DowDuPont Inc. (DWDP) CEO Edward Breen on Q3 2018 Results - Earnings Call Transcript

About: DowDuPont Inc. (DWDP)
by: SA Transcripts

DowDuPont Inc. (NYSE:DWDP) Q3 2018 Results Earnings Conference Call November 1, 2018 8:00 AM ET


Neal Sheorey - VP, IR

Edward Breen - Chief Executive Officer

Howard Ungerleider - Chief Financial Officer

Jim Fitterling - COO, Materials Science

James Collins - COO, Agriculture

Marc Doyle - COO, Specialty Products

Jennifer Driscoll - IR

Lori Koch - IR


Vincent Andrews - Morgan Stanley

David Begleiter - Deutsche Bank

Jeff Zekauskas - JPMorgan

P.J. Juvekar - Citi

Christopher Parkinson - Credit Suisse

John McNulty - BMO Capital Markets

Steve Byrne - Bank of America

Jonas Oxgaard - Bernstein

Arun Viswanathan - RBC Capital Markets

John Roberts - UBS

Frank Mitsch - Fermium Research


Good day and welcome to DowDuPont’s Third Quarter 2018 Earnings Call. [Operator Instructions] Also, today’s call is being recorded.

I would now like to turn the call over to Mr. Neal Sheorey. Please go ahead, sir.

Neal Sheorey

Good morning, everyone. Thank you for joining us for DowDuPont’s third quarter 2018 earnings conference call. We are making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this conference call. These slides are posted on the Investor Relations section of DowDuPont’s website, and through the link to our webcast.

Speaking on the call today are Ed Breen, Chief Executive Officer; Howard Ungerleider, Chief Financial Officer; Jim Fitterling, Jim Collins, and Marc Doyle, Chief Operating Officers for DowDuPont’s Materials Science, Agriculture, and Specialty Products divisions, respectively; and Jennifer Driscoll and Lori Koch who will lead IR for Corteva and DuPont, respectively.

Please read the forward-looking statement disclaimer contained in the earnings news release and slides. During our call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risk and uncertainty, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K and each of Dow’s and DuPont’s Forms 10-K as well as Dow's and Corteva’s Forms 10 include detailed discussion of principal risks and uncertainties, which may cause such differences.

Also, we will comment on segment results on a divisional basis, so please take note of the divisional disclaimer in our earnings release and slides. Unless otherwise specified, all historical financial measures presented today are on a pro forma basis and all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

I will now turn the call over to Ed.

Edward Breen

Good morning. Thank you, Neal and thanks to all who are joined for the DowDuPont third quarter earnings call. We delivered another strong quarter as you saw earlier today. I was pleased with the way our teams performed in all three divisions, as they successfully grew the top line and bottom line. They did this while delivering cost synergies, executing good price volume discipline, advancing their growth synergies and preparing for the spins.

The financial highlights on slide two are as follows, first sales grew 10%. We saw continued demand for our products and executed well against our new product launches.

While we had higher raw material costs and more currency pressure than we expected, we successfully increased pricing by 5 points while also delivering solid volume growth. The consistency across all divisions and regions was very good.

Second, operating EBITDA increased 19%. We expanded our operating EBITDA margin with volume and price gains, cost synergies and strong executional role, and last, adjusted EPS rose 35%.

As our divisions advanced towards separation, they continue to build out the structure and features necessary to their future success. Each of them continues to make progress towards their best-in-class cost structures. Cost synergies this quarter exceeded $450 million. We have executed against the majority of our cost synergy projects and those savings are coming through.

Today we increased our cost synergy target to $3.6 billion another $300 million increase to reflect further expected benefits. These increased benefits are expected to begin to show in our results in the second half of 2019 and are primarily related to additional permit [ph] savings.

For DowDuPont we are reaffirming our full year adjusted EPS guidance of low 20s percent growth. This is consistent with the increased guidance we provided during our second quarter earnings call. It speaks to our team's focus and our ability to continue to deliver a strong full year result, which comes from the levers within our control, execution of cost synergies, new product introductions, and growth investments to name a few.

Another step towards separation was the naming of the boards of the three intended companies. These boards each consist of highly experienced, independent professionals across a range of relevant fields. They bring deep insights, expertise and support to their respective management teams as they work to drive growth and fully capitalize on the potential of our three independent companies.

I really appreciate the good work the board and advisory committees have already done. They have worked closely with management to develop near-term strategic plans for the respective businesses.

They also have worked hard to enable all three companies to be well positioned in their markets, great capital structures and plan to invest capital and R&D in a way that will drive meaningful shareholder value creation now and over the long-term.

Our confidence in our future is one of the reasons we announced today a new share buyback plan, a $3 billion program. We intend to complete it before the first spin. This would bring our total expected share repurchases to $7 billion since merger close. We are - three financially strong independent companies each of which will be well-positioned for continued growth and further shareholder remuneration to be determined by each company's board at the time of spin.

In September and October we filed the initial Forms 10 for Dow and Corteva. Filing the forms gets the clock ticking for the SEC to approve these registration documents, enables us to stay on schedule for our expected separation. This means separating Dow on April 1 and Corteva on June 1, thereby, creating the new DuPont on June 1. We show the time line on slide three. Keep in mind these Forms 10 are iterative. We will be sharing more information with you in updated filings.

I am pleased to report today that our board made solid progress in the quarter on defining the capital structures of the intended spins. Howard will cover this in more detail in a moment. The important point is that we are doing what we said we would; creating three strong companies that can hit their targeted capital structures.

