08 headwind versus prior year.

Next on the waterfall is portfolio changes, which is a $0.07 benefit. Although this does primarily reflect the acquisition of Danisco, it also includes a couple of smaller divestitures and acquisitions that were made to further enhance the strength of our portfolio. Speaking of Danisco, I want to just take a moment to give a quick update on how pleased I am with the status of the integration. We continue to make excellent progress with respect to the cost and revenue synergies that we had targeted. And I always knew that Danisco had exceptional science capabilities. However, I recently had the chance to see this firsthand when I visited Genencor's R&D facility in Palo Alto. And let me say, I came away very impressed with the facility, the energy of the scientists and the projects that are currently being developed within the R&D pipeline. After that visit, I have become even more enthusiastic about the potential of the combined businesses and the innovations that we can expect in the future.

Turning back to the waterfall chart, exchange gains and losses was a negative $0.04 variance in the quarter. Our goal is to achieve 0 after-tax impact from our balance sheet hedging program. However, there was volatility in exchange rates, coupled with the cost of coverage, which created a reduction in earnings during the quarter. As is typical, the detailed reconciliation is on Schedule D in the earnings news release to show you the exact impact that our hedging program had on earnings, as well as the effective tax rate.

Income tax on the EPS waterfall was a $0.06 headwind. This represents the difference between the base tax rate this quarter of 23.9% versus 21.3% last year. As expected, the increase in the base tax rate primarily reflects an increased proportion of earnings in higher tax rate jurisdictions, as well as the absence of R&D and other tax credits which expired at the end of 2011. We continue to expect full year 2012 base tax rate to be 23%.

Lastly, Other on the waterfall shows a negative $0.06 variance, including a $0.02 headwind from reduced pharmaceutical royalties. First quarter pharma income of $27 million was in line with our expectations, and we're still estimating full year 2012 pharma income to be about $50 million, which represents about a $240 million decline from 2011.

There's a graph depicting sales by geographic region on Slide 5. We delivered strong performance in developing markets, with sales up 15% in the first quarter led by growth in Agriculture.

Turning now to the balance sheet and cash on Slide 6. First quarter free cash flow was a seasonal outflow of $2.2 billion versus an outflow of $1.8 billion in the prior year. This change was primarily due to the $500 million cash contribution to the U.S. principal pension plan that was made in January of this year.

At the end of the first quarter, on a 12-month trailing basis first quarter '11, we were able to increase net working capital turnover by about 5 percentage points, excluding the Danisco impact, reducing our working capital needs and in line with our commitment to deliver $300 million of productivity for the full year. Our strong balance sheet continues to serve us well. We value our A/A2 credit rating, and we work hard to maintain the associated metrics that support that.

Our long-held strategy has been to maintain a strong balance sheet and return excess cash to our shareholders unless the opportunity to invest for growth is compelling. We paid our 430th consecutive quarterly dividend in March. Additionally, in the first quarter, the company initiated a $400 million share repurchase program, which will be completed no later than May. This program begins to tap into the $2 billion share repurchase plan that was approved by the board last year.

In summary, for the first quarter, our market environment was a dynamic one and played out as we had expected. Global volume for the company declined on a year-over-year basis but improved sequentially. In spite of challenging market conditions, we delivered double-digit increases in underlying total segment PTOI, which is a testament to our portfolio diversity, pricing discipline and productivity focus.

Turning now to the second quarter. We expect a strong finish to the northern hemisphere planting season. Additionally, we expect the sequential volume growth we experienced in the first quarter to continue, particularly in PV, consumer electronics, TiO2 and automotive markets. Jim and Karen will provide more details when they cover the individual segments.

For the full year 2012, we are reaffirming our previous guidance of $4.20 to $4.40 per share, excluding significant items. The midpoint of our full year earnings guidance suggest we will grow earnings by 12% over the remaining 3 quarters, and we are well positioned to do just that. We continue to expect slow sequential movement against a backdrop of dynamic markets. The businesses affected by these dynamic conditions are taking actions in a variety of ways to mitigate the effects, including reducing expenditures and tightly managing cash.

Our businesses are staying close to their customers to adapt to changing demand signals and to continue to service those customer needs. We remain focused on our disciplined processes around innovation, productivity and differential management. DuPont's leadership team remains confident in the business plans and in our ability to execute against those plans.

