DuPont de Nemours, Inc.

Please stand by. We're about to begin. Good day and welcome to Dow DuPont's fourth quarter 2018 earnings call. You may signal to ask a question by pressing star 1 at any time during today's presentation. Also, today's call is being recorded. I would now like to turn the call over to Jen Driscoll, VP of Investor Relations. Please go ahead, ma'am.

Thank you, Rochelle. Good morning, everyone. Thank you for joining us for Dow DuPont's fourth quarter 2018 earnings conference call. We're making this call available to investors and media via webcast. We've prepared slides to supplement our comments during this conference call. These slides are posted on the Investor Relations section of Dow DuPont's website and through the link to our webcast. Speaking on the call today are Ed Breen, Chief Executive Officer, Howard Ungerleiter, Chief Financial Officer, Jim Fitterling, Jim Collins, and Mark Doyle, who are Chief Operating Officers for Dow DuPont's Material Science, Agriculture, and Specialty Divisions, respectively, and Laurie Koch and Neil Chure, who will lead IR for the new DuPont and new Dow, respectively. Please read the forward-looking statement disclaimer contained in the news release and slides. During our call, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10 in each of Dow's and DuPont's Form 10 case, as well as Dow's and Corteva's Form 10s, and Dow DuPont's prospective supplement, filed on November 16th of 2018, include detailed discussion of principal risks and uncertainties which may cause such differences. Also, we'll 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 for the full year 2018 are on a pro forma basis. and all financials, where applicable, exclude significant items. We'll also refer to non-GAAP measures. The reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website. With that, I'll turn the call over to Ed.

Thanks, Jen, and thanks, everyone, for joining us. Today we reported fourth quarter and full year results for 2018, and as we'll discuss on this call, it was a good year on all counts. as we delivered innovative solutions to customers, exceeded our cost synergy target, and at the same time prepared stand-up three industry-leading world-class companies. In terms of our overarching performance for the full year, we grew adjusted EPS 21% on a pro forma basis to $4.11. We delivered a net sales increase of 8%, with price improvement in all regions and volume growth in most regions. We also increased operating EBITDA 13%. In two months, we plan to separate the new Dow, followed shortly thereafter by the separation of Corteva from new DuPont. We made significant progress this year towards these important milestones, and I'd like to thank the teams for all their hard work to make this happen. Now let me recap the high points of the year we concluded. First, we delivered on the earnings objective we set for ourselves, strengthened by well-executed capacity additions and many new product launches, leading to overall local price improvement for each of the divisions and volume growth across the majority of our segments. Second, we upped our cost synergy target to $3.6 billion, 20% higher than our initial target, and we have delivered more than $1.8 billion in savings since merger close. Third, after completing our initial 4 billion share buyback program, we announced a new 3 billion share repurchase authorization and completed 1.4 billion of that in the fourth quarter. We have returned nearly 10 billion to shareholders since the merger closed and intend to complete another 1.6 billion share repurchase by the end of the quarter. And finally, we announced the future boards, including many new directors. Across each board, our directors bring strong and highly relevant experience, insights, and key expertise to help our companies launch, grow, and deliver for all stakeholders. We also announced the three CEOs. Each one is a talented leader with deep knowledge of their industry, has a track record of delivering value, and is highly focused on increasing shareholder returns. They also have great teams supporting them, successful, dedicated operators who know their respective businesses and markets extremely well. As a result of the process we have been through in creating them, we are confident that each company will be well positioned in its markets with appropriate capital structures and plans to invest capital in R&D in ways that will drive significant shareholder value creation now and into the future. I couldn't be more excited about where each one is headed. Howard will go over our fourth quarter results in more detail, so I'll point out a couple of things that we're keeping an eye on. We saw some short-term softening in the fourth quarter, including a steady drop in the price of oil and destocking in a few of our value chains that went beyond normal seasonality. Even in this environment, we were able to offset the headwinds to deliver flat sales year over year, which included 1% volume growth. We also delivered year-over-year adjusted EPS growth because of unique levers in our control, such as cost synergies, new capacity additions, and product innovations. We believe our market share held up well, our execution was good, and our new products are resonating with customers. As we look at 2019, we are confident that the global economy will grow. However, there is more uncertainty than usual over the precise rate of growth we expect. We anticipate China to continue to grow this year, albeit at a slower pace, along with slowing activity in Europe. We expect modest growth in most other regions. Let me provide some context to our expectations, starting with material science. We have consistently been forecasting a period of margin compression in both the polyurethanes and polyethylene chains due to capacity additions across the industry. These dynamics have turned out largely as we expected, and Jim Fitterling will go into more detail about the trends we saw in the fourth quarter and the start to the year. For specialty products, we see benefits in 2019 from global economic growth and from our highly differentiated market positions, as Mark Doyle will explain. And in agriculture, we expect to realize first-half benefits from cost synergies and new products. offset by currency, and higher unit costs, as Jim Collins will outline. With that, let me turn it over to Howard.