We are very excited about the growth opportunities for each of the three businesses. With greater focus each of these intended companies will be industry leaders as divisions of DowDuPont will be able to unlock their full growth potential.

We expect each will be able to allocate capital more effectively, apply their powerful innovation more productively and expand their products and solutions to more customers worldwide. Our results today and throughout the year we've been merged illustrate that our strategy is working.

At our investor events next week, you will hear how each of these and companies will be positioned to capture the attractive growth opportunities in their end markets as well as further details on their capital structures and financial priorities.

You’ll also will have access to all the leaders who will be driving our future growth. I look forward to seeing you there to introduce you to these exciting new businesses.

With that, let me turn it over to Howard.

Howard Ungerleider

Thanks, Ed. Turning to slide 4. As Ed mentioned one of our key achievements in the quarter was defining the capital structures of the each of the three intended companies. Each of the companies will have strong investment grade credit profiles in line with what we committed when we first announced the merger. We were able to accomplish this and implement our new $3 billion stock buyback program announced today for DowDuPont.

Consistent with the rating agencies' criteria, adjusted debt include several adjustments to each company's leverage to account for pension deficits, non-consolidated subsidiary debt and operating leases. We have also now finalized how we will allocate the heritage DuPont and Dow defined benefit pension plans and OPEB.

As you see on this slide, Corteva and the new Dow will each assume the heritage U.S. pension plans of DuPont and Dow, respectively. New DuPont will issue new debt based on its standalone financials and provide funds to Corteva and new Dow to enable the deleveraging of the heritage financial debt necessary for their respective target credit ratings.

Turning to slide 5, we will implement the capital structures in several coordinated steps. New DuPont will first issue new debt based on its pro forma financials. As we disclosed when we made the shelf filing in the third quarter this debt will be non-recourse to Corteva or new Dow.

New DuPont will then contribute the majority of the proceeds from the debt issuance to Corteva and new Dow, so that those entities can further delever to achieve their targeted capital structures.

Taken together these structures best position each company and their shareholders for long-term success and financial strength. At our investor events next week each of the future companies CFOs will unpack more details on the financial policies that underpin these capital structures.

Moving to slide 6 and a summary of our third quarter results, for every quarter since merger close, we grew earnings per share, net sales and EBITDA year-over-year. Drivers of our 35% EPS increase included volume and local price gains, cost synergies and lower pension and OPEB costs. These gains more than offset higher raw material costs in all divisions and currency headwind primarily in agriculture from the Brazilian real.

We grew net sales by 10%, evenly balanced between pricing actions and broad based demand for products across the vast majority of DowDuPont's key market verticals. Sales rose 13% in Materials Science with double-digit gains in every segment. Specialty Products achieved 8% sales growth led by 14% gain in nutrition and biosciences, and Agriculture grew sales by 2% led by strong gains in Latin America and Asia Pacific.

Volume increased 5% with gains in all divisions and all regions. Agriculture grew volume 8% led by gains in Latin America and Asia Pacific. Materials Science grew volumes 6% with gains in most [Audio Gap] and Specialty Products delivered 3% volume growth with gains in all segments and all regions as well.

Local price increased 5% also with gains in all divisions and all regions. Price increases were led by Materials Science, which was up 7%. Agriculture increased local price by 3%; and Specialty Products increased local price by 2%.

And as Ed mentioned, we continue to exceed our cost synergy commitments, delivering more than $450 million on the quarter. We have now delivered cumulative savings of more than 1.3 billion since merger close, and we ended the quarter at a run rate of greater than $2.5 billion on our cost synergies exceeding our original one-year target by more than $400 million.

These collective drivers translated to operating EBITDA of 3.8 billion in the quarter, up 19% year-over-year and operating EBITDA margin expansion of approximately 140 basis points. We delivered these results despite approximately $600 million of higher raw material costs versus the prior year period.

Cash flow from operations was a use of cash of approximately $320 million in the quarter, which included discretionary pension contributions of approximately $2.2 billion. Excluding this cash flow from operations would have been a positive $1.9 billion.

The pension contributions had two benefits; first, they significantly improved the funded status of the Dow and DuPont plans. And second they provided economic value as we were able to optimize the benefit under prior tax law and free up tax credits to offset tax on future income.

Finally, we again returned nearly $2 billion of cash to our shareholders in the quarter including another $1 billion of share repurchases. Including dividends, we have now returned $7.5 billion of cash to our owners since merger close.

Turning to our modeling guidance on slide 7. For the full year we are reaffirming our prior guidance of adjusted earnings per share up low 20s percent consistent with the increased guidance we provided during our second quarter earnings call. We continue to expect healthy demand, as well as pricing gains across most of our businesses.

At the company level we expect our top and bottom line growth to continue year-over-year. We see full year net sales to be in the range of $86.5 billion to $87 billion, and we continue to expect full year operating EBITDA be up in the mid-teens percent.

For the year, the Materials Science division expects low teens top line growth on the continued ramp-up of our recent U.S. Gulf Coast investments and strong global demand. Operating EBITDA is expected to increase in the low teens as well on solid underlying end market fundamentals, continued cost synergies, supply from our U.S. Gulf Coast growth projects and lower start-up and commissioning costs.

These tailwinds will be partly offset by some margin compression in plastics and lower isocyanate prices that have begun to come down from the record levels we saw in the second half of 2017. As you may recall these trends are in line with expectations we laid out at the beginning of the year.

