E. I. du Pont de Nemours & Co. Q2 2008 Earnings Call Transcript

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EI DuPont de Nemours Co. (DD) Q2 FY08 Earnings Call July 22, 2008 9:00 AM ET


Carl J. Lukach - VP of IR

Charles O. Holliday, Jr. - Chairman and CEO

Jeffrey L. Keefer - EVP and CFO

James C. Borel - Group VP


David Begleiter - Deutsche Bank

Sergey Vasnetsov - Lehman Brothers

Kevin McCarthy - Banc of America Securities

Jeffrey Zekauskas - JP Morgan

Mark Connelly - Credit Suisse

Robert Koort - Goldman Sachs

Donald Carson - Merrill Lynch

Michael Judd - Greenwich Consultants

P. J. Juvekar - Citigroup

Steve Schuman - New Vernon Associates

Mark Gulley - Soleil - Gulley & Associates

John Roberts - Buckingham Research


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 Second Quarter 2008 Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. For listening to the webcast, please go to www.dupont.com. Thank you.

It is now my pleasure to turn the floor over to your host, Carl Lukach, Vice President of Investor Relations. Sir, you may begin your conference.

Carl J. Lukach - Vice President of Investor Relations

Thank you, Jackie and good morning everyone. Thank you for joining today's webcast covering DuPont's second quarter 2008 financial results and outlook. We apologize for the 10-minute delay to start this morning due to some technical difficulties on our phone lines. Remind you that a replay of today's call is available afterwards on our website.

So let's get started. With me today are Chad Holliday, Chairman and CEO of DuPont; Jeff Keefer, our Chief Financial Officer; and Jim Borel, Group Vice President of DuPont's Production Agriculture businesses. Since growth in agriculture was a key factor in our second quarter results, and there is lots of news this time of year in production agriculture, we've asked Jim to join the call and share with you his insights on his businesses and their performances in the quarter and outlook.

The first administrative items for those of you accessing this call through our website dupont.com, we will be using slides today.

Please turn to slide 2. 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, 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 also will refer to non-GAAP measures and request that you please refer to the reconciliations to GAAP measures or GAAP statements provided with the earnings news release and on our website. We have also posted on our website supplemental information that we hope is helpful to your understanding of our company's performance.

So with that, I'm pleased to turn the call over to your Chairman and CEO, Chad Holliday.

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

Thank you, Carl. Good morning and thank you for joining us today. DuPont had a solid second quarter with record underlying earnings per share and our second half outlook projects a record underlying earnings year.

Our agricultural businesses were very strong. All of our businesses in emerging markets had another great quarter. Our pricing actions produced the highest quarterly gain in the past four years. And we had excellent fixed cost productivity results from our ongoing projects we described to you in the past.

The combination of these positive factors, plus excellent execution by our teams, was more than enough to offset the weak demand in U.S. markets and the accelerated increases in the price of national gas and petroleum feedstocks that we buy as raw materials.

We also had some help this quarter from currency in a few items we could not project in our guidance, three months ago.

Jeff will cover all the details next, but the bottom line is our earnings per share for the quarter ended up 13% higher than last year. And for the first half we grew earnings per share 18% versus last year.

Five years ago, we could not have delivered these results in this environment. We are a very different company today and I hope you'll see that in our results.

Let me turn it over to Jeff, who will take you through the quarter and the outlook. And I'll come back at the end to share closing thoughts. Jeff?

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

Thanks Chad. Before covering the details of the quarter, let me frame for you how we view the results.

In short, we had a strong performance in the second quarter, with earnings per share up 13% versus last year. The $1.18 earnings per share in the second quarter had about $0.07 of benefits from items we could not predict, when we gave you our guidance. The $0.07 is comprised of a litigation settlement and one-time tax settlement. We had resources working diligently on these items for sometime. And their efforts resulted in successful resolutions in the quarter.

After accounting for those items, our strong performance was a result of better-than-expected Agriculture & Nutrition results, as well as strong performance across all our businesses. We are executing very effectively to meet our commitments in a challenging macro-economic environment.

Turning now to slide 3, which summarizes earnings per share and sales results. Second quarter reported earnings per share grew 13% to $1.18 versus prior year quarter. For the first half, reported earnings per share grew 18%. Second quarter consolidated net sales increased 12%, a positive 7% local price, 5% currency benefit, 1% increase in volume and a negative 1% due to portfolio changes.

Turning to slide 4, all segments increased sales by 8% or better. The standout in the quarter was Agriculture & Nutrition posting 23% sales growth. These results were underpinned by strong global agriculture markets, price gains in crop protection products and seed holding corn share in North America and gaining share in other seed markets.

While Agriculture & Nutrition results were outstanding, all of our businesses turned in solid results reflecting global positions, the first five end markets, brand strength and technology advantages.

Carl and Jim will cover the segments in detail but I want to highlight a few businesses performance. The coatings business grew sales and earnings due to the value of our industry-leading water-based ink technology and the strength of our brands. The TiO2 business grew sales and earnings as the global team relentlessly drew down costs, moved higher raw material costs down the value chain, grew in emerging markets and benefited from customers seeking a reliable supply partner.

The chemicals businesses in Safety & Protection platform benefited from cost productivity, strong placing and value-enhanced offerings, such as environmental solutions.

Electronics businesses in the E&CT platform delivered double-digit top and bottom line growth, reflecting strong demand for Solamet and Tedlar going into the photovoltaics market.

There are headwinds, but this quarter, again, shows the value of the diversified... of the diversity of our product portfolio by end market and geography.