Thanks, Ed. Moving to slide three in the summary of our fourth quarter results, we closed the year with solid financial performance for Dow DuPont, utilizing the levers in our control to offset all of the margin compression we experienced in the quarter. We delivered earnings per share of 88 cents, a 6% increase year over year. Earnings drivers in the quarter included cost synergies and local price gains. Our operating tax rate was also a tailwind of $0.02 per share. EBITDA was flat at $3.9 billion as these earnings tailwinds were offset by margin compression and material science, lower equity earnings, and a currency impact of 2% on sales or $0.03 per share. Volume grew 1% with gains in industrial intermediates and infrastructure, nutrition and health, safety and construction, and ag. From a regional perspective, we achieved high single-digit volume growth in Asia Pacific and Latin America, which more than offset declines in the U.S. and Canada and EMEA. Local price also rose 1% with gains in transportation and advanced polymers, safety in construction, performance materials and coatings, and ag. Currency was a 2% headwind. We continued to exceed our cost synergy commitments with more than $500 million of savings achieved in the quarter. This brings our year-over-year cost of energy savings to $1.6 billion for 2018, above our increased target of $1.5 billion. Cash flow from operations in the quarter was $5.1 billion, up from $1.8 billion in the year-ago period. On an apples-to-apples basis, after adjusting for the accounting and presentation change for the AR securitization program, our cash flow from operations increased year-over-year by $900 million. and we returned $2.3 billion of cash to our owners, which included $1.4 billion of share repurchases. Looking at our full year, Dow DuPont delivered strong financial and operational performance, as evidenced by several metrics. We achieved solid top and bottom line growth. We outperformed on every one of our increased synergy savings and run rate targets. We generated $4.7 billion of cash from operations, which included discretionary pension contributions of more than $2 billion. We finalized the capital structures for each intended company, achieving the targeted credit ratings for each, and we successfully completed debt offerings for New DuPont and New Dow of $12.7 billion and $2 billion, respectively. We also completed a tender for $4.4 billion of Heritage DuPont's debt as part of establishing Corteva's capital structure. And we made significant capital returns to shareholders, which from merger close to the end of the fourth quarter totaled nearly $10 billion. Summing it up, the Dow DuPont team responded to and offset the headwinds we faced, staying focused on executing our new capacity startups and our product launches, and advancing activities and our key milestones towards spin. Turning to our modeling guidance on slide four, at the macro level, we continue to monitor macroeconomic and geopolitical developments, including ongoing trade negotiations and the pace of economic activity in China. In this environment, we remain focused on the actions under control, including capitalizing on our growth investments, capturing cost energy savings, delivering productivity actions, and advancing on our spin milestones. We expect first quarter net sales to be in the range of $20 to $20.5 billion. Operating EBITDA is expected to be in the range of $4.2 to $4.4 billion. Additionally, net interest expense is expected to be up more than $100 million as a result of the new debt we took on in the fourth quarter to implement our capital structures and prepare for spin. And we also see currency headwinds year over year, which will impact EBITDA in the range of $150 to $200 million. In the agriculture division, first half sales are expected to be down low single digits percent, and we see operating EBITDA flat. Excluding currency, sales are expected to be up low single digits percent. It's always difficult to call the sales split between the first and the second quarter and farmers are still finalizing their planning decisions. First quarter sales are expected to be down low single digits percent but up low single digits percent excluding currency. Operating EBITDA is expected to be down low single digits percent as synergy delivery and organic growth from new product sales are more than offset by currency pressures and increased input costs. In the material science division, we expect continued strong consumer demand though at a moderately slower pace than in 2018. We expect operating EBITDA to be down low 20% as volume growth, cost synergies, and the benefit from the completion of our U.S. Gulf Coast investments will be more than offset by lower chain margin spreads that will continue into the first quarter due to the averaging effect, particularly in our polyethylene and isocyanates chains. The Division is acting quickly on a series of actions to offset as much of these headwinds as possible, including cost and productivity actions, capitalizing on new capacity additions, and driving pricing improvements. As a result of all of these actions, the Division expects margins to stabilize and then improve as it moves into the middle of the year. The Specialty Products Division expects gains in local price across most segments to be more than offset by currency, a portfolio headwind, and softer volumes resulting in low single-digit percent declines for the quarter. We expect organic revenue growth to be roughly flat with prior year. We expect operating EBITDA to be down low single digits percent from raw material and currency headwinds, as well as softer volumes more than offsetting cost synergies and strength in local price. Excluding currency and portfolio, we expect operating EBITDA to be slightly up. More comments on our segment expectations for the first quarter can be found in the appendix. And with that, I'll turn it over to Jim Federling to discuss the Material Science Division's fourth quarter and full year results.