With that, I'm going to turn the call over to Jim to review the Agriculture and Nutrition & Health segments. Jim?

James C. Borel

Thanks, Nick. The Agriculture segment posted a great first quarter underpinned by strong northern hemisphere commercial performance and favorable corn market dynamics. Our teams delivered growth in every region around the world as our footprint continues to expand at an impressive pace.

On Slide 7, you'll see that sales grew 16% to $4.1 billion, with 8% price and 8% volume gains. Earnings were up 18% to $1.3 billion on higher volume and prices, more than offsetting the input cost increases, unfavorable currency impact and continued growth investments.

Starting with seed sales, first quarter reached $3.2 billion, an increase of 20%. Corn sales growth in North America was the leading contributor, coupled with impressive results from an early strong start in Europe and robust Brazil Safrinha corn season sales. Specifically in North America, our direct sales teams are working closely with our customers to ensure the highest level of service, which continues to be a competitive advantage. And in a dynamic ag market like we're experiencing, it provides even more differentiation. Our new product ramp-ups of the Optimum AcreMax family of integrated and reduced refuge products, along with Optimum AQUAmax technology hybrids, are on track, contributing to our net price gains as customers increase their use of these higher value end-use products.

In soybeans, the USDA is forecasting lower acres year-over-year. And despite this fact, we'll grow our soybean sales in 2012, continuing to lead the market rate based on the confidence that customers have in our disease packages and our overall product performance.

In addition to executing a great North American sales season, we received regulatory approval for our Optimum AcreMax XTreme integrated and reduced refuge insect-protection product. XTreme has dual mode of action above- and below-ground insect control for extended trade durability, with a 5% integrated refuge. This year, we're preparing IMPACT Plots that demonstrate our Optimum AcreMax XTreme product, and we'll be selling it commercially in 2013. Our line of AcreMax products gives us the range of product options we need to extend our position with a robust product lineup of integrated and reduced refuge products providing growers with added convenience.

Turning to our European seed business, increased corn sales reflect our ability as market leader to capture growth when presented with an early start to the season and timing differences favoring the first quarter. We've been making investments in our business operations, both in research and production in Central and Eastern Europe, extending our leadership position and accelerating our progress in this important growing region. Our leading market position confirms we're making the right growth investment choices.

And finally, our corn performance in the Brazil Safrinha season was outstanding. Safrinha corn crop, as you know, is smaller in value versus that of the summer season, but it continues to grow each year in both hectares and technology adoption and therefore, value. From a product perspective, our Herculex I products are quickly penetrating our product lineup because of their excellent insect protection, particularly against fall armyworm.

And to further extend trade durability in our lineup, we'll be launching Optimum Intrasect insect protection products, which offers dual-mode above-ground insect protection. Based on our strong business model, we anticipate building our early success in 2012 and delivering strong summer season performance later this year.

Turning to Crop Protection. Sales for the quarter of $929 million grew 7%, with both volume and price gains. The results reflect particular strength in the insect control product sales as Rynaxypyr continues to penetrate markets around the world. The success of Rynaxypyr supports our investment efforts to quickly expand the franchise, bringing Cyazypyr products and Dermacor seed treatments to the market.

As a status update, we're on track for a second half 2012 introduction of Cyazypyr in Asia Pacific, and we'll be introducing Dermacor seed treatment in the Mexican core market. While the 2012 launches are small, the target is large, and we believe the franchise of insect control products derived from the same novel chemistry family will grow to $1 billion over the next few years.

Looking ahead to the second quarter for the Agriculture segment, we expect mid-teens percent sales growth and mid-single-digit earnings growth compared to the same period's previous year. This reflects strong business performance in the early start to the season, which added about $0.03 per share to the first quarter at the expense of the second quarter.

The seed business anticipate a strong finish to the North American and European planting seasons. Crop Protection expects a very strong second quarter as farmers are incented to protect their crops and maximize their yield. Also considered in our updated outlook are input cost increases in the seed business, currency headwinds and growth investments.

In summary, the ag segment laid out many proof points by which to measure success in 2012, and we're well on track or exceeding our commitments, which include segment sales growth at the upper end or slightly above our long-term compound annual growth rate guidance of 8% to 10%.