Taking a different cut at our sales results, the global sales distribution on slide 5, shows that 60% of our sales were generated outside the U.S. U.S. sales were up 5% reflecting 9% price and 4% lower volume. The U.S. volume decline reflects lower volumes in all segments, except Ag & Nutrition.

To add further color to our U.S. volumes, we estimate that about two-thirds of the U.S. volume decline was associated with the auto and housing markets. The remaining decline in the quarter can be attributed to other situation, such as being supply limited due to an extended plant outage at our ethylene facility, due to a scheduled major maintenance shutdown.

Our earnings outlook, which we will discuss in a few minutes, anticipates weak demand from North America auto and housing markets continues into second half of 2008.

Sales in emerging markets continued strong and overall grew 23%. Sales in Latin America grew 19%, emerging Asia grew 23% and emerging Europe grew 27%.

Our growth in Latin America continues to be broad based, as all segments delivered solid growth in the quarter. Looking forward, our third quarter outlook for Latin America is favorable, as we start this summer agriculture season, which Jim will cover in a minute.

We also anticipate continued growth across all other businesses. China sales grew 22% in the quarter. All segments posted solid results, and our outlook does not show slowing.

Emerging Europe continued strong and the growth is broad based. We had double-digit growth in Poland, Russia and Turkey. Our emerging market teams led by Ellen Kullman are organized and executing well.

Moving now to earnings and the EPS variance analysis on slide 6. You can see clearly that the largest variance for the quarter was our variable costs followed by price. We achieved our 18th consecutive quarter of local price increases, which boosted earnings per share of $0.42 over last year, but not enough to cover the $0.51 impact from higher variable costs. This was the largest quarterly gain from our pricing actions in the past four years as well as the largest quarterly increase in ingredient costs.

All segments achieved local price improvements. Our teams have been doing a great job working with our customers; therefore [ph] the price changes quickly. And with the experience we've gained in adapting to the economic environment during the first half, we'll be even more vigilant on pricing action in the second half.

The variable cost increase this quarter, adjusted for volume and currency, was $0.51 of our earnings per share. Let me elaborate just a bit.

Raw material, energy and transportation costs increased about $550 million or about 15% in the quarter, which compares to 9% in the first quarter versus about 5% increase in all of 2007. The raw material increases are the result of a historic high oil and gas prices that also reflect agricultural commodity cost increases as well as tight supply for chemicals, such as sulfur, ammonia, caustic soda, coke, ore and methanol, just to name a few.

In addition, variable costs and margins this quarter also included a $52 million pre-tax charge on open soybean contracts. Let me give you some background on this. We do utilize financial contracts to help manage the commodity price risks on our purchases. We have been using financial contracts for over 10 years and usually these gains or losses are fairly small in any given quarter.

In the second quarter, we took a mark-to-market charge on open soybean contracts due to the recent run-up in soybean commodities prices. Looking forward, we have put in place financial instruments to minimize the negative earnings volatility. In our full year earnings guidance, we are assuming that our variable costs, excluding volume and currency impacts, will continue to increase at about the rate we occurred in the second quarter. Meaning, we are anticipating full year variable cost increases of about $2 billion pre-tax.

Our base tax rate in the quarter was 22.7% versus 24.6% prior year quarter, generating a $0.03 earnings per share benefit as shown in the waterfall. The lower base tax rate primarily reflects one-time tax benefits and to a lesser extent, favorable geographic mix of earnings. We expect the full year base tax rate to be about 25%, creating about an $0.08 per share of headwind in the second half versus last year.

Closing up the EPS variance analysis, the increase in fixed cost was $0.04 in the quarter, excluding the impacts of currency and volume. This equates to about a $50 million pre-tax increase on a $ 3 billion base of fixed cost in the quarter. Fixed cost, as a percentage sales, improved by 200 basis points to 36.6%.

Our productivity programs, again, delivered savings that largely offset inflation and growth investment. We are on track to deliver $400 million of productivity programs in 2008, as one component of our commitment to deliver $1.7 billion in fixed and variable savings between 2008 and 2010.

Moving to cash and debt, our strong sales performance increased accounts receivable levels, versus prior year resulting in higher net working capital at quarter end. Our capital spending is on track to be about $2 billion in 2008. This plan includes growth investments in a higher margin, higher return businesses. In general, our cash performance is following typical seasonal patterns.

Turning to slide 7, we are raising the lower end and are narrowing our full year earnings per share guidance, to a range of $3.45 to $3.55, or 5% to 8% growth in 2008. Having earned $2.49 per share in the first half, this equates with the second half guidance range of $0.96 to $1.06 per share, compared to $1.16 per share in last year's second half.

After adjusting for the absence of asset sales in last year's second half of $0.04 and about $0.08... an $0.08 headwind from the higher tax rate, we expect second half segment pre-tax operating income will be about equal to last year. This assumes slightly lower volumes, higher ingredient costs and continued pricing of productivity gains. We also expect the split between third and fourth quarter EPS to be about equal.

The assumptions embedded in our guidance are firmly rooted in the new realty of our challenging environment, slightly lower volumes and higher raw material costs. They are also rooted on our proven capability to achieve continued pricing and productivity gains.

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

James C. Borel - Group Vice President

Thanks Jeff. Let's move to our Ag & Nutrition platform on slide 8. They reflect on where we are as a company and in this platform, it underscores how uniquely positioned we are to combine seed, breeding and trait technologies, quality inputs and sound farming practices to increase both the quantity and quality of food supply globally and really make a difference for economies around the world. And that we can deliver strong results along the way.