The Specialty Products Division expects full year net sales to increase in the high single digits percent with strong organic growth across all of our segments. We continue to expect operating EBITDA to be up in the high teens percent driven by cost synergies, lower pension and OPEB costs, sales growth and portfolio and currency benefits, partially offset by increased raw material costs and growth investments.

The Agriculture division expects full year sales to be flat with 2017 as price and mix gains and the benefits from new products are offset by lower planted area in North America and Brazil, continued currency pressures and the portfolio impact.

Operating EBITDA is expected to grow by the mid-single digits percent, which we said is about $2.7 billion. The gain is expected to be driven by cost synergies, higher local prices and lower pension and OPEB costs.

Before turning it over to Jim, I want to address the trade and tariff topics that are still receiving attention. After assessing the potential and based on actions implemented to date, we do not expect that tariffs will have a material impact on any of our divisions in the fourth quarter. This is due to our global asset base, our local presence in markets around the world and proactive mitigation actions we have been taking.

I'll turn it over to Jim to cover Materials Science business performance.

Jim Fitterling

Thanks, Howard. Moving to slide eight. Materials Science delivered another strong quarter. The core business again achieved strong top line gains with double-digit increases in each of our segments and gains across all our regions.

We continued to capture demand growth well above GDP while also driving quick pricing actions where supply/demands fundamentals are favorable and the value and use of our products differentiates us in the market, and our growth investments also continue to contribute to our performance.

Our assets under U.S. Gulf Coast are running at/or above design rates and were executing our marketing plans to continue to place product in the market. And in our first quarter lapping full commercial operations at Sadara, the JV again delivered a year-over-year earnings improvement.

Let me hit the division highlights. We have delivered double-digit top line growth every quarter since merger closed. We grew volumes 6% with gains in most segments and all regions, and we achieved local price increases of 7% with gains in all segments and all regions.

We delivered strong EBITDA growth up 8% with gains in most segments. We again exceeded our cost synergy commitments, and we delivered all of these results despite 400 million of higher raw material costs in the quarter.

I'll now take a closer look at our business performance. Performance Materials & Coatings achieved operating EBITDA growth of 37% led by local price gains as well as cost and growth synergies. This segment achieved double-digit sales gains in both businesses and in most regions.

Sales gains in consumer solutions were driven by double-digit local price gains in all regions. While total volume was down for the business, our price volume management and upstream silicone one intermediate enabled us to achieve volume gains for our downstream formulated silicones applications where we achieved higher margins for our products

Industrial Intermediates & Infrastructure operating EBITDA declined by 3%. Double-digit volume gains and strong pricing actions in both businesses were more than offset by rising raw material costs. Margin compression in isocyanate and equipment repairs to an isocyanate unit on the Gulf Coast.

Polyurethanes achieved double-digit sales gains in most regions based on broad-based demand growth in all regions led by Asia Pacific and EMEA, as well as our local price increases.

Industrial solutions delivered volume and price gains in every region led by gains in downstream ethylene oxide derivatives with double-digit growth in Intermediates for crop defense, energy heat management and food and feed manufacturing. Volume gains in both Polyurethanes and Industrial Solutions were further supported by increased supply from the Sadara joint venture.

The Packaging & Specialty Plastics segment grew operating EBITDA up 4%. Volume and local price gains were the key earnings drivers including increased supply from growth projects.

Lower commissioning and startup costs and cost synergies also contribute to the year-over-year improvement. These benefits more than offset the increased feedstock costs.

Additionally you'll remember that last year's hurricane activity hit this segment the hardest and the absence of that cost impact also helped the segments earnings year-over-year.

The Packaging & Specialty Plastics business grew volume 6% on broad-based demand strength and new capacity additions on the U.S. Gulf Coast. Volume gains were led by demand for industrial and consumer packaging and a health and hygiene applications. The business also achieved double-digit growth in elastomers applications.

Finally on our growth projects through the third quarter, Sadara has now delivered year-over-year equity earnings improvement of $170 million. We have now lapped full commercial operations in the year-ago period, and the JV remains on track to execute the full lenders reliability test at year-end or early in 2019.

On the U.S. Gulf Coast, our new assets continue to run hard and contribute to earnings. And our high melt index elastomers train in Freeport and our bimodal high density debottleneck in St. Charles both remain on track for start-up before year-end.

The strong results of our packaging and specialty plastics segment is worth noting particularly during the quarter where we experienced significant raw material cost headwinds.

Our results, which outperformed our peers are another proof point of the value of the portfolio we've carefully constructed over the last several years and it's one that well positions us for future growth going forward. There are many pieces to that advantage that pay off especially in times like we saw in the third quarter.

First, our industry leading asset flexibility, which enabled us to more effectively manage feedstocks swings versus other industry players. Second, is our ability to reduce risks and drive greater margin stability across the cycle. We do this in three ways; through our full chain integration and ownership of the entire monomer to polymer chain through our broad geographic reach and through our product differentiation that is further downstream than peers. Lastly, our growth investments leverage these collective factors and deliver EBITDA growth to offset the headwinds like those that we saw in the quarter.

To sum it up, Materials Science continues to capture strong demand growth, drive agile and pricing actions, and exceed our synergy commitments and control our costs. I look forward to sharing more on the path forward for the new Dow, which will separate from DowDuPont in less than five months at our Investor Day event on November 7th.

I'll turn it over to Marc to cover Specialty Products.