In seed, we targeted net price gains in seed between 5% and 10% as our customers validate our value propositions product by product. The ramp-up of our Optimum AcreMax family of integrated and reduced refuge insect protection products, the regulatory approval of Optimum AcreMax XTreme and continued growth of our international businesses in corn, soybeans, sunflowers and canola.

Turning to Crop Protection, we estimated the market would grow 4% to 6%, and that our growth would outpace the market based on contribution from both volume and price gains and from a product perspective, the continued expansion of Rynaxypyr and the registration approvals and launches of sister products, Cyazypyr and Dermacor seed treatment and finally, the expansion of a novel weed control mode of action into land management. Consistently delivering against our commitments is important. And with our strategies firmly in place, our new product launches lined up, we believe achieving our growth objectives comes down to execution, and our teams continue to execute very well.

Now turning to Slide 8, reviewing our Nutrition & Health segment, which includes the Health and Protection, Enablers and Solae businesses. Sales of $808 million were up $484 million, with earnings of $83 million reflecting both the integration and positive cost synergy benefit of the Danisco Specialty Food Ingredients acquisition. The results posted show progress on the segments' key goals.

First is our focus within Solae, to mix enrich by growing the high-value specialty soy products. In line with our business objectives, double-digit sales growth in specialty was offset by a decline in the soy commodity side. The quality of earnings is improving as we enrich the mix and drive productivity in our Solae operations.

The second goal is aligned with driving our acquisition targets. Legacy Danisco businesses achieved price gains as they continued to deliver new applications in the arena of nutrition and functional food solutions, improved health and food protection. With respect to cost synergies, the quarter reflects progress delivering cost synergies and productivity gains: leveraging DuPont operations and global sourcing capabilities, as examples. This demonstrated performance gives us confidence that we're on track to achieve our 2012 synergy goals.

Pretax operating margin for the segment hit 10%, up sequentially, reflecting the progress we're making on our key goals. And moving to the outlook for the second quarter, we expect sales in the combined segment in the range of $820 million to $860 million, with portfolio impact, as well as organic growth from all segments. Earnings growth will be underpinned by higher sales and cost synergies offset in part by raw material inflation.

Now I'll turn the call over to Karen for an update on the remainder of the segments.

Karen A. Fletcher

Okay. Thanks, Jim. Let's move to Electronics & Communications on Slide 9. Segment sales of $677 million decreased 17% on lower volumes. Price was up 1%, primarily due to metals pass-through. While sales were down in Asia and Europe on a year-over-year basis, we saw photovoltaic module inventories starting to normalize. Our PV sales were up sequentially as our newest Solamet offerings are doing very well in the marketplace, attracting much interest from Tier 1 producers.

Turning to consumer electronics, demand was mixed overall but particularly robust in tablet PCs and smartphones, given recent new product launches by our customers. PTOI of $33 million was down substantially, as expected, given the volume declines and lower plant utilization experienced in the quarter. Looking to second quarter, we expect sales to be down moderately and PTOI down substantially versus very strong comps.

On a sequential basis, we see sales up significantly and PTOI up substantially as photovoltaic and consumer electronics markets continue to improve. We continue to expect PV module installations to grow about 10% for the year, with strong demand for products like DuPont Solamet and Tedlar.

Moving to Slide 10, we'll talk about Industrial Biosciences. Sales of $288 million and PTOI of $41 million were driven primarily by last year's Genencor acquisition, with strong performance in our enzymes offering. This includes Axtra XAP, our newest animal nutrition product line, which is being very well received in the poultry market place. Likewise, our enzymes for grain processing are gaining traction in Asia, where high fructose corn syrup is not well-penetrated in the beverage market.

For the second quarter, sales are expected to range between $290 million and $320 million as the year-over-year benefit due to acquisition comes to an end. PTOI margins will be low-double digits. We see continued growth in enzymes, where our products are clearly differentiated based on our science, for example, in animal nutrition and grain processing. Additionally, on the biomaterial side, we see Sorona increasingly gaining adoption in carpeting.

Moving to Performance Chemicals on Slide 11. Sales were up 6% due to 16% higher price offsetting 10% lower volume. TiO2 demand was strongest in North America, with Asia demand stabilizing and destocking coming to an end. Although TiO2 volume was down on a year-over-year basis, we saw sequential growth in all markets. Industrial chemicals demand was favorable due to strong performance from aniline and cyanide. Overall, PTOI was up 30% as strong pricing and our industry-leading productivity more than mitigated cost increases and lower volumes in both businesses.