We had a strong quarter. Our revenue for the platform increased $467 million, up 23% to $2.5 billion. The growth was across all units, with corn seed sales up 16%, soybean seed sales up 26%, crop protection sales up 21% and our nutrition and health sales up 34%.

We now expect that for the full year 2008, Pioneer seed sales will exceed $4 billion, compared to $3.3 billion last year, and our platform sales will exceed $8 billion, compared to $6.8 billion last year. Both will be sales records.

Earnings for the platform grew 18% to $504 million. This reflects strong sales growth across all products and regions, including both price and volume gains, partially offset by our ongoing seed investments in R&D and sales and marketing as well as significantly higher commodity prices.

Marketplace fundamentals for growth are outstanding. Growers are investing more in technology to protect their crops and maximize yields.

For the first half, we delivered 20% revenue and 20% earnings growth, well ahead of the 15% per year commitment that Tom outlined in March. And I'm pleased to say, we now expect to deliver 20% PTOI growth for the full year 2008.

I'm really proud of our team and the results they delivered. Let me share some of the details.

Crop protection delivered another impressive quarter and closed out the first half with record sales. High commodity prices supported demand globally, and our growth was led by strong demand for fungicides in Europe, insecticide volumes globally and favorable currency exchange rates.

Earnings were up substantially with pricing gains, volume growth and solid fixed cost productivity gains, all driving increased margins in pre-tax earnings.

First half sulfonylurea herbicides sales were just over $600 million, that's up 17% from last year, with more than half of the sales in new blends.

Turning to slide 9, Carl told you last quarter that Rynaxpyr sales were off to a strong start in 2008. That momentum has continued and we now expect to end the year at more than twice our original plan.

Today, I'm also pleased to announce three key increases in our outlook for Rynaxpyr beyond this year. First, we're doubling our sales outlook next year to $100 million. Second, we are increasing our peak revenue outlook by about $100 million to $300 million. And third, we expect to hit that peak revenue target by 2011, which is a year earlier than previously communicated.

We were also pleased to learn recently that Rynaxpyr has been named one of the winners of the R&D 100 Award by R&D Magazine, which is an award given to the top 100 new technology products for 2008 across industries. So clearly this is a very exciting product.

Moving to our seed business, 2008 is the pivotal year for our Pioneer team with record sales in the quarter of $1.4 billion, up 21% from last year, driven by both volume and pricing.

In North America, we held market share in corn. It was a key milestone that we committed to you over two years ago. And we grew soybean share about a percentage point to 24%.

Overall, our seed earnings for the quarter were down modestly with our growth investments in higher commodity costs offsetting the earnings benefit of our revenue growth. However, to help make sure that you have the right perspective on the underlying business, without the $52 million mark-to-market charge that Jeff mentioned earlier, pre-tax operating income would have been up double digits, including our growth investments for the future.

Let me give you some more context behind our results. Even with the shift of acres from corn to beans in North America, we achieved record seed revenue with strong market share and double-digit pricing increases for corn. Our biotech trait mix grew as we expected and helped drive the nap [ph] seed price increases.

We hit all of our goals. Total trait sales in corn were about 90%. Soybean acreage and volumes were up as was price. Margin percentages were a bit lower primarily reflecting the significant and rapid run-up in commodity prices. The key takeaway though is that we hit all of our business goals.

Turning to slide 10. Earlier this month, we announced with the Y series soybean launch that we will deliver a step-change improvement in soybean yields and unprecedented volumes for the 2009 growing season.

The entire line is demonstrated a 5% yield advantage against key competitive varieties, with some of the Y series varieties yielding 6% to 10% better yields than competitors. And what's really exciting is the increased value, these products will deliver to our customers, could be realized on up to 9 million acres next year.

This is the largest product launch in the 82-year history of Pioneer. With the Y series yield advantage, the projected volume and the potential acreage impact to these products will likely add about 90 million bushels of soybeans to U.S. production next year.

We've been saying for sometime that we have the science to help address the incredible demand for agricultural commodities. No one else in the industry is bringing this kind of soybean yield improvement to the number of acres that Pioneer will, this coming year.

We fully expect the yield advantage and the large volumes of Y series soybeans will extend our industry-leading soybean position and further expand the Pioneer share in North America soybean acres in 2009.

These top-performing new varieties were developed with our exclusive, accelerated yield technology. And they'll serve as a strong platform for the Optimum GAT trait. This brings me to another exciting soy announcement we made last week with the USDA regulatory approval of our Optimum GAT trait in soybeans. This milestone brings an innovative technology and another step close to the farmer skills.

The Optimum GAT trait combined with our industry-leading genetics and other and other complementary technologies, will help soybean farmers maximize yields, give them a new level of weed control flexibility. In parallel with the Optimum GAT trait for soy, we have four new exciting herbicide blend products under development: Freestyle, Traverse, Instigate and Diligent, designed to complement our Optimum GAT seed offering to deliver even higher value to the grower.

I've just got back from spending time with Paul Schickler, the President of Pioneer, and his North America sales team and I can tell you, they are fired up about the new line of for '09 based on having ample supply of leading technology, high-yielding seed that farmers want.

By the way, some of you may be wondering whether the flooding this spring will impact our seed supply for next year. Actually our production acres were largely unaffected. In addition, we had already ramped up our production acres to ensure we had full supply for '09. So we're in good shape for seed supply for 2009.

