E. I. du Pont de Nemours & Co. Q4 2007 Earnings Call Transcript

E.I. du Pont de Nemours & Company (DD)

Q4 FY07 Earnings Call

January 22, 2007, 9:00 AM ET

Executives

Charles O. Holliday, Jr. - Chairman and CEO

Carl Lukach - VP of IR

Jeffrey L. Keefer - EVP and CFO

Analysts

Donald Carson - Merrill Lynch

David Begleiter - Deutsche Bank

Frank Mitsch - BB&T Capital Markets

Robert Koort - Goldman Sachs

Jeff Zekauskas - JPMorgan

P.J. Juvekar - Citigroup

Kevin McCarthy - Banc of America Securities

Steven Schuman - New Vernon Associates

Mark Gulley - Soleil Securities

Edward Yang - Oppenheimer

John Roberts - Buckingham Research

Presentation

Operator

Good morning, my name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont Fourth-Quarter 2007 Investor Conference 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, Chad Holliday, Chairman and CEO. Sir you may begin your conference.

Charles O. Holliday, Jr. - Chairman of the Board and Chief Executive Officer

Thank you. Good morning everyone and thank you for joining today's webcast covering DuPont's financial results and outlook. Our CFO Jeff Kiefer is with me today and so is Carl Lukach, our Vice President of Investor Relations. He will be coming on in just a minute to take you through our results, but I wanted to introduce today's call.

First, thank you for calling in today, recognizing all the dynamics in the financial markets. I believe you will be pleased with what we have to say about our company. If you remember, we announced actions to accelerate value creation in November 2005, which are now largely complete. As a result, our company is stronger, more productive and more profitable. We are announcing today the next phase of our acceleration plan. I posted a letter to our shareholders today on our website outlining the key focus points of our plan and I invite you to read it.

The bottom line is, DuPont today is on a springboard for growth, from new science, new products and new markets. I'll discuss this later in today's call. But also I want you to attend our upcoming meeting on March 14 for investors. We will introduce in our press release today and we will explain our acceleration plans in more detail.

Let me now turn the call over to Carl to kick things off.

Carl Lukach - Vice President of Investor Relations

Okay, thank you Chad. I need to first take care of some administrative items and then Jeff is going to walk you through our highlights on performance. I'll come back after Jeff with our customary platform preview and then we will go back to Chad.

For those of you accessing this call through our website dupont.com, we will be using slides today. Please turn to slide two. During the course of this conference call, we will make forward-looking statements. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, the statements are not guarantees of future performance and involve a number of risks and assumptions. We urge you to review DuPont's SEC filings for discussion of some of the factors that could cause actual results to differ materially.

We've also posted on our website today supplemental information that we hope will be helpful to your understanding of our company's performance. With that, let me turn it over to our Chief Financial Officer, Jeff Keefer.

Jeffrey L. Keefer - Executive Vice President and Chief Financial Officer

Thanks very much Carl and good morning everyone. It was a strong quarter and year. We executed our plans and delivered results that exceeded our targets. Underlying fourth-quarter earnings per share grew 27%, $0.57 per share. Underlying full-year 2000 [ph] earnings per share grew 14%, the fourth quarter and full-year growth was broad and deep across our businesses.

In summary for the quarter, we drove strong topline growth of 11% globally and 20% in emerging markets. Our pricing gains were well ahead of increasing raw material and energy cost. Fixed cost as a percent of sales improved 210 basis points while we continue to invest in our higher margin businesses. In segment pretax operating income excluding items grew 30%, and our operating margin improved 210 basis points.

Starting now with slide three. Fourth quarter reported earnings were $0.60 per share and includes a net benefit of $0.03 per significant item that include impairment charges, tax settlements, and a litigation reserve reversal. Excluding items from both periods earnings per share were up 27%. The results are higher than the outlook issued by the company on January 9, largely due to finalization of the company's tax rate and higher business performance. Aligned with the double-digit earnings growth segment pre-tax operating income increased 30% and margins expanded 210 basis points. All five segments grew earnings in the quarter and locked in full year of segment pre-tax operating income growth of 13%. While performance increased across all our segments, Performance Materials and Ag and Nutrition delivered over 20% earnings growth in 2007.