In the second quarter, we expect sales up modestly. Our leading indicators and demand signals suggest an improvement in demand for all major regions consistent with seasonality and general economic stabilization. PTOI is expected to be up moderately versus strong comps with an ongoing productivity focus.

Now let's turn to Slide 12 and Performance Coatings. Segment sales of $1.1 billion increased 6% due to higher selling prices in all regions and all market segments. OEM volume was up, particularly in North America where auto builds increased by 17%, and there was continued strong demand in the heavy-duty truck market. Offsetting these increases was a decline in refinish volume, primarily in Southern Europe, resulting from uncertain macro conditions there.

PTOI of $87 million increased 34% with 170 basis point margin expansion. These increases were the result of pricing and mix enrichment actions plus productivity gains partially offset by higher raw material cost.

For the second quarter, we expect segment sales to be up slightly and earnings up substantially with continued margin expansion versus prior year. Auto builds are forecast to be up 10% to 12% in the second quarter, with full year global builds expected to be up 5% to 6%. This segment continues to implement pricing and mix enrichment actions while driving productivity gains that improve margins.

Turning now to Performance Materials on Slide 13. Sales were down 6%, primarily due to 10% lower volume, partially offset by higher selling prices of 6%. Automotive-related demand improved, particularly in North America. This was more than offset by continued softness in industrial and electronics markets, especially in Asia Pacific and Europe.

Packaging markets remain stable. Although volume was down on a year-over-year basis, we saw sequential growth versus fourth quarter. PTOI was down $48 million or about 17% on lower volume.

For the second quarter, we expect sales down slightly with continued sequential growth. As a reminder, global auto builds are expected to grow 10% to 12%. Packaging demand will remain stable, and electronics and industrial markets are expected to improve sequentially but down versus prior year. PTOI is expected to be up moderately, primarily due to lower ethane costs.

On Slide 14, we'll cover the Safety & Protection segment. Sales decreased 2% due to lower volume resulting from continued softness in industrial markets, partially offset by higher selling prices. PTOI was down $45 million or 31%, principally due to lower volume and higher costs associated with operating the new Kevlar Cooper River plant. I would like to note that customer qualifications at the new plant are proceeding as scheduled.

For the second quarter, sales and PTOI are expected to be up slightly with continued improvement in North American demand. We see demand improvement for Kevlar as some of our newer products, like Kevlar AP, Kevlar XP and Kevlar KM2 Plus, for industrial and ballistic applications are being well received in the market. These products utilize the new technology we've installed at our Cooper River plant. Additionally, we expect sequential demand improvement for Nomex, particularly in the auto and energy solution markets, and in Tyvek for consumer applications.

This concludes the segment updates, and I'll now turn the call back to Ellen.

Ellen J. Kullman

Great. Thank you, Karen. As Nick stated, today we are reaffirming our full year guidance of $4.20 $4.40 per share or 7% to 12% growth. We've had a couple of challenging quarters, but we're now seeing encouraging signs in our markets. Destocking is ending in photovoltaics, consumer electronics and automotive plastics. Essentially, all of our industrial businesses saw volume improvement sequentially from the fourth quarter to the first quarter. Now keep in mind that first and second quarters last year were extremely strong and make for tough year-over-year comps. We expect sequential volume again improvement in the second quarter.

Moving to the regions. Asia demand is recovering from the slowdown that we saw in the fourth quarter with gradually improvement throughout the first quarter, and we expect this trend to continue. While many European markets remain weak, a couple of exceptions are Agriculture and certain auto exports. The good news is that we don't see conditions deteriorating for our industrial businesses. Jim spoke about the strong year we're delivering in Agriculture. You've heard about the powerful combination of attractive farmer economics, strong product performance coming from rich R&D pipelines in seeds and Crop Protection and an advantage route-to-market in our seed business.

And I would be remiss not to mention productivity, which continues to be core to every business in DuPont. And I'm particularly proud of our Coatings business, which has had an unwavering focus on productivity over the last few years. Last year, the bottom line impact of productivity was matched by a dramatically higher raw material cost. And the coatings team took pricing actions during the second half of '11, made some tough portfolio decisions and never let up on productivity. So I'm very pleased to see the margin expansion this quarter of 170 basis points, and I look forward to the business sustaining and further expanding those margins through the rest of the year.

