E I du Pont de Nemours and Co - Ellen Kullman to Retire as Chair and CEO Conference Call

Oct 05, 2015 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

DD - E I du Pont de Nemours and Co
E I du Pont de Nemours and Co - Ellen Kullman to Retire as Chair and CEO Conference Call
Oct 05, 2015 / 09:00PM GMT 

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Corporate Participants
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   *  Greg Friedman
      E.I. du Pont de Nemours and Company - VP of IR
   *  Ellen Kullman
      E.I. du Pont de Nemours and Company - Chairman & CEO
   *  Ed Breen
      E.I. du Pont de Nemours and Company - Director
   *  Nick Fanandakis
      E.I. du Pont de Nemours and Company - EVP & CFO
   *  Jim Borel
      E.I. du Pont de Nemours and Company - EVP

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Conference Call Participants
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   *  Don Carson
      Susquehanna Financial Group - Analyst
   *  Rory Blake
      Wells Fargo Securities - Analyst
   *  John Roberts
      UBS - Analyst
   *  Silke Kueck
      JPMorgan - Analyst
   *  Jermaine Brown
      Deutsche Bank - Analyst

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Presentation
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Operator   [1]
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 Welcome to the DuPont investor conference call. My name is Vanessa and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. And I will now turn the call over to Mr. Greg Friedman, Vice President of Investor Relations. Sir, you may begin.

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 Greg Friedman,  E.I. du Pont de Nemours and Company - VP of IR   [2]
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 Thank you, Vanessa. Good afternoon, everyone and thank you for joining this call on such short notice. On today's call, Ellen Kullman and Ed Breen will make brief remarks and then Nick Fanandakis will provide the Company's perspective on the current conditions that have deteriorated since our second-quarter call and the acceleration and expansion of our operational redesign initiative.

 Please keep in mind that we have not yet closed the books on the third quarter, so our numbers are not yet final. We will provide more details on our third-quarter results during our regularly scheduled quarterly earnings conference call, which will be held on October 27. Given the preliminary nature of our results, Nick and Jim Borel, Executive Vice President responsible for agriculture and nutrition and health, will conduct a brief Q&A session after Nick's remarks on the revised outlook.

 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. They 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 refer to non-GAAP measures and we request that you review the reconciliations to GAAP statements provided with our news release. With that, I will turn our call over to Ellen.

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 Ellen Kullman,  E.I. du Pont de Nemours and Company - Chairman & CEO   [3]
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 Thank you, Greg and I'm sure you've all seen today's announcement. I will retire as Chair and CEO of DuPont on October 16. But with the separation of Chemours completed and a strong foundation for growth in place, the Board and I believe now is the right time for a new leader to guide the Company through its next stage of growth.

 Over the past seven years, we've significantly transformed this Company focusing our portfolio on attractive growth opportunities and reshaping our organization to make it more streamlined, efficient and productive. We've made disciplined investments in innovation that have made a real difference to our customers and we have a robust pipeline of new solutions to meet their future needs.

 The next generation DuPont is making possible important human and industrial progress around the world. We've executed a tremendous amount of change in a short period. As the next generation DuPont moves forward, we need to continue to drive the pace of change to compete effectively and to continue to meet and exceed our shareholders' expectations. I believe I'm leaving DuPont well-positioned to capture the tremendous opportunities before it as the Company applies its unique capabilities to solve for some of the world's greatest challenges.

 Before I close, I just want to say what a privilege it has been to lead this great Company at such a transformative period and working with such talented colleagues around the world. I want to thank all of them for their relentless hard work and dedication to DuPont, and I also want to say how pleased I am that Ed has agreed to take on this interim role. He is an accomplished, respected leader and I know DuPont is in good hands and poised for a bright future. So now I will turn it over to Ed.

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 Ed Breen,  E.I. du Pont de Nemours and Company - Director   [4]
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 Thanks, Ellen and on behalf of the Board, I want to thank Ellen for her outstanding leadership and contribution to DuPont. During her more than 27 years with the Company, she has consistently and decisively led constructive change with a constant focus on the Company's science, leadership and close customer relationships. DuPont is a very different Company than it was when she took the helm at the end of 2008. She guided the Company through some of its most significant challenges, including a financial crisis and led the transformation of DuPont out of commoditized, cyclical businesses into the career, market-driven science and innovation leader that it is today. This is a huge achievement and it has redefined DuPont.