Marc Doyle

Thanks, Jim. Turning to slide 9. Specialty Products again reported strong growth on both the top and bottom line. We continue to deliver a steady, mid single digit top line gains through higher volume and price. Our organic growth is enabled by our new products, customer driven application development and leadership positions in attractive end markets.

The division reported 5% organic sales gains with transportation and advanced polymers again leading the way with organic sales growth of 9%, and Safety & Construction was not far behind at 8% growth.

Operating EBITDA for the division again grew double digits with gains in all segments, driven by cost synergies, sales gains, lower pension and OPEB cost and a portfolio benefit more than offsetting higher raw material and freight costs and one-time prior year benefits.

One of the items I'm particularly pleased with this quarter was our pricing strength. We delivered an overall 2% improvement in price with contribution from almost all of the businesses. The specialty nature of our portfolio enabled us to price our products for the value they deliver to our customers and mitigate the earnings impact of higher raw material costs.

Turning out to the segments. Electronics & Imaging net sales and operating EBITDA were steady with last year due to well known weakness in the tech space caused by the mid-year reduction of incentives in China.

We continue to see strength in the semiconductor business, driven by new customer wins and robust end markets. Sales in our displays business were up nearly 20% due to strong demand in China for one of our new OLEDs products.

Overall operating EBITDA improvement from cost synergies, higher semi and display volumes and lower pension and OPEB costs were offset by headwinds from softness in photovoltaic and higher raw material costs.

Nutrition & Biosciences grew sales - grew net sales by double digits with price and volume gains in addition to the benefit from the acquisition of the FMC Health and Nutrition business, organic sales increased 4%.

Nutrition & Health continues to see strong growth in probiotics with sales of more than 30% this quarter. Within industrial biosciences, top line growth in CleanTech and volume growth and bioactives were offset by lower production volumes in biomaterials, partially driven by Hurricane Florence.

Segment operating EBITDA grew 33%, driven by portfolio benefits, cost synergies and volume growth. Safety & Construction organic sales increased 8% led by broad-based growth across industrial, personal and life protection and medical packaging, partially offset by softness in construction and U.S. residential markets.

Our pricing strength continues to improve. In this quarter we delivered 2% growth. This was a result of targeted actions to drive value in use pricing across our portfolio. We look for this pattern to continue.

Operating EBITDA for the quarter was up 10% as reported but up 20% when excluding prior year one time gains of approximately 30 million. Growth was driven by cost synergies, lower pension and OPEB costs and higher local price, partially offset by higher raw material costs and the absence of prior year one-time gains.

Transportation and advanced polymers again delivered strong top and bottom line growth. The segment continues to perform well, driven by strength in automotive, which grew double-digits and again significantly outpaced auto builds. Our ability to sustainably deliver this type of above-market growth stems primarily from two factors, first is our leading position with key OEMs.

Second, is our robust product portfolio, which enables both higher content per vehicle and biases our offering towards higher-growth areas of the industry including hybrid and electric vehicles.

We also continue to experience growth within the electronics and the aerospace end markets. In addition to higher volume, we again benefited from pricing strength in our nylon products as tight industry supply dynamics supported our position with customers looking to meet strong market demand.

Operating EBITDA margins expanded by more than 550 basis points to about 31% driven by sales gains, cost synergies and pension and OPEB benefits, partially offset by raw material headwinds.

In closing, I am pleased with our businesses ability to execute on items that are benefiting all lines of our P&L through pricing actions, productivity initiatives, high-return capacity expansions and customer-driven new product innovations. This winning formula will enable us to continue to drive sustainable top and bottom line growth.

With that, I'll turn it over to Jim to cover agriculture.

James Collins

Thanks, Marc. Turning to slide 10. For Agriculture, our third quarter is mostly on the southern hemisphere and we finished strong. The two standout highlights were the 11% organic sales growth and the $134 million year-over-year improvement in operating EBITDA. I'm pleased with how well the team has executed particularly with our new product launches in crop protection.

Let me break down that organic sales growth figure of 11%. Volume for ag this quarter was 8%, driven by Latin America and Asia Pacific and local price increased 3%. Our organic sales growth was largely driven by crop protection. Total sales, rose 2% with a negative currency impact of 6% and portfolio reductions of 3%.

Our currency pressure came mainly from the Brazilian real, which went as high as 4.1 to the $1 at the time our seed selling season began. The portfolio change was a result of the Brazil seeds remedy, we executed last year to complete the merger.

Our organic sales growth this quarter reflected the strength of new product launches, more normalized crop protection inventory levels in Brazil, and benefits in crop protection and an early start to the Latin America season for Seeds and Crop protection.

Our Crop Protection business led the way with 17% organic sales growth. As expected, much of the sales gain came from volume, up 13% as we successfully launched several new crop protection products this quarter.

Among the products driving our volume gains were the picoxy-based products such as the Vessarya, the leading treatment for Asian soybean rust in Brazil; Arylex, a new cereal herbicide in Europe and Pyraxalt, a novel insecticide for rice brown plant hopper control in Asia Pacific. We also saw strong growth in seed apply technologies with new launches of Lumisena.

Last year's third quarter, crop protection inventories were unusually high and have now returned to more normal levels helping our volumes. Pricing in crop protection rose 4% as we responded quickly to fluctuations in the Brazilian real. We still expect currency to be about $100 million EBITDA headwind in the second half for the ag segment impacting seed more than crop protection.

Organic sales for seed rose 1% on volume gains, despite an expected reduction in corn planted area and lower royalties. We continue to have good results and strong demand for our PowerCore and Leptra brand corn seeds.