Outside North America, we continue to extend our leadership position in our growing profitable business. In the quarter, seed sales grew 23% and we closed out the first half up 38%. Our key driver was our corn market share gain in Europe, with new share in competitive high value markets.

We were up 2 to 3 points in Italy, 2 to 3 points in Hungary, 1 point in France and we also captured strong pricing gains in Europe. For the remainder 2008, we expect to see strong demand for our corn soybean products in the Southern Hemisphere, continued strong oil seed performance in Europe as well as a strong start to the '09 early season sales in North America, Europe and China.

So for the platform outlook, for the remainder of this year, we expect double-digit top-line growth at attractive gross margins. At the same time, we'll continue our growth investment plans in R&D and sales in the second half to further strengthen our capabilities.

We also will not have the $25 million gain that we disclosed to you in the third quarter last year, from a contract termination payment. Bottom line then, is we expect pre-tax operating income in the second half to be about, April to last year, which as I shared earlier, will bring full year pre-tax operating income growth for the platform to at least 20%, with all businesses expected to deliver double-digit revenue and earnings growth.

I want to repeat, what I said at the outset. We're uniquely positioned to combine high performing seed, breeding and trait technologies, quality inputs and sound farming practices to increase both the quantity and quality of the food supply and to make a real difference for economies around the world.

Look forward to sharing more good news with you at the Farm Progress Show in August. We're planning 0.5 billion [ph] event for investors, the afternoon at Tuesday, August 26 at our Johnston, Iowa offices, which are closed to the show. So please look for further details from Carl and the IR team. I look forward to seeing you there. Carl?

Carl J. Lukach - Vice President of Investor Relations

Okay, thank you, Jim. I'll now cover our remaining businesses and then turn things back to Chad.

Moving now to slide 11, Coatings & Color Technologies segment sales increased 10% and earnings increased 9%. Platform margins were essentially flat with last year, through good cost control, pricing gains, favorable currency and successful sales efforts.

Titanium dioxide sales were up modestly, on flat global volumes and improved U.S. dollar price. Volumes in North America were weak for architectural paint, but importantly, we achieved a third quarter of sequential price increase, as well as achieved a price increase versus the prior year quarter.

Sales grew outside of North America driven by strong demand, particularly in Latin America and higher U.S. dollar prices. Due to these actions and aggressive cost controls, earnings grew modestly, despite the weak domestic markets and higher raw material and transportation costs.

Our Performance Coatings businesses delivered moderate sales growth and significant earnings growth. The results reflected diversity of our coatings franchise and our ability to execute in these market conditions.

Our industry leading refinished paint growth with industrial paint growth, coupled with OEM paint businesses' tight control on costs, more than offset the pressure created by the weak auto market in the United States.

Looking ahead for Coatings & Color technologies, we expect modest second half sales and earnings growth based on the favorable impact of pricing actions, continued growth in emerging markets and cost control efforts, mitigating continued weakness in North American markets.

From a product perspective, our TiO2 business is operating at high utilization rates, as end users seek a reliable supply source. We expect coatings growth will be tampered by continued weak OEM markets.

Please turn to slide 12, for Electronic & Communication Technologies. Sales grew 10% to $1.1 billion on higher prices and continued market strength. Earnings were $170 million in the quarter, compared to $176 million last year. 2007 PTOI included a one-time $25 million pre-tax inventory valuation benefit that we discussed with you in that quarter. Excluding this item, PTOI increased 13%, reflecting strong sales and good cost discipline.

Photovoltaic markets were especially strong along with continued demand in Asia for electronic components, partially offset by weakness in U.S. automotive electronics.

For the second half, we expect moderate sales growth, with continued strength in photovoltaics, printed packaging and refrigeration, coupled with seasonally strong demand in the second half for electronics, but tampered by a potential slowdown in consumer discretionary spending. We expect earnings growth to be moderate, excluding $28 million from our landfill in the fourth quarter of 2007.

Please turn to slide 13, for Performance Materials. Sales grew 8% to $1.8 billion on stronger price, currency benefits and growth in Asia. Earnings declined 2% to $223 million. This platform faced some of the largest increases in raw material costs in the company this quarter and was able to offset them with pricing gains and benefits from currency.

Volume declined 5% reflecting scheduled production outages and some softening in developed markets. The earnings declined reflects lower volume and currency-related fixed cost inflation. Given the recent dramatic run-up in raw material costs, we are pleased with this business unit's solid performance in a much tougher environment.

For the second half, our expectation is for continued significant increases in ingredient and energy costs, and continued softening in developed markets. We're responding to these conditions. Sales are expected to increase modestly, driven by pricing actions. Earnings would be flat to down slightly on the lower volumes and a weaker regional sales mix.

Turning to slide 14, and looking at our Safety & Protection segment. Sales increased to $1.6 billion, up 8%. Our pricing actions, particularly in chemicals, along with volume growth in emerging markets, more than offset the moderate volume declines in North America.

Earnings were $302 million, down 5% from the prior year quarter, and PTOI margin was 19.1% lower than last year. The segment earnings and margin decline reflect a change in business mix versus last year. Significant earnings growth in the chemicals business was more than offset by the housing impact on volumes, less favorable product mix in Nomex, Kevlar, higher raw material costs and growth investments.

All businesses posted sales increases in the quarter with the exception of surfaces product lines. From a regional perspective, the businesses delivered higher local prices and double-digit volume growth in Latin America and Asia.