So in closing, it's about execution, staying close to customers to understand underlying demand signals and anticipating an inflection point in demand like the ones we're seeing in photovoltaics; delivering value through new products, like our Optimum AcreMax family of corn hybrids, or the pending launch of Cyazypyr insecticides; [indiscernible] developing new product applications on a very localized basis for our innovation centers; and delivering on our productivity targets. We are well positioned for continued recovery in growth through differentiated offerings and a global footprint, and we remain confident in meeting our targets and delivering value to our customers and to our shareholders.

So Karen, back to you.

Karen A. Fletcher

Great. Thank you, Ellen. And John, let's open up the line for questions.

Question-and-Answer Session


[Operator Instructions] And we do have a question from John, I'm sorry -- Don Carson from Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Jim, question -- 2 questions on ag, actually. Or one plus one follow-up. On the seed front, is your expectation for your share gains and volume gains based on the USDA plant and acreage assumption of 95.9 million acres, which should be about, I guess, a 4.5% increase in the overall market in the U.S.? And then just to follow-up on Crop Protection, we had a pretty mild winter. Some people are thinking that, that could lead to significant weed and insect infestation. And does that cause you to be more optimistic in terms of the overall volume outlook for that business as we get into second quarter?

James C. Borel

Thanks, Don. First on the seed, yes, the -- we're expecting share gains in corn based on the USDA estimate of 96 million. And our progress so far, the order books and early deliveries are supporting our expectation there, so that's correct. And on the Crop Protection side, certainly, we're expecting a strong second quarter in Crop Protection over the remainder of the year, really. And it's based on a number of things, both what we've got coming from the pipeline of products, but also the season. And as you know, farmers have a real incentive to maximize production. So if we have additional pest pressure, that only gives us more support.


And our next question is from Mike Ritzenthaler from Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

One question on guidance. I guess, I'm a little curious as to why you elected not to increase the low end of guidance after such a strong quarter. Was there some sales pulled into 1Q from Q2, in your opinion, beyond what Jim had outlaid? And another question, on the Evonik plant disruption, and can you provide a little bit more clarity on products you already have in the market and how quickly volume could be ramped to meet demand if a suitable replacement can be found?

Ellen J. Kullman

Yes, so as far as the guidance goes, we've provided that guidance to you in December. We didn't change it in January when we saw headwinds, currency and tax and things like that. It's early in the year. I think that we're really want to see a little more beyond the second quarter before we would change that, and so we elected to keep it the same. But we, obviously, as you pointed out, have got a strong start to the year. As far as the Evonik situation goes, we don't have a drop-in product. So there would need to be work done, either in Delrin or Zytel, depending on which of the polymers would be relevant to the application. And that's why we've got our application development people and our sales people out with each of the OEMs that are impacted to really understand if we can help out. I think the timing depends on the qualifications for the OEMs and the specific applications, so we'll have more on that as time goes on.


Our next question is from Mike (sic) [Mark] Connelly from CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

So the first question is on Safety & Protection. The margins there are still low versus your low-double-digit goal. Obviously, you've got commercial construction headwinds, the Kevlar expansion, but housing is getting better. So I'm just wondering, do you need just a stronger macro environment sort of GDP to hit this target or is there a way to get there without it?

Ellen J. Kullman

Mark, I think it's a combination. I think it's a combination of the external factors you discussed. I think it's also the qualifications off of the new plant. I mean, we invested quite a bit of money in the Kevlar plant in Cooper River, and those qualifications are obviously coming along. We're very pleased with where they are, but there's a burden that comes along with that until we get through that. Between the fourth quarter and the first quarter, we're up about 100 basis points, and we expect that to see continued improvement sequentially as we come through the year.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Okay. And just to follow up, on ag R&D, you had been spending a chunk of that money on regulatory improvements internally. Is that still true in Q1 and will that be true going through 2012?

James C. Borel

Yes, we continue to strengthen our regulatory efforts, as well as with increased products coming through the pipeline. That brings with it some additional cost. That's not the only increase by any stretch. In fact, the majority is going into basic product discovery and development. But yes, it is a piece of it as we ramp up our pipeline.