And we enjoyed an earlier start to the planting season. And I will also note that Pioneer Hi-Bred were awarded the first and second prizes in Mexico's – Congress for their extraordinary silos results.

Price in seed was essentially flat with last year's quarter. The remedy loss subtracted nine points from seed with currency taking another six points for a total sales decline of 14% in seed.

The ag segment operating EBITDA loss this quarter was $104 million, an improvement of 56% versus last year's quarter. The third quarter is our seasonal low point ahead of the southern hemisphere season that starts in September.

The year-over-year improvement reflects cost synergies, sales gains, lower performance-based compensation, and lower pension and OPEB costs. These positives offset higher raw material costs and launch spending for our new products.

We reaffirm our full year guidance of $2.7 billion of operating EBITDA consistent with what we said last quarter, including the earlier start in Brazil, which benefited the third quarter and continuing currency pressure.

Turning to operational highlights, we have three worth calling out this quarter. First, we exceeded our commitment of reaching a 75% run rate against our goal of $1.1 billion in cost synergies by the first year since merge. This run rate illustrates that we have taken quick action and are tracking these projects rigorously.

Consistent with the company's new synergy targets, we now project a total of 1.17 billion in cost synergies, an increase of 70 million. We expect to reach 100% of that higher goal on a run-rate basis by the third quarter of 2019.

Second, we have advanced our new multichannel multi-brand strategy in the quarter. Realigning our global brand portfolio was necessary to better focus our product and service offerings to our customers. This strategy will expand access to the company's genetics, technology and traits across various agriculture distribution channels, including agency direct, retail, distribution and licensing.

So far the response from farmers has been good and early indications are that we are making a smooth transition to the new brand structure.

We launched our Brevant brand in Eastern Europe after having launched it in Brazil and Argentina earlier this year as part of our efforts to regain share lost from the seed remedy. We will delve deeper into this topic at Investor Day next week.

Third, we filed the initial Form 10 for the Corteva spin. As promised, we will continue to update that document as more details become available. Overall, we are happy with the progress that the team is making towards separation. All the key projects remain on track as we advance towards June 1st.

In closing, we are delivering results by optimizing our organizational structure and go-to-market strategies, successfully launching innovative new products targeted to customers' needs and maximizing efficiency and productivity.

I'll now turn it to Jim to open up the Q&A.

Unidentified Company Representative

Thank you, Jim. And with that let's move on to your questions. First, I'd like to remind you that our forward-looking statements apply to both our prepared remarks and the following the Q&A. Rochelle, please provide the Q&A instruction.

Question-and-Answer Session


Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] And our first question today will come from Vincent Andrews with Morgan Stanley.

Vincent Andrews

Thank you and good morning, everyone. Maybe I could ask you to put the buyback $3 billion in the context, it feels more like the share prices. Why not – why wasn't it larger? Why did do your discretionary pension paying it now versus maybe doing a higher buyback now? And why not accelerate the share repurchase given where the stock is? Thank you very much.

Edward Breen

This is Ed. Let me comment and maybe Howard wants to make a couple of comments also. Remember the share repurchase that we announced today we're going to accomplish that in literally the next five months pre- spin of Dow. So we'll be moving at a pretty good clip there.

I would also say to you though we have the new boards of the three companies look at this but we're obviously going to talk about financial policy next week at our Investor Day for the three companies, so we'll get into more detail on that talking about dividend and all. But I can suggest to you that we will be very friendly remuneration companies to our shareholders and share buyback will also be a part of that. So I will look at this in the context of the next year and the opportunity we have to repurchase shares and have a nice dividend on each of the companies.

The pension, I'll let Howard comment on that here, but it was very advantageous for us to do it at this point in time, and Howard why don't you give more details around that.

Howard Ungerleider

Yeah, good morning, Vince, and it was really a combination of tax benefits as well as the value from the spread between the ERLA [ph] and the interest expense spreads. And so – and it was credit-neutral event. Because if you look at the capital structure slides in the deck, you'll see that the rating agencies look at the underfunded pension. So it was credit-neutral from that perspective and it allowed us to take a significant economic opportunity to create value.


And next we'll move to David Begleiter with Deutsche Bank.

David Begleiter

Thank you, good morning. Ed, can you and Jim discuss, the low guidance in Materials Science for full year? And then how much of that additional cost synergies are in the Materials Science going forward?

James Fitterling

Yeah. I'll take it Ed. Good morning, David. Look I think the two big things that are on the radar screen for everybody in materials is just margin compression in isocyanates, which we've seen and also a little bit of concerns about what's going on with sub-costs as we look at the plastics chain.

Just to give you a reference on the third quarter, we actually did better in plastics versus what the IHS forecast were out there in terms of margin compression considerably better. And we're starting to get synergies to roll through.

I'll give you a quick plastics recon. Synergies in the third quarter were positive 87 million. We had a positive 80 from hurricane. We had lower start-up costs, so that was positive 66. We had positive 103 million from our Gulfstream investments, positive 15 from Sadara.

Turnarounds and maintenance was a negative. So I had a couple of turnarounds and I had one unplanned event 70 million. And feedstocks were 231. So that's how you get to the third quarter results. Isocyanates saw some compression, still good margins. I think that these growth rates both PMDI and TDI will tighten up by mid-2019.

Howard Ungerleider

David, this is Howard. And the only other thing that I would like to just add is if you look at it on a full year basis, the Materials Science division is up on an EBITDA basis, low teens percent. And so we feel really good about that performance.


And next we’ll move to Jeff Zekauskas with JPMorgan.