North American volumes were down. The outlook for second half anticipates moderate sales growth and moderate earnings growth. The half will benefit from 25% Nomex capacity expansion coming online in the later part of the third quarter, contract awards in Nomex and Kevlar, continued mix enrichment in our chemicals business as well as pricing actions associated with the recent raw material increases.

Earnings will be tampered, however, by continued negative comps in the housing market, higher raw materials and Kevlar expansion-related growth investments.

Turning now to our Applied BioSciences technology platform on slide 15, I'd like to provide a brief update on some key milestones and our efforts to address the pressing needs for products and technologies from renewal resources.

First, our biofuels programs. DuPont has two major initiatives: one in cellulosic ethanol and one in biobutanol. Two months ago, we announced the joint-venture with Danisco/Genencor to develop and commercialize an integrated cellulosic ethanol technology package. At that time we said the first pilot plant would be operational in 2009, a larger scale facility to produce commercial volumes by 2012. We are now in the final stages of sighting our U.S. pilot plant for this venture.

As for biobutanol, our technology development is progressing very well. And we have surpassed the incumbent ABE process in terms of conversion efficiency, the combination of great, tighter and yield. This is a major milestone for us on the way toward attractive process economics and a more efficient and sustainable process.

Second, in the area of biomaterials, we are nearing completion of expansion plans for Sorona Polymer for Asia and the U.S. and are on schedule for initial Sorona commercial capacity this year.

Additionally, our Sorona product continues to gain momentum in a variety of applications, for example, with major apparel brands and retailers.

Finally, in the area of biospecialties, our Omega-3 project has moved into the pilot plant phase, and we remain committed to the timeline where we begin to realize revenue starting late next year. This will be the first time that Omega-3s have been commercially produced from an organism using the tools of applied biosciences. And we're pleased that the manufacturing process is meeting the initial commercialization targets that we set out.

Recognize this is a small business opportunity for us, but a major proof point in demonstrating more sustainable, highly differentiated offerings from renewable resources.

Now that completes our segment review. I'll now turn things back to Chad.

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

Thank you, Carl. To conclude our presentation today, I'd like to put our company's current performance and future growth in the context of four major changes we're seeing today.

Please turn to slide 16. Specifically there are three industries that over time and with adjustments will recover and revert to the norm. More importantly, we see one that won't. We think of this is the new reality ahead and due to change as a catalyst for growth for our company that we've been planning for.

First, the U.S. housing market. While currently in a depressed condition, it will correct over time. We don't see the volume of new residential homes getting back to the 2005 peak of 2.1 million new homes anytime soon. But what's important to DuPont, however, is that new homes will be much more energy efficient and will focus more on protection for family.

We think the demand for energy saving material and solutions for the construction industry is going to rise dramatically. And therefore the value of future market for DuPont is greater than today. This is the perfect position for DuPont and a suite of new existing products we are introducing for this market.

Let me give you two examples. First, DuPont StormRoom, the only in-home shelter reinforced with DuPont Kevlar to protect people in a tornado. Our new Evergreen systems for the interior walls and ceilings of homes and building to store heat during the in the day and release at night to reduce energy use.

Our expanding offering of Barrier products such as the Steel X system with DuPont Tyvek Tekgraf [ph] and increasing the installed or valuable wall system with DuPont Tyvek ThermaWrap and DuPont Tyvek Silver and future products to improve the lifetime and efficiency of photovoltaic module, both crystal and silicon modules and amorphous silicon thin film products. We see a terrific opportunity to have all of these products to become a integral part of new homes and also for remodeling existing homes.

Let me go to the second industry, the U.S. auto industry. While volumes are down in North America and there are very real impacts of this throughout the value chain in auto industry, we'll stabilize and start to grow. However, new vehicles will be smaller and much more energy efficient. At the same time people will place more value on a safe vehicle. We are adjusting our capacity for current materials in this new reality, but more importantly, we're rapidly expanding our products to meet the new needs of this market. Our new Kevlar plants, which will increase our capacity by about 25%, will start production in 2010, and we'll bring new Kevlar applications to automakers.

In the past six months, we've announced expansion of several lighter weight polymers, which will bring additional material options. Sorona, our new bio-based polymer is being designed into multiple vehicles for the 2009 and 2011 launch years.

Internally, we've converted 22% of our DuPont U.S. vehicles to hybrids on our way to 100% of the very best technology commercially available.

The third area, the banking system, the current dislocations are underway. And we at DuPont are not feeling this rate impact in terms of our ability to raise funds or our ability for our customers to pay us. We believe the banking systems will recover and banks will play even greater value on doing business with companies that have a strong balance sheet and good cash discipline, like DuPont.

We'll continue to use the period of higher credit as a time to perhaps on opportunity for acquisitions or otherwise opportunities that might not be available because of the environment.

Now, finally, let me turn to the one trend which will not turn to the norm and that everything that comes from the earth. For those resources that we did out from, or grow in Europe, we have reached a new norm, and will not revert to the past in terms of price and availability. Of course, there will be short term swings in price and they'll be hard to predict. But over time we see higher price natural resources are here to stay reflecting increased global demand from these resources. This is another area where we have been focused for over five years with commercial payoffs.

Jim Borel described our suite of new agricultural products and we'll make a step-change improvement in agricultural productivity. Our cellulose, ethanol and biobutanol offer great promise and we're partnered for speed with Danisco and BP respectively.

I described earlier our photovoltaic and what a difference it's gong to make in overall energy security.