Our next question is from Kevin McCarthy from Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Jim, just to follow up on ag. How much of the 20% growth -- sales growth in seeds would you attribute to volume versus price? And then second, would you care to characterize or quantify any potential timing benefits in either North America or Europe related to the early season here?

James C. Borel

First, both seed and Crop Protection had both price and volume gains. And for the segment, it was 8% volume and about 8% price, so it was a combination of both. Global seed net-net, we'll deliver -- we expect between 5% and 10% net price. North America will be at the upper end of that range based on what we see today. And let's see, your second question was -- what was your second question? Seems like there was a second piece, I'm sorry -- Kevin, was there a second piece to your question?

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Yes, I was wondering, Jim, whether or not you experienced any favorable timing issues with regard to a potential pull-forward of sales in either North America or Europe given early planting?

James C. Borel

Thanks, Kevin. Yes, there was an early start, strong start to the European season, a little bit in North America as well, but particularly Europe, we're positioned well for that. As I mentioned earlier, about $0.03 a share is what I would estimate. We'll know more clearly once we get through the second quarter. But certainly, it was some pull-forward but not significant.


Our next question is from Laurence Alexander from Jefferies.

Lucy Watson - Jefferies & Company, Inc., Research Division

This is Lucy Watson on for Laurence today. Ellen, you mentioned in your comments that you expect a year-over-year volume growth to flip to positive in the next 2 quarters. Just wondering if you could provide a little bit more detail on how you see this progressing through your businesses from, I guess, more of an overall perspective. Or I guess another way to word it, is there a checklist of items you're expecting to hit certain inflection points, such as that midyear recovery in the photovoltaics market? Or how are you thinking about reaching that inflection point?

Ellen J. Kullman

Yes, so I think we have to -- the thing is, you have to take it sort of industry-by-industry to understand it. In photovoltaics, we're looking at what everybody believes to be about a 10% increase in global installs this year. Inventories were at about 1/2 of what they were in the third and fourth quarter, and we're seeing things like the Solamet paste volume increase. Now part of that is due to our innovation and our new product, PV17A, which is really being consumed in great quantities by solar manufacturers. It's just tremendous from an efficiency standpoint. Part of it is recovery. And so when we -- we see if that happens, destocking ending in the second quarter and coming out to about 10% a year. So I think what we see there is the progression. If you look at DTT, again, we see sequential month-by-month, quarter-by-quarter improvement in volumes around the globe. That comes from a variety of different industries. Not only construction, but also in industrial and plastics and things like that. And if you look at auto, I think that's going to be a key one this year, it was up 4% in the first quarter, but it was hugely different by country. The U.S. in the fourth quarter -- in the first quarter was up some 17%, but China was down 4%. Now overall, the second quarter, we see China is going to be up tremendously. And whether those numbers -- and we think globally, second quarter looks like it's north of 10% growth in the second quarter for automotive. So I think as we take a look at the quarterly progression of these industries, as we take a look at what we're seeing in some of our products that kind of go in on the front-end, like the paste does on the production of a cell, that we're feeling very much like that slow sequential improvement will continue as far as we can see out into the future.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay. And then a quick follow-up on Safety & Protection. As you bridge the gaps towards your margin targets, assuming that macro is not within your control, so keeping with other initiatives, I guess, what would be a reasonable estimate for the margin benefit you should get from qualifications at the new Kevlar plant?

Ellen J. Kullman

Okay. Well, Nick, why don't you deal with that one?

Nicholas C. Fanandakis

Yes, sure. When we talk about the long-term targets for this business, this segment being in the 21% to 23% sort of margin area, when you look at this facility, the additional capacity we added, the new product offering that we have in this segment, you're looking at something that's going to play out over the next 18 to 20 months to sell out that facility. So you're going to see this gradual margin improvement. We're confident were going to reach our long-term targets of the 21% to 23%, but this will play out over time as that capacity continues to be fully utilized at that site.


Our next question is from Frank Mitsch from Wells Fargo Securities.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Just a question on the TiO2 front. I know that you guys are pretty much running flat out a year ago so not that surprising to see the volumes off, but you specifically mentioned Asia being a bit weaker. Can you talk about the -- can you compare and contrast the volume trends by region? I would have thought that North America would have been pretty strong given the weather situation and the strong start to the coating season here. So a little more color on that would be helpful.