Jeff Zekauskas

Thanks very much. If you add back your pension contribution, you said your cash flow from operations was 1.9 billion. So what that means is that for the year even if you added back your cash flow from operations are down by about 3 billion. Can you talk about that differential why it's so much lower? And last year your cash flow from operations for the year were 8.7 billion. Where do you think you'll stand relative to that adjusting for your pension expense?

Howard Ungerleider

Yeah, I think on a – good morning, Jeff. This is Howard. On cash from ops basis, I mean one of the big drivers is working capital. So we've been growing sales double- digit now every quarter since merger close. And it's just not possible to do that and not add some working capital dollars. But the team's very focused on efficiency. And if you look at the efficiency metrics for working capital Q3 versus a year ago our efficiency improved by a day, a little bit higher DSI, but offset by positive improvements in both DSO and DPO.

When you think about it on a full year basis, I mean, if you just take street estimate of around $18 billion of EBITDA for 2018, you subtract out the interest expense the working capital investments the voluntary pension contributions, integrate one-time integration restructuring costs, you're getting cash from ops of around $10 billion. And if you subtract out CapEx, you're talking about free cash flow of around $5 billion.


And next we'll move on to P.J. Juvekar with Citi.

P.J. Juvekar

Yes. Hi. Good morning. Question on Ag for Jim Collins. Jim can you describe the impact you expect to see from a 4 million to 5 million acreage from soybeans to corn next spring? And then in your recent $4.6 billion charge that you took in Ag, you mentioned delayed product registration. Can you share some light on what else is getting delayed? Thank you.

James Collins

Yeah. Thanks. Thanks, P.J. So it's a little too early to kind of nail on what we expect to see going into the 2019 in terms of acres. And we would be out selling right now normally. We'd a good look at our order book. But you're probably also keep in track North America harvest has been quite delayed. So our signal that we would normally have by now is a little be weak.

That said, commodity prices on soybeans that pressure is likely to drive some higher corn acres. And historically our portfolio from a margin perspective and our ability to compete favors our strong corn market. So we expect to see that with other crops that we participate in a little bit too will benefit. We think some of that shift out of soy could be going into wheat and cotton, so it's a little hard to say.

The flip side is as we seeing more acres going into Brazil, we have a very strong chemistry portfolio that I've talked about before. Our cocci-based products are industry-leading. So we expect to benefit on this soy shift in Latin America.

In terms of the impairment and our registrations, the main one we were worth pointing was chrome another year delay not huge. But with the discussions going on with China, we would expect to not hear anything now until early 2019 in our ability to ramp up parent seed. We are out with limited commercial launch. So we're still demonstrating that technology to customers and we still see good yield advantage.

So the other thing is some delays in being able to integrate some of that Dow trades into Pioneer germplasm especially with that list another delay in that and the final one we pointed to is we lost a registration in Europe far for the cocci for fungicide in wheat. And we're working with European Commission to get that registration back, but we're going to lose at least the sales season there.


And next we'll hear from Christopher Parkinson with Credit Suisse.

Christopher Parkinson

Great. Thank you. Within the specialty businesses there's been a lot of end market noise and even some investor fear just ranging from construction to semis to auto. Can you just parse out the key micro variables over the 12 -- next 12 months as you see and how you position for further growth? And then also if you just address the simple sources of the -- a 100 million synergy increase and give a quick update on your intentions for the broader portfolio realignment that will be greatly appreciated? Thank you.

Edward Breen

This is Ed. Let me just make a few comments on trends and by it's always hard to say what the next 12 months will do, obviously. But if you look at the quarter that we just recorded, I'll not even go to guidance that we gave for the quarter we're now in fourth quarter. You know auto sales for us were up 10% even though auto builds were flat to down 1%. And by the way that continues trend we've had for almost three years now where we've had double-digit growth in auto. And it's because of the parts of the market that we participate in the lightweighting, electrification et cetera. So we're seeing strong demand there. Our China sales across the DowDuPont portfolio were up 18% and very strong. In fact it was double-digit growth in all three divisions by the way. So continuing strength there, our semi businesses Marc had mentioned was up nicely 3%. And our industrial sales across the platform were up 8%. So some of the areas I know others have been talking about -- we continue to see nice secular strength and in our part of the product portfolio that we're delivering to those markets.

Marc Doyle

This is Marc. Let me just add a little bit more on the markets going into 2019. We are -- as I've said it's hard to predict the future, but we are expecting that electronics markets to be strong next year. We think semi will have another strong year next year. And as Ed indicated we think our auto growth will continue to be strong because we are better connected to key trends like auto electrification. And we're also expecting photovoltaic to rebound next year so that will be a positive tailwind next year for us versus this year.

Edward Breen

I want to say something about those synergies. There's a question about the synergy breakdown.

Marc Doyle

You know, I'd say just from a SpecCo perspective, we said that the breakdown of synergies would be about [ph] 100 for SpecCo. That mostly going to be driven by procurement savings and we'll see most of that add in the back half of next year. And so that maybe answers the question on the synergy.

Edward Breen

And just a follow it, MatCo will have about 130 million extra synergies. Ag will have about 70 million in extra synergies. The bulk of the increased synergies and we've kind of highlight this before that we've been working on hard is in the procurement area. So that will start kicking in kind of depending on the division but kind of by midyear 2019 those extra synergies will be kicking in as it flows through our production facilities.


And next we'll move on to John McNulty with BMO Capital Markets.