In 2006, we announced... our 2015 goals that included doubling revenue from non-renewable resources to at least $8 billion and doubling our R&D investment to produce new products that will reduce [indiscernible]. I'm glad, we started both of those programs two years ago.

So what do these really mean for you to invest in DuPont? Turning to slide 17, our 2010 accelerated growth plan to achieve higher revenue and earnings growth rate is on track. We are not allowing the current conditions to offset our plans for at least $1.7 billion in additional cost productivity improvement, a major increase in growth rate of our Agriculture & Nutrition platform and a significant step up in revenue growth from emerging markets in our Safety & Protection platform.

Our base programs are priced for value and reprogramming R&D have been in place since 2003 and they're building momentum every month.

We now measure not just results from decisions our readers make but the speed to implementation and delivery of those results. This paid off for us in the second quarter as you can see.

We're even better positioned with the right suite of products to grow and return value in the next five years. We will continue to deliver performance that cannot be ignored.

In closing, I'd like to reiterate what Jeff said about the outlets in the second half. Slide 18, we are reducing the lower end of our guidance to a narrowed range of $3.45 to $3.55 for the full year. This equates to 5% to 8% earnings growth in a much tougher economic environment. The exact pace of play for the economy and input costs are still highly dynamic and this raised guidance is a prudent step during this period. Carl, back to you.

Carl J. Lukach - Vice President of Investor Relations

Okay. Thanks, Chad. Jackie, in light of the delayed start, I think we better go right to question, question-and-answer session now.

Question And Answer


Thank you. [Operator Instructions]. Your first question is from David Begleiter of Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank

Thank you. Good morning. Jim, now that we're through the '08 season, what are your expectations for corn seed share and soybean share in March in '09?

James C. Borel - Group Vice President

Thanks Dave. We expect share to increase on corn in the... in North America we think we've hit the inflection point, and we feel great about the line-up. So we expect it to start increasing. And as I mentioned earlier, we increased soybean share this year, and with what we're going to do with the Y series, next year we expect share to grow up again.

David Begleiter - Deutsche Bank

Any numbers on corn seed share next year, 1%, 2%?

James C. Borel - Group Vice President

Up. I am not going to say a percentage, but we expect to gain.


Thank you. Your next question is from Sergey Vasnetsov of Lehman Brothers. Please go ahead.

Sergey Vasnetsov - Lehman Brothers

Good morning. How do you see a flow-through of energy cost accrued on natural gas, for you given typically DuPont has a little bit of a delay, what it used to have historically?

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

Sergey, thanks, this is Jeff. If you look at the first half, we have covered our raw material and energy cost increase with pricing. And so we really got out in front of the curve there on our pricing and standing us in good stead. And as I said earlier, we are going to be very vigilant on pricing as we go forward to make sure we are keeping up with the raw material flow through.

Sergey Vasnetsov - Lehman Brothers

Okay. Thanks --

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

And Sergey, I would add to that, what Jeff said early in the call that we expect about 15%. Again inflation in cost is our best guess in the third quarter.

Sergey Vasnetsov - Lehman Brothers

Okay. Thanks.


Thank you. Your next question is from Kevin McCarthy with Banc of America. Please go ahead.

Kevin McCarthy - Banc of America Securities

Yes, good morning. Chad, the chemical industry has seen two large multibillion deals so far this month. You mentioned in your prepared markets that the credit market dislocations may provide some opportunity. So I wondered if you could comment on the activity industry wide and elaborate on DuPont's latest thoughts with regard to external growth over the next year or so.

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

Thanks for the question. As we outlined in March, we believe these... both of acquisitions particularly in Agriculture & Nutrition, Safety & Protection and other selected places across the company, including in these fast growing markets of China and India, developed parts of the world that we think are going to be very much available to us. And as this year plays out. And given our cash good position, we are looking for those that are on target with our goals. If you look at our 2010 forecast, what we're trying to accomplish, we'll be looking for acquisitions related to that. We have been more of a net divesture over the last years as we clean up our both portfolio and focus on higher growth businesses.

So now we think the right time is to adjust for that, but again we are not talking about some big massive acquisition. We think that will be very disruptive to delivery with the consistence earnings pattern we show.

Kevin McCarthy - Banc of America Securities

Thanks very much.


Thank you. Your next question is from Jeff Zekauskas with JP Morgan. Please go ahead.

Jeffrey Zekauskas - JP Morgan

Hi, good morning. All things being equal, energy prices are probably higher than you expected for the second half. And auto and housing demand is probably lower, but you raised your guidance. So in general, in the second half, what do you expect to be much better that's offsetting those weaknesses?

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

Jeff, we continue to expect strong emerging market growth, continued pricing gains. And we will continue our productivity efforts, those that stood us in good stead. And we are going to continue those in the second half.

Jeffrey Zekauskas - JP Morgan

Okay. And for my follow up, how many triples domestic, triple stack acres in corn did you achieve? And what's the size of the rollout in Optimum GAT in soy in 2011 and why is that late?

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

On the triples we were about 30% this year as we said. And we expect that to be no issues going forward. I am sorry; your other question was on Optimum GAT and soy? And that... we just got the USDA approval. If I go back to the Y series launch, first thing is we've got great technology in that product line already. But we're going to bring out the Y series. And we intend to bring Optimum GAT and integrate it into that line so that we've got the best yielding, best performing varieties going forward from where we are. We're timing that to make sure that we continue to have leading soybean position overall.