Ellen J. Kullman

I think what we've seen, Frank, is sequential improvement around the world. I mean, I think it's pretty much played out the way we discussed it in our January call. The fundamentals are still there. High-quality pigment is still being -- is in demand. And as we see the markets progress, we're seeing that improvement. Second quarter is the big North American quarter for pigment. The first quarter is seasonally their lowest quarter. But as we take a look month-by-month, it's improving. If we take a look from the first quarter versus the fourth quarter, it's improving, and we are seeing that globally.


Our next question is from David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Also on TiO2 -- and Nick, you mentioned an advantageous mix of ores in the quarter and for the full year. Can you provide some color as to what are your ore costs up year-over-year and how that might impact year-over-year earnings in this business for 2012?

Ellen J. Kullman

So we have an advantaged position in our manufacturing process capability in that when we need to produce more, we can change the ore blend and produce more. If we're producing less, we can take our ore blend down, reduce our cost, still operate the plants at high utility and lower our cost as we come through there. So that kind of capability allows us to really optimize our performance from that. I mean, we expect to have lower cost than our plan was for 2012 because of being able to operate with these lower ore blends. And for the full year, our margin target is on track, and we had -- viewed that as being flat from that standpoint. And so we're right on track from where we've been talking.


Our next question is from Bob Koort from Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's Brian Maguire on for Bob this morning. Just a follow-up on the Evonik situation. Just wondering if you source any CDT for your own specialty resins in that segment? And also, we've been hearing some chatter from the auto OEM guys that they may have to curtail some of their productions because of lack of supply of the PA-12 resin. Are you hearing that from your customers too, and is there any risk to your global auto builds numbers in your guidance assumptions?

Ellen J. Kullman

Yes, obviously, we took a hard look at all our supply chains, and we don't foresee any supply disruptions at this time to our products as a result of this unfortunate event. We were out talking to industry about that and committed to them that we'll expend our efforts and time to collaborate with them to find alternatives so that they can minimize the supply disruption. So obviously, it's unfortunate that this has happened, but we've got a great relationship with the OEMs. We're very deep on the research and development side with them and are working very closely with them to see if we can help offset some of their shortfalls from other suppliers in the industry.


Our next question is from Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

It looks like you're obviously pacing well against your cost productivity estimates for the year and also on the synergies with Danisco. Can you give us a sense on how those should trend over the balance of the year and what the potential is for maybe exceeding those numbers?

Ellen J. Kullman

Great. Nick?

Nicholas C. Fanandakis

Yes, as you said, we're we on track to achieving our targets. We had set $300 million of fixed cost productivity and $300 million of working capital productivity. And in the first quarter, we were approximately $100 million for each one of those. So you can see that we're well on track to meeting or potentially exceeding. From the cost energy standpoint, we've talked about this before, that $130 million of cost synergies is what the anticipation was with Danisco. And when we originally were talking about it, we were talking about it in 2013. And as we've mentioned in prior calls, we've accelerated that, and we're now going to realize that full savings of $130 million in 2012. And if you look at the Danisco in aggregate, it's tracking well in -- from a margin perspective -- the pieces that we acquired, not only in Nutrition & Health, but in IB as well. So we're seeing very positive results and very happy with the speed at which we're realizing the synergies that we had projected.


Our next question is from P.J. Juvekar from Citi.

P.J. Juvekar - Citigroup Inc, Research Division

I wanted to address the Asian weakness in volumes. Could you break it down a little differently how much of the Asian weakness was from electronics and TiO2?

Ellen J. Kullman

Yes, so you're -- I'm sorry, you're kind of breaking up there. So the question is about volumes and specifically Asia and how much of that was TiO2? It was electronics, it was performance polymers and TiO2 were the 3 big revenue areas in Asia. So those would be the 3 I'd look at, P.J.


And our next question is from Jeff Zekauskas from JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Your SG&A costs were up 14% year-over-year and your sales were up 12%. And most chemical companies really try to keep their SG&A growth lower than their sales growth. Did you accrue from management compensation at above average level? Or -- why are your SG&A costs so high?

Ellen J. Kullman

Well, actually, I'd like to start first to say we're not a chemical company, so I don't want to use that as a -- but we'll let Nick answer the question for you, Jeff.