John McNulty

Yes. Thanks for taking my question. I think in the remarks you indicated I think it was a $650 million raw material headwind that you were dealing with. I guess can you give us color as to where you're catching up on that where you feel like there's still more to go I guess especially in specialty business but even on the materials segment would be helpful.

Edward Breen

Let me give you an overall though and -- Marc and Jim can comment on those the two divisions that you mentioned. I think look -- one of the highlights in the quarter was across the whole platform we had a 5% price increase. So we saw raw materials going up and our teams reacted very, very quickly. And with the products we have we were able to get price out of it.

So to capture that kind of price across the platform I think really demonstrates the strength of the portfolio. So we were able to take that $600 million and really cover it and have great leverage to the bottom-line.

I mean look our leverage hit the bottom line with 35% EPS growth was very significant despite that fact. And a lot of that was due to price actions that we did. Jim, do you want to comment specifically on that.

James Fitterling

Out of those John out of those 600 and some-odd million $400 million of that approximately was within Materials Company, it's both hydrocarbons energy, but it is some non-hydrocarbons cost so just to other raw materials that we purchase.

As I mentioned, 230 million of that was in plastics so you can see the rest of its in and largely in Performance, Materials, Industrial, Intermediates and infrastructure. Some of what happened in the quarter was you had a big spike at the end of the quarter in ethane.

And as we know that was very short lived and that's come back down to kind of the $0.35, $0.40 range. And I think as we go forward you'll probably see that ethane in the $0.40 range for that quarter.

Natural gas has come back off quite a bit. So natural gas, there's plenty of gas in the United States below 350 and plenty of gas at $3.1 million BTU. So that's to me means we're going to have good gas, good ethane, good propane position and that's our key feedstock exposure.

So I think in the quarter as we saw the stock prices decline. There were some overreactions to what people were anticipating with some of those feedstock costs. And look that's why we invest to be able to navigate through that with feedstock price Howard do you want to comment also?

Howard Ungerleider

Yeah, let me just add on the specs side. We had a little over 100 million in headwinds on raw materials. And it was distributed through the segments. The largest piece was within our transportation and advanced polymers segment.

And there you can think commodity chemicals for monomers, for our polymers production. And we more than offset it at division level with pricing. So we felt pretty good about how we performed during the quarter.


And next we'll move to Steve Byrne with Bank of America.

Steve Byrne

Hi. I've got a question for James Collins just wanted to know how you're doing on trying to recapture some of that divested insecticide business.

And then I'm sure you saw EPA blessed the camera tolerance technology last night. If you can ever get Chinese import approval on your less technology, do you think that market is going to be too penetrated to enter into with new technology?

James Collins

Thanks Steve. So globally we've been working with our really strong insecticide portfolio as headlined by our Spinosa and Špinarová products and we've been working on debottlenecking manufacturing processes. So we have the volumes to be aggressive.

And overall that's working quite well. And we talked about our insecticide volumes through the first half were up dramatically. And we continue to see that same trend for the second half of the year. So I feel really good about that.

The other area we're focused on remedy recovery is certainly in our seed business in Latin America. And I feel really good about the way that team is executing. At least we saw a nice early start to the season. And the additional launches of our new seed brands like Brevant are giving us greater opportunity there.

So overall really great shape in terms of the dicamba piece yeah the main news there was obviously the shortening of the window days after planning application window. And we're still excited about the Roundup Ready 2 Xtend technology and we still feel like it's very useful. That said, with Enlist in soybeans, we think we will benefit from may be a better advantage in terms of application flexibility. And we already know that in cotton, today, we have a strong advantage within Enlist and the flexible that growers have around application windows.


And we'll move on to Jonas Oxgaard with Bernstein.

Jonas Oxgaard

Good morning guys.

Edward Breen

Hey Jon.

Jonas Oxgaard

Two-part question if you don't mind. Ed you previously said that you were going to stay actively involved with all three companies. We saw the announcement on the Boards today and you're not on the Dow Board. So, first part is how are you planning to be involved with Dow after this spin?

And the follow-up question is also on the Dow Board, there were a couple of Board members who are very close to that mandatory retirement age. How should I think about that going forward? Is that mandatory retirement age going to change or are they going to be basically interim members?

Edward Breen

No, I think by the way on all three of the Boards, we'll have additional turnover here in the next year or two because of the -- and part of it because of the age limit you just mentioned. So, we're well aware that. Each of the three divisions is actually continuing to talk to other people about joining the Board.

I wouldn't doubt by the way you see in another announcement from -- or two or three from us still that. If you kind of add up the list of what we announced today, you can see we're maybe one or two short in each of the Board's potentially from where we want to be including turnover because of the ages as you mentioned that we'll be having over the next year or so.

So, we're clearly talking to a group of people still. I'm excited about some of the people we're talking to and skillsets that they have. So, we're not 100% complete there and yes, there'll be additional turnover that we're working on.

As far as my involvement, I am -- as you can see from today's announcement, I'm going to be on the Corteva Board, Executive Chair of DuPont. And I think my comment back when I made was I'm going to stay actively involved to help these companies out. So, I think that's the best area for me to be involved. And Executive Chair will be a full-time role, so I'm going to be very, very busy doing that.

I feel very good about the Dow Board and the additions that we made. I think they are awesome addition to the business. And I also feel very, very good about where the Dow Board is -- and the management team is headed with the business. I think the focus around capital spending on their D&A levels. By the way, they're going to crush it this year on that, they're going to be $550 million below, no big greenfields come.