Thank you. Your next question is from Mark Connelly of Credit Suisse. Please go ahead

Mark Connelly - Credit Suisse

Thank you. Just one big picture question. When you talked about the reversion to the mean in some of your core businesses like housing and auto, how does that play out in practical terms with the management incentive changes that you've made recently to try to accelerate growth in earnings? I'm just curious if we do experience a couple of years of subdued growth how do you manage to embed incentive program through that period of this long [ph]?

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

Hey Mark, it's Chad. Great question. One of the things in the changes that we described for you back in March that we implemented for this year, something we call dynamic planning factor. We think that's probably unique to run other businesses, so we can uniquely incent people based on changing economic conditions.

So if we do see a change, we don't follow people to either to get a windfall or necessarily lose our hope because there's no way to do it. We have that adjustment. We think we've got that balance across our units where it's very much in line with the shareholding out, because our performance stock shares are how we compare to our new frame of reference companies on top of shareholder returns. So we believe we have a management incentive better to perform for the shareholders than I have ever seen in the company.


Thank you. Your next question is from Bob Koort with Goldman Sachs. Please go ahead.

Robert Koort - Goldman Sachs

Thanks very much. Jeff, I was wondering given the $2 reversal in soybeans, will there be a favorable mark-to-market in the third quarter and then for June? You mentioned the Y series has some pretty nice yield improvement. Can you talk generally about what your pricing strategy is in the seed business going into '09 given the escalation in commodity prices over the last couple of years?

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

Bob, this is Jeff on your question on the hedge. We have put into place instruments to impact the negative volatility. I don't know what as we look forward exactly with that hedge is going to do but that's what we've done.

Carl J. Lukach - Vice President of Investor Relations

Bob on pricing, couple of key things: first of all, we're bringing a lot of technology to the market. And this is a market where farmers are really looking to protect and maximize yield and they're willing to pay for that. We price per value. So we're expecting pricing to go up on the product line to reflect that value that we're going to be delivering. In general, we could anticipate important price increases. We're price leader in soybeans and in corn, I'd anticipate double-digit prices again in '09 based on where we are.


Thank you. Your next question is from Don Carson with Merrill Lynch. Please go ahead.

Donald Carson - Merrill Lynch

Yes. Jim, a question on Optimum GAT, you just got your approval for soybeans. You're going to have relatively margin reductions over the next few years. But my question is on Optimum GAT and corn, and do you feel more confident about regulatory approval now that's got in soybeans? And more importantly, is that going to be in elite germplasm from your initial launch in 2010 and maybe you could just describe what skill that launch will be on?

James C. Borel - Group Vice President

Sure, Don. We are on track for commercial introduction in 2010. We'll ramp up aggressively beyond that, and as we've said before, we expect to be largely converted by 2015. And the intent here is to bring Optimum GAT into corn with our... as we bring out new leading hybrids. And so, I can't size the acres for 2010 exactly, but it'll be a commercial introduction and leading hybrids there and it'll be ramped up aggressively over the next several years beyond that.

Donald Carson - Merrill Lynch

And just as follow up on Optimum GAT, you described some of the new SU mix as you'll have for Optimum GAT beans. I know you've recently signed an agreement with Syngenta to get access the two active ingredients for corn. What benefit do you see to the SU franchise from a) these new mixtures and b) introduction of Optimum GAT in both corn and soy?

James C. Borel - Group Vice President

This is a real opportunity, Don because first of all, there are weed shifts and other things, Mother Nature at work and Optimum GAT gives us the ability to put a range of sulfonylurea herbicide products in combination with other things that may be useful for the farmers. So we can really make sure we're getting the right products on the right acre. So it just opens up an important opportunity for us to make sure we're giving the farmer what they need when they need it.


Thank you. Your next question is from Mike Judd with Greenwich Consultants. Please go ahead. Mr. Judd, your line is live. Please proceed, with your question.

Michael Judd - Greenwich Consultants

Yes, thanks for the opportunity. I just had a question about the mark-to-market loss you said that you're pretty much hedged for the rest of the year. Could you just talk... provide a little bit more detail on that please?

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

Well,again, we've used in our seed business for many, many years hedging tools. They are primarily used to help us manage the price risk on the commodities we purchase. Normally the gains and losses on those are small but with the run up in the soybeans we had the negative $50 million that you saw. Going forward, to minimize that volatility we have put into place instruments that will minimize that negative earnings volatility.

Michael Judd - Greenwich Consultants

Just to follow up to that, it appears that corn and soybean seed, probably have come down fairly sharply in the last couple of weeks or so. Could there be a potential benefits or just too early to tell?

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

It's too early to tell. I can't speculate on that.


Thank you. Your next question is from P. J. Juvekar with Citi. Please go ahead.

P. J. Juvekar - Citigroup

Yes. Hi good morning. Question for Jeff. The cash conversion of earnings lagged a little bit, cash flow from operations was negative in the first half. Can you just talk about that and did you finance any purchases for the farmers?

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

So, let me take your first question. P.J., yes cash flow from operations was negative, that's primarily due to the increase in working capital, which was primarily accounts receivable. You've seen the large increase in our sales and the success we had on pricing. Obviously the currency is a positive there too. So I can assure you that our day sales outstanding and our inventory days supply are under control in line with where we would expect them to be. And as we make those collections, we're seeing no high here in terms of account receivable, because we do not collect the... the ag collections until the end of the year. So we expect to be on target for our cash for the year

P. J. Juvekar - Citigroup

Okay. And just to follow up on bioplatform. What is your latest timeline on EPS impact from your bioplatform, your biofuels and biomaterials? Thank you.