Thanks, Howard. Moving to slide five, material science delivered solid results to close out the year, despite some short-term market headwinds. On the demand side, we saw softness in select end markets related to durable goods, such as appliances and autos, which drove some above-normal destocking. Outside of this, demand was relatively strong. And on the margin side, we faced some discrete pressures in the quarter, particularly in isocyanates and polyethylene. We pivoted to counter these headwinds with the multiple actions in our control, including cost synergy savings, discipline price volume management, feedstock flexibility, and capitalizing on our recent capacity expansions. Here are some division highlights. We again captured demand growth across the majority of our core businesses. We achieved high single-digit volume growth in polyurethanes and industrial solutions, and our packaging and specialty plastics business grew volume 4%. We delivered high single-digit EBITDA growth in consumer solutions, where we drove pricing actions and adjusted our product mix to focus on higher-margin business. We brought online our new high-melt index elastomers train and completed the bimodal polyethylene debottleneck by the end of the quarter. CapEx for the quarter was $890 million, bringing Dow's full-year CapEx to $2.5 billion. and the Sudara joint venture successfully completed its creditor's reliability test in the first attempt. The fourth quarter presented us with some discrete challenges. Brent crude oil started the quarter at more than $80 per barrel and then steadily dropped throughout the quarter, finishing the year in the low $50 per barrel range, a drop of more than 35%. In addition to that, we saw a 40% compression in the naphtha to ethane spread, driven by the oil price drop, as well as weak gasoline demand and higher US natural gas price on cold winter weather. These trends compressed our feedstock advantage, not just in the Americas, but also for our main joint ventures. And you see that in the nearly $240 million impact, which is split about evenly across our core business and our equity earnings. While we were not immune to this trend, our results demonstrated resilience because of the factors that we've consistently highlighted, feedstock flexibility, full-chain integration, cost-out actions, and strong operating discipline. I'll now take a closer look at our performance of each business on slide six. Performance materials and coatings achieved operating EBITDA growth of 5% as price gains in all regions and benefits from cost synergies more than offset volume declines. Consumer solutions faced a sequential moderation in siloxanes prices, primarily in Asia-Pacific, following an 18-month run-up in prices that peaked in the third quarter. In response, the business drove proactive measures to improve its product mix in the quarter, resulting in volume declines. However, price, margin, and bottom-line earnings all rose. In coatings and performance monomers, the business expanded operating EBITDA margin in coatings as raw material costs fell. However, performance monomer sales and EBITDA declined due to an extended turnaround in the quarter, which is now complete and impacted results by approximately $20 million. Industrial intermediates and infrastructure operating EBITDA declined by 18%, primarily driven by a contraction in isocyanates that impacted core business results, particularly in polyurethanes, as well as some softening in appliance and automotive end markets. The contraction in isocyanates spreads, along with a 25% margin compression in MEG, also led to year-over-year reduction in equity earnings. These headwinds more than offset demand growth and benefits from cost synergies. Sales gains in both polyurethanes and chloralkali and vinyl and industrial solutions were led by robust volume growth due to increased supply from Sedara. In the polyurethanes chain, the moderation in isocyanates prices that we've forecasted for some time accelerated in the quarter, with MDI prices dropping about 40% year-over-year. In our view, the fly-up margins that we captured over the past year completely unwound over the course of the fourth quarter, notably in Asia Pacific and Europe, where we have the largest merchant isocyanates exposure. Moving to packaging and specialty plastics, operating EBITDA declined 13% in the quarter. Cost synergies, increased supply from growth projects, and lower commissioning and startup costs were more than offset by reduced equity earnings and the margin contraction across polyethylene products. The 40% compression in the naphtha to ethane spread, coupled with polyethylene price declines, align with what we forecasted for polyethylene margins for some time. Given that demand remains solid, our view is that polyethylene margins will stabilize in the first half of the year, potentially with some volatility in feedstock costs, depending on how new cracker startups are eventually balanced by new NGL fractionation capacity. It is worth noting that we did not face a demand issue in packaging and specialty plastics in the quarter. We grew volume on higher demand across most regions and new capacity from Sedara and the U.S. Gulf Coast. Demand growth was led by our industrial and consumer packaging and flexible food and specialty packaging markets. The business also achieved volume gains in elastomers and wire and cable