 Now given Ellen's retirement, it is the job of new leadership to turn to the future and translate current opportunities into even greater growth and value for shareholders. The Board has appointed me Interim Chair and CEO effective October 16. We have also engaged an executive recruitment firm to identify a permanent leader. I know there is a lot of work to do and I will dive right in working with the leadership team.

 Ellen and the team are already taking action to accelerate DuPont's cost-reduction initiatives as we confront a volatile and challenging environment. Looking ahead, we will continue to drive productivity and we plan to conduct a deep dive into the details of our cost structure and allocation of capital to ensure we deliver appropriate returns for our shareholders.

 DuPont's unique science and leading position in attractive growth markets are strong competitive advantages and we are committed to build on that base to drive DuPont's performance for the benefit of shareholders. As we go through this process, we will be moving forward quickly and we will talk with you further on our third-quarter call. I know that many of you have been looking forward to our November Investor Day, but I'm sure you understand we want to take a little time to assess our path forward. Therefore, we plan to reschedule the event for sometime in the future. Again, I look forward to talking to you on the third-quarter call, but for now I will turn the call over to Nick, who will review DuPont's updated guidance and then he and Jim will take questions. Nick.

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [5]
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 Thank you, Ed. As we indicated in our news release, today, we lowered our outlook for 2015. This outlook reflects continued strengthening of the US dollar particularly against the Brazilian real and further weakening in agricultural markets. Specifically, we adjusted our outlook for 2015 operating earnings per share to approximately $2.75 versus our previous expectation of approximately $3.10.

 To put these numbers and the driver of this adjustment in context, our new guidance of $2.75, while below 2014, includes $0.72 from unfavorable currency movements. Excluding currency, the revised guidance for operating earnings per share represents a 3% increase year-over-year. Our full guidance assumes second-half operating earnings per share of approximately $0.40 versus a prior assumption of approximately $0.75. We continue to expect about 25% of the second-half operating earnings to be generated in the third quarter.

 While our underlying businesses remain strong, we are not pleased with this revised outlook. But we are clear about the market and industrywide drivers and what DuPont can do about them. Conditions in Brazil are the most significant cause of our change in outlook. If you break down the change, the two primary factors are currency, primarily the weak Brazilian real, and ag weakness in Brazil.

 First, we said in our last earnings call that we expected currency to be down approximately $0.60 per share as headwinds for the year. Based on continued strengthening of the US dollar against key currencies in which we operate, we now anticipate a $0.72 negative impact from currency for the year. We see the currency pressure on the top line and bottom line impacting each of our segments given our global reach.

 The Brazilian real, as you can see on the first slide of the presentation materials, has depreciated over 60% year-over-year and about 20% since our earnings call in July. Brazil is a key market and one where we maintain a strong position. It is seasonally important to us in the second half as this is when the southern hemisphere's growing season begins.

 Second, we expect additional headwinds coming primarily from agriculture. We continue to see ag as a large attractive secular growth market where our science is truly making a difference. However, in the near term, conditions remain challenging. Markets in Brazil weakened further in the quarter and competition is intense. Tighter farmer profit margins and tighter credit are causing growers to be very cautious with their spending on crop inputs.

 As you can see on the second chart, in recent months, input costs have been rising while crop value has been on the decline. In crop protection, we have a strong market position with high-value products like Rynaxypyr; however, low expected insect pressure and the macro environment have softened the demand for insect control products. A weaker real makes Brazil's soybean exports more competitive globally and this shift has the effect of incenting growers to plant more soybeans, further reducing our expectations for hybrid corn planted area and corn seed volumes in Brazil's summer season.

 We are responding to the slower macroeconomic environment by executing on the things we can control. Specifically that means driving productivity throughout the Company and making the difficult choices that are required in this environment. At the same time, we continue to invest in research and development. We know that even in this economy, we must advance our pipeline and support products like [leftgro] and seed treatments that will help drive our growth in the future.