Nicholas C. Fanandakis

So when you look at our SG&A percent of sales, you can see a slight increase there. I think the biggest factor there is the addition of the Danisco acquisition that we have in place there with the additional cost that came on board there. And you also have the new products that we continue to drive and introduce across the portfolio but largely in the ag section as well. So I think those would be primary drivers of anything around the SG&A line item.

Ellen J. Kullman

Yes, it wouldn't have been affected by management cost at all because that was down year-over-year. But if you take a look at the -- we did not have Danisco in the first quarter last year and we had it this year, so it's just added in.


Our next question is from Edward Yang from Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Ellen, on TiO2, you sounded positive and you're looking for a recovery there, but wanted a clarification on the comment in Slide 11, where you mentioned destocking ending in Asia. Does that imply that you're seeing positive volumes now in Asia and restockings occurring or you're seeing destocking at a lower rate? We'd like some clarification there.

Ellen J. Kullman

Yes, so I think it's about sequential. Because year-over-year, the first quarter and the second quarter last year were huge quarters. Right? And so if you look at sequentially how we've moved through the fourth quarter and ended the first quarter, we're seeing continued improvement. I think the number from first quarter versus fourth quarter was like up 10%. So I think that's a better view of it, and that's even considering there was Lunar New Year in the first quarter. So I think that's a better way to really understand how the volume is progressing as opposed to a year-over-year basis.


And our next question is from Andy Cash from UBS.

Andrew W. Cash - UBS Investment Bank, Research Division

Jim, just a question on your ag space. The new acres in corn, like in the Kotas, these may or may not be sustainable in the long term. So I'm just curious, if Pioneers -- how much of Pioneers' going after that business? Is much of your seed volume growth this year tied to those new acres? Are you leaving that to the competition?

James C. Borel

We're participating there, as well as everywhere else. I wouldn't say that's a significant part of the growth, but we're positioned well where those acres grow. In fact, oftentimes, it's our genetics that are helping farmers be able to grow corn competitively in some of the marginal areas. So it's -- yes, it's a part of the growth but not a significant portion.


And our next question is from Duffy Fischer from Barclays.

Duffy Fischer - Barclays Capital, Research Division

Two questions actually, one on Performance Chems. If we look over the last 5 years, Performance Chems sequentially from Q1 to Q2 has grown sales about 10% pretty consistently. And generally, that's led to a PTOI growth of about 25% sequentially. But kind in the guidance if you look at it, it looks like sales are going to do about the same thing this year, but PTOI doesn't look like it's going to grow its normal growth pattern sequentially. Can you kind of walk through what the puts and takes on that might be?

Ellen J. Kullman

Yes, I think if you take a look at it, our Performance Chemicals business is made up of a mix of a lot of different chemicals from cyanide to anilines, TiO2. And so there's a great mix effect that's in there. As you know, I guess, in the last year, the economics of TiO2 were very strong, and TiO2 was in short supply throughout the first half of the year. Now the market is moving a little sideways. It's continuing to progress. And so the mix of volume and price is different for each one of them, and that's what really contemplates or allows the difference among them. So it's very much a mix effect of the variety of products that are in there. We've said that the 2012 earnings growth will moderate but will still grow going forward.

Karen A. Fletcher

So John, I think we're about out of time. I want to respect our analysts' time, but I do want to give it back to Ellen for final closing comments.

Ellen J. Kullman

Great. Thank you, Karen. So I want to thank you all for joining the call today. First, the Agriculture segment, obviously, an increasingly large part of our portfolio over the past several years, strong start with the northern hemisphere planting season, 16% sales growth in the segment, 18% earnings growth through our industry-leading products and services. Second, we're encouraged with sequential improvements for many of our industrial businesses in the first quarter compared to the fourth quarter. And even within the quarter, we experienced volume increases each month in most of our businesses. And we're well positioned with differentiated products, backed up by robust research and development pipelines. And our geographic footprint really allows us, combined with the innovation, to quickly capitalize on growth opportunities with our customers at a local level, which is where innovation happens. And so I think, finally, we are executing well. You've heard numerous examples today in our financial results, our new products successes and in productivity. And I think all of this supports our expectation of 7% to 12% earnings growth for the year.

So we'll look forward to updating you throughout the year. And again, thank you very much for joining our call today.

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