I think the way Jim Fitterling and the team are managing the business is just very, very different as we move forward here over the next few years. And I think you're going to see great returns out of that business. And I think you're going to see great returns out of the other two businesses the way we're managing them. So, I'm pretty excited about the future for all three.


And next we'll move to from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

Thanks. Good morning. Just wanted to go back to some of the commentary on materials though. Jim you mentioned that you'll see that $0.40 range or so on -- you also mentioned that isocyanates and MDI could improve by mid-next year. Maybe you can just give us a little bit more detail on both of those and also your outlook on polyethylene you have some recent nominations and also the pullback in ethane? Thanks.

Edward Breen

Yeah. Sure. On isocyanates MMDI is tight. PMDI is a little more well supplied right now. But at these growth rates, it's going to tighten up by mid-2019. And what you had in the first half of the year with the big spike in PMDI pricing and MMDI pricing was because you have some unplanned outages that we’re in the marketplace as well. And so those are not easy technologies to run so sometimes things happen to tighten those markets up. PDI is in a similar situation with PMDI.

The other thing I would say is the growth in the business is really heavily shifting towards systems and so if you look at systems and this is where isocyanates get consumed. You're talking about double-digit growth rates whether it's systems going into automotive applications, insulation applications, energy efficiency, food value chain, food storage, comfort and to new materials they're all good demand growth. So I think you're in a very short shallow adjustment period here to new capacity with some of it includes the Sadara capacity that we brought on.

Polyethylene, look as I said relative to the IHS estimates, we ended up in a much better place in the third quarter there. There are some predictions out there that everything's going to collapse. I'm not sure that I believe that. We've seen that inventories are relatively under control they're actually down at the end of the third quarter slightly. So inventories are 42 days. And that's basically what you need to run the supply chain.

So there's no massive issues there. Operating rates on polyethylene are tight. The new polyethylene capacity is coming on that will tighten up ethylene a bit. We needed ethylene to tighten up a bit and I think you'll see that start to happen. And most of that ethylene link has been in the U.S.

So I think there's some concerns that people have about China and China demand. As Ed said, DowDuPont was up 18% in China this quarter. Materials was actually up 20%. So we're still moving a lot of material into China and the demand is good. So I think some of that pessimism is a little bit overblown.


And John Roberts with UBS will have our next question.

John Roberts

Thank you. The industrial intermediates volume growth of 14% include a significant benefit from distribution from Sadara. But you didn't mention any Sadara income there like you did with the Plastics segment. So is all of the Sadara equity income being booked in plastics even though the Sadara division sales are spread across the segments?

James Collins

Yeah. John, this is Jim. Sadara was positive in plastics this quarter. It was not slightly negative in the Polyurethanes space. It wasn't good industrial intermediate. It was a slightly negative in the Polyurethanes space mainly because we had isocyanates units that was done in the quarter and we did that because we are making some mechanical adjustment to get ready for the Lenders Reliability Test which is underway right now. So that was planned that was just something that we needed to get done so we had a good shot to pass this test. Otherwise I think you'll see good rates through the fourth quarter and you'll see some improvement there.


And moving on we'll hear from Frank Mitsch with Fermium Research.

Frank Mitsch

Hey, good morning, folks. Hey, Jim just to follow-up on integrated polyethylene margins and your comments before that you exceeded the IHS margin forecast in Q3. And in your supplemental slides you talked about the U.S. and European integrated polyethylene margins down greater than 50%. Obviously it sounds like you don't believe that. Can you kind of ballpark where you think that might settle out? And actually more importantly what is your expectation as we head into 2019 for the integrated polyethylene margin? Thanks.

James Fitterling

Welcome back Frank. I think couple of things factor in here. One of them is mix. One of the reasons we did better than the IHS forecast was product mix. I think the IHS forecast kind of attributes quite a bit of our mix to commodity materials. And so they don't account for things like double-digit growth in elastomers and how much elastomers mix we've got. And the investments that we've made in both Sadara and in the Gulf Coast to grow that elastomers business. So we're continuing to shift mix as we make those investments. And that helps feedstock advantage health in the quarter because we are able to use flex in the quarter in Europe and that's an advantage to us. So you can see that in the pure comparisons.

And then geographic mix, we're obviously growing share in Asia. We were growing share in Africa. We’re growing share in India, Middle East. So those are all helpful to us. We get synergies. So synergies are going to continue to accrue into next year. Our volume growth and the margin on that volume is offsetting obviously some of the compression that you've got across the rest of the base.

And we're continuing to keep the focus on making sure that we're getting the right nominations out there on the pricing. So I think we ended up probably half the Delta of the IHS what they anticipate that the margin compression was going to be in the third quarter. That might be a good barometer on how you look going forward. I think we’ll tighten up obviously what's happened with ethylene is you've got ethylene and PE kind of out of balance with each other. They’re both running at high rates. They’re in the 90% to 95% operating rates.

So I think what you'll see is a couple of polyethylene units come up as I’ll tighten things up across the board and through the early part of next year, we’ll be kind of short and shallow compression here and then we’ll come out of it.

Neal Sheorey

Thanks Jim and thanks everyone for joining us to DowDuPont. We appreciate your interest in the company. As to your reference, transcript will be posted on DowDuPont’s Investor Relations website later today. I'd also like to remind you that our Investor Day will be held next week on the afternoon of November 7 and also on 8. These events will be on video webcast. And all materials will be made available on the new DowDuPont Investor Relations website. And with that we conclude our call.


And that will conclude today's call. We thank you for your participation.