 With those objectives in mind, we are announcing a substantial expansion and acceleration of our operational redesign initiative. We are taking a hard look at investments in the second half and will make decisions, including deferring expenditures where appropriate based on current macro conditions and related impact on return.

 Over the past few quarters, we've shared with you our progress with streamlining the way we support our global businesses. We have fundamentally revamped our Company's operational structure to drive down costs and firmly embed greater efficiencies. Given the difficult environment, we've raised our commitment for cost savings targeting an annual run rate of $1.6 billion by the end of 2017, up from our previous $1.3 billion commitment. We also accelerated our timeline for delivering these savings. We now project that $1.3 billion of savings will be achieved on an annual run rate basis by the end of 2016, one year earlier than initially anticipated.

 We have identified targeted areas from which to generate savings centered on productivity gains and overall spending control. In the fourth quarter, we will provide further details on the expected costs associated with these additional savings as we finalize our plans. We believe that accelerating and expanding our potential redesign initiative is an important way to offset difficulties in the current environment. We also believe that these actions will enable a stronger, more agile and more successful DuPont for the benefit of all our shareholders. So with that, Greg, let me turn the call back over to you.

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 Greg Friedman,  E.I. du Pont de Nemours and Company - VP of IR   [6]
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 Thank you, Nick. We will now open the lines for your questions on our revised outlook. Nick and Jim Borel will take questions focused on that topic. Vanessa, if you could open the lines?

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Questions and Answers
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Operator   [1]
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 And thank you. We will now begin the question-and-answer session. (Operator Instructions). Don Carson, Susquehanna.

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 Don Carson,  Susquehanna Financial Group - Analyst   [2]
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 Question on -- you say you are going to delve into the details of the cost structure. Is that going to go beyond infrastructure costs? I'm thinking particularly on R&D where you've had some relatively unproductive biotech trade discovery. So I don't know if that's for Nick or Jim or Ed. Just comment on how you are going to evaluate R&D costs going forward.

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [3]
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 So we are looking at all costs. We have expanded this in not just the operational business model, but beyond that into the businesses themselves, warehousing costs and R&D will be a part of that as well where we will be looking at decisions we are making in this area and making sure that those decisions still make sense in the market environments that we are dealing with today.

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Operator   [4]
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 Thank you. Did you have anything further?

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 Don Carson,  Susquehanna Financial Group - Analyst   [5]
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 No. That's it. Thank you.

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Operator   [6]
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 (Operator Instructions). Frank Mitsch, Wells Fargo.

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 Rory Blake,  Wells Fargo Securities - Analyst   [7]
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 This is actually Rory sitting in for Frank. Just had a follow-up on the agriculture market. Obviously, you guys called out the competitive pressures. Is there any reason that shouldn't spill over into maybe the core domestic market and how does it really set 2016 up from an earnings base level?

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 Jim Borel,  E.I. du Pont de Nemours and Company - EVP   [8]
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 First of all, with the Brazilian market in a fair bit of a funny dynamic, let's say, it's just a very competitive market. We see summer corn acres are down; crop protection sprays are down based on lower insect pressure and so it's competitive down there. I think those situations right now are fairly unique to Brazil. Certainly they are exaggerated or accentuated in Brazil. So looking at 2016 in a domestic market, we are taking a cautious view towards 2016, but we will have a little time here to see how this season shakes up in the northern hemisphere next year.

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 Rory Blake,  Wells Fargo Securities - Analyst   [9]
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 And just given the ongoing challenges, does it create more opportunity on the M&A side and what is DuPont's stance as of now and is there more stuff coming to market?

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [10]
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 When you look at our position on M&A, it hasn't changed. We are always looking at strategic areas that fit the focus that we have within the Company around the areas of ag and nutrition, advanced materials and industrial biosciences. So that really hasn't changed our positioning. As always, any acquisition is going to have a series of strategic hurdles it must reach or overcome. It's got to have the technology that we would be willing to buy or channel access. It also has financial hurdles that would come into play. So that has not changed; it's something we've always been considering and we will continue to focus in those three areas any potential acquisition opportunities.