Carl J. Lukach - Vice President of Investor Relations

Well I guess the first one P.J. that we mentioned today was late next year, the Omega-3 program. We expect to bring revenues to the income statement late next year. All of the other timelines that we outlined for you at the November bioday here remain the same on track. Significant income statement impact out about after 2010, out about 2012. That's for the fuels program and the materials program. Materials program, though as you know, is commercial today, with Sorona and it's in the capacity increase phase

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

P.J.it's Chad. Let me just add. As I've said in my comments, this partner with Danisco around the cellulosic ethanol is the speed about to get to market. I have no question we have the best team. We've got the right pieces of technology. We are moving very rapidly towards the top power plant to work. So, we see nothing in the environment except great demand for the cellulosic technology flow-through from government... and for consumer way. And our work with BP on biobutanol, I just could not be more pleased with the progress we are making.

So we are not in a position to update the numbers we gave you in March. But we are seeing everything is kind of fallen into place like we hoped in the market demand. I just can't imagine being best.


Thank you. Your next question is from Steve Schuman with New Vernon Associates. Please go ahead.

Steve Schuman - New Vernon Associates

Good morning. You have mentioned that you're more of on a divestiture mode. When do you think the right time is to divest some of your ethylene cracker assets and related businesses?

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

Steve, I am sorry, if we said we are in a divesture mode that was a misstatement. That is not where we are. We are on a acquisition mode. And we have no currently planned divestitures. Unlike this portfolio we had a chance when we divested our fibers business, if there is anything that we didn't see was good long term, I was drawing in that to give me the coke [ph]. So we are very happy with the portfolio. We will always be making small ups and downs. And if we are not doing that every year, we'll be not doing right thing to shareholders but if we like, dismiss the businesses.

Carl J. Lukach - Vice President of Investor Relations

Steve, I would add to that, if you look back at the March 14, Investor Day we had in New York we had a specific slide on key areas of interest that we might, we hope to find some opportunities for in the acquisition area.

Steve Schuman - New Vernon Associates

Great thank you.


Thank you. Your next question is from Mark Gulley with Gulley. Please go ahead.

Mark Gulley - Soleil - Gulley & Associates

Just a couple of questions. First of all Chad, with respect to biobutanol in Europe, recently there has been some pushback in Europe for perspective of the economics of that period. Do you see that affecting your joint venture with BP?

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

I've been in Europe in the last three weeks and met with a series of government officials for multiple countries. I think we have a very good fix on that situation. There's a lot of politics around this, a lot of stuff in press, but the government officials I've met with clearly see the values and particularly like the biobutanol piece. And my guess is there will be a lot of press back and forth until we have commercial products but we still remain quite encouraging.

Mark Gulley - Soleil - Gulley & Associates

There's a follow up with your pricing actions across the board, I would imagine you're probably doing more walking away from business. Is the weak volume growth that this 1% reflects the price increase well in this to walk away from low margin business? And if so, do you see that continuing?

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

That market is not the primary driver. We're a value news price. So we're continuing to do that. That's primarily how we're getting our pricing up. I think the only place that's occurring is a little bit in our performance materials platform. But I would caution you that, that volume decline you saw in performance materials is more related to you for this quarter... is more related to the ethylene plant shutdown which was a planned scheduled maintenance shutdown.


Thank you. Your next question is from John Roberts with Buckingham Research. Please go ahead.

John Roberts - Buckingham Research

Good morning, guys.

Carl J. Lukach - Vice President of Investor Relations

Good morning, John.

John Roberts - Buckingham Research

I thought the majority of the cellulosic ethanol income was going to come mainly through royalties and maybe small minority interest in projects. So do you think we need to have profitability improved materially in the existing biofuels industry for those companies who want either life insured technology or take even a small partner?

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

John, if you've seen, there's been a lot of press particularly in the last 90 days, kind of anti-ethanol via corn grain. We think that's probably been over done. But remember ethanol is the commodity. And so what we're shooting for is a lower cost position, absolute they can be achieved by the grain, that's what we only described for you previously.

Did we avoid that food versus fuel debate and we focus on a lower cost position, that's our goal. We haven't seen anything to think that we can't get to that goal today. Of course we've described before a very logical step where we'd take any of the grain ethanol of plants that are out there today and convert with cellulosic feedstock. So we think it's a win-win-win position and we're getting a lot of encouragement from multiple governments including the United States.

John Roberts - Buckingham Research

Where do you think the capital for that investment will come from? Because if I remember right I don't think DuPont was going to put a lot of its own capital into this growth.

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

Well... if we've been successful as we could be and I'm not predicting that today. We'll go into these steps of rapid phase up a bit it just would not smart for anyone caught me to do it on capital and just our capacity to handle that. So we must be operators of some plants because we got to keep reflecting the technology and bringing out. But I think our step would be to license the technology as we described before exact details of how to do that. We're premature to get into it but we are not looking for the gigantic cash hole here from DuPont. We've got different rate multiple years to get cash back.


Thank you.

Carl J. Lukach - Vice President of Investor Relations

Jackie, I think we have to leave. We've run out of time, and we greatly apologize to all for running over because of the delayed starts and technical difficulties. IR team is available for all of you to take care... take follow up questions and we will get a reminder notice out to you shortly about the investor event coming up at the end of August. Thank you very much for your interest in DuPont. That concludes our call today.


Thank you. This concludes today's DuPont conference call. You may now disconnect your lines and have a wonderful day.

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