Fourth-quarter consolidated net sales were $7 billion, up 11%. The topline results reflect our strong presence outside the US and the success of new products, particularly in Ag and Nutrition and strong performance in Kevlar and Nomex brand names. Looking at our global sales distribution on slide four, 67% of our sales in the quarter were generated outside the United States and sales in emerging markets grew 20%. While each business contributed for the topline growth, Ag and Nutrition sales grew 23% in the quarter and had double-digit sales growth in every region around the world. The results reflect strong performance of our products during the southern hemisphere season as well as a very solid start to the European selling season.

As a company, we delivered strong volume growth in Asia, Latin America and emerging Europe and improved price in every region. We grew sales in China 14% versus prior year quarter performance material product lines increased sales greater than 25% in the quarter. Glass laminating products are doing particularly well in the architectural sector, Coatings and Ti02 also had solid volume and price improvements in China. Both businesses are working to increase their local presence and as an example, in December we opened a collision paint facility in Shanghai [ph] on time and on budget. We grew emerging Europe 25% and achieved a milestone by generating $2 billion in sales in 2007. Latin America sales were $941 million, up 16% with double-digit growth in all platforms and especially strong in Ag and Nutrition.

Moving now to the EPS variance analysis on slide five. The local pricing improvements delivered in each region contributed $0.25 per share. This marks our fourth year of consecutive pricing gains. Total variable cost increased $0.19 in the quarter, excluding the impacts of royalties, commissions, and the impact of pass-through pricing inflation, our underlying raw material, energy and transportation cost were up 6%. As we look back at 2007, we estimate the full year cost escalation was about 5%. For the quarter, our price increases netted a $0.06 per share benefit over variable cost. On a full year basis, we introduced 1200 new products. Today we use pricing on these new products and our pricing discipline kept our local price gain somewhat ahead of raw material and energy cost increases. All other was a benefit of $0.05 per share and primarily reflects proceeds from the sale of non-core assets.

Moving now to fixed cost. We delivered over $100 million of cost reduction programs in the quarter, which covered inflation and partially funded growth programs, primarily in Ag and Nutrition and Safety and Protection. Accelerating growth in these high margin businesses would certainly create future value for our shareholders, the fixed cost variance with a charge of $0.02 per share in the quarter.

For the full year 2007, we delivered over $400 million in cost reduction program savings and an additional $130 million in restructured program savings. Fixed cost excluding currency and volume was up just 1.5% for the year.

Moving to slide 6, fixed cost as a percentage of sales improved this quarter again and for 2007 was 41%, a 150 basis point improvement versus last year. From 2003 through 2007, we've reduced fixed cost as a percent of sales by a whole 7 percentage points.

Turning to slide 7. 2007 full-year pretax operating income margin improved by 100 basis points and return on invested capital improved 90 basis points. The 2007 performance locked in the fifth consecutive year of improvements in both metrics. While higher earnings are certainly contributing to both metrics, our work on underperforming assets is also underpinning the results.

Each quarter we show you our [inaudible], which is on slide 8. We're pleased to show another significant increase in the underperforming assets classification. Improving the metric is done business unit by business unit. Several of our target businesses adjusted their strategies and are now achieving attractive sustainable returns. As examples, from December 2005 to December 2007 the performance of elastomer's business improved 1300 basis points. Ethylene copolymers, 800 basis points. Fluoromonomer and polymer 750 basis points and Zytel resins moved 500 basis points. We also took key strategic actions such as shedding certain industrial chemical in Coatings businesses.

We've momentum. As we move forward, we will continue to improve underperforming asset return and have faster asset growth in our high return businesses, all with the intent to grow ROIC. The internal decision support processes we are using to guide our actions, that