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 Rory Blake,  Wells Fargo Securities - Analyst   [11]
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 All right. Thank you for taking my call.

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Operator   [12]
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 John Roberts, UBS.

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 John Roberts,  UBS - Analyst   [13]
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 Ellen, thanks for your leadership. Best wishes for the future.

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 Ellen Kullman,  E.I. du Pont de Nemours and Company - Chairman & CEO   [14]
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 Great. Thank you.

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 John Roberts,  UBS - Analyst   [15]
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 Nick, would the buybacks be delayed until you can do the full assessment of the strategy?

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [16]
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 No, the plan is to complete the $2 billion, the accelerated share buyback that we put in place this year and to implement the second $2 billion in next year, 2016.

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 John Roberts,  UBS - Analyst   [17]
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 Okay. And you would see that under really any change or adjustment to the strategy?

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [18]
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 Well, it's the plan right now as we move forward and I have no reason to adjust that plan at this point in time.

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 John Roberts,  UBS - Analyst   [19]
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 And then, Ed, is there a Board member leading the CEO search? And the Board has chosen to go with one of the newest Board members for the interim here rather than a Board member that might have more experience with the Company. Should we read anything into that in terms of a break with the past strategy or culture?

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 Ed Breen,  E.I. du Pont de Nemours and Company - Director   [20]
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 No, I would not read anything into that. And to the first part of the question, it's our HR Committee of the Board that is proceeding with the search for the permanent Chair and CEO.

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 John Roberts,  UBS - Analyst   [21]
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 All right. Thank you.

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Operator   [22]
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 Jeff Zekauskas, JPMorgan.

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 Silke Kueck,  JPMorgan - Analyst   [23]
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 Good afternoon. It's Silke Kueck for Jeff. In light of the earnings cuts, I was wondering whether you could address how you think about your operating cash flow in the second half and maybe your free cash flow in the second half. Will it be -- in the second half, will it be a number that's bigger than $5 billion operating cash flow, or lower and how do you think about your free cash flow? Thank you.

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [24]
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 Yes, so that's something that we will cover in detail in the third-quarter earnings call, not really for this point in time. As you know, we have a seasonal cash movement of our businesses and ag is big in the fourth quarter and so that sort of activity is still going to occur, but I'm not really going to get into more detail on the cash flow. We will do that on the third-quarter earnings call.

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 Silke Kueck,  JPMorgan - Analyst   [25]
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 Thank you.

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Operator   [26]
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 David Begleiter, Deutsche Bank.

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 Jermaine Brown,  Deutsche Bank - Analyst   [27]
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 Good evening, this is actually Jermaine Brown filling in for David. Two quick questions. Within your ag business, how much of your business is in local currency versus dollars?

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 Jim Borel,  E.I. du Pont de Nemours and Company - EVP   [28]
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 If you are talking globally --

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 Jermaine Brown,  Deutsche Bank - Analyst   [29]
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 Just Brazil.

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 Jim Borel,  E.I. du Pont de Nemours and Company - EVP   [30]
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 -- the majority is done in local currency around the world. In Brazil, over the years, that's a market where it's been a little more typical. They do some business in dollars, but even that is reduced during these times.

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 Jermaine Brown,  Deutsche Bank - Analyst   [31]
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 Okay. And excluding ag, can you walk through which other segments have large exposure to Brazil, or significant exposure, rather?

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 Nick Fanandakis,  E.I. du Pont de Nemours and Company - EVP & CFO   [32]
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 Well, ag would be the single largest one in the region at this point in time.

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 Jermaine Brown,  Deutsche Bank - Analyst   [33]
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 All right, thank you very much.

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 Greg Friedman,  E.I. du Pont de Nemours and Company - VP of IR   [34]
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 Great. Well, I think we've come to our time and we will end the call. Thanks for your questions and making yourself available. As usual, a webcast of this call will be available on our website as soon as it's possible and we will also post the transcript. With that, our webcast is ended and you may disconnect from the call.




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