applications. Taking a broader look at the full year, Materials Science delivered an exceptional year financially and operationally. We achieved double-digit sales in operating EBITDA growth with gains in every operating segment. We brought online three new facilities, a next-gen Nordell metallocene EPDM plant, a new world-scale proprietary tubular low-density polyethylene facility, and a new high melt index elastomer's train. We also completed the capacity expansion of our bimodal gas-based polyethylene unit in St. Charles, Louisiana. These were the final units of our Wave 1 U.S. Gulf Coast investments. Product from each unit is now in the market, and we have performed at or above design rates on each one. CapEx for the Dow Tower in 2018 was $2.5 billion, compared to $3.3 billion in 2017 and below our DNA level. In addition, Sedara successfully passed the critical creditor's reliability test, and we consistently outperformed on our synergy commitments driving toward a leaner cost structure. Looking ahead, at this early stage in 2019, we're seeing a stabilization in our key product spreads, and demand remains robust. We see the first half of the year as a time to focus on stabilizing prices in order to rebuild margins as we move into the middle of the year. Team Dow remains focused on the task at hand, controlling what we can control, harnessing our growth projects, driving innovation. And we're taking proactive measures to mitigate near-term headwinds, including deferring certain spending to adjust to the current macros and spreads, and continuing to address our cost synergy and stranded cost actions. And we're progressing our spin milestones to deliver a successful separation and spin in two months' time. I'll now turn it over to Mark to cover specialty products.

Thanks, Jim. Turning to slide seven, specialty products reported strong results amid a softening macro environment which unfolded during the quarter, specifically in automotive and consumer electronics end markets. We overcame macro conditions to again deliver organic revenue growth and solid earnings improvement. Our leadership position in diverse and attractive end markets is built on customer relationships and value-added innovation, which together with our intense focus on productivity enables us to outperform the industry in any market environment. This quarter, we continue to drive double-digit growth in our probiotics portfolio. We're nearing completion of our capacity expansion and expect to have the new volume online by the end of the quarter. Additionally, our overall nutrition and health sales in the Asia-Pacific market continue to grow by double digits. Our Tyvek business continues to be strong in the high-growth industrial and medical application space, and other bright spots include semiconductors enabled by their broad and market applications, life protection with our Kevlar high-strength materials, and our Nomex business, where we're benefiting from exposure to the high-growth aerospace industry and continued strong demand for protective garments. We reported 2% organic revenue gains with safety and construction leading the way with organic sales growth of 6%. We also realized strong organic growth of 4% in nutrition and health and 3% in transportation and advanced polymers. Operating EBITDA for the division again grew double digits with gains in all segments driven by cost synergies, higher local price, a customer settlement in our Hemlock joint venture, and higher volumes. which more than offset rising raw material costs. We continue to focus on disciplined pricing practices. We again delivered an overall 2% improvement in price with contribution from almost all of the segments. Our pricing discipline allows us to offset raw material costs and ensures we realize the benefit of the value our products deliver to our customers. Turning now to the segments on slide 8, electronics and imaging organic sales declined 1%. We delivered sustained strength in our semiconductor technologies business through new customer wins and 3D NAND growth in Asia. Continued softness in the photovoltaic space and the impact of lower smartphone sales on our interconnect solutions business offset these gains. Operating EBITDA increased 18% driven by higher equity earnings, a gain on an asset sale, cost synergies, and higher volume, partially offset by lower local price. Excluding equity affiliate income, operating EBIT arose 9%. Looking forward, we anticipate equity affiliate income for the segment to decline as a result of a reduction in customer settlements, contributing approximately $175 to $200 million this year, which is a year-over-year reduction of approximately $210 to $240 million. Nutrition and biosciences grew organic sales by 1%, driven by strong volume gains of 4% in nutrition and health. Probiotics drove strong growth, with sales up more than 20% this quarter. We also continue to expand our Asia footprint, where sales grew by greater than 10%. Within industrial biosciences, volume declined by 3%, driven by a slowdown in U.S. and Canada energy markets due to oil prices, which negatively impacted both our microbial control and biorefineries businesses. Operating EBITDA for the segment grew 4%, driven by cost synergies and a portfolio benefit, which was partially offset by higher raw material costs. Safety and construction organic sales increased 6%, led by broad base growth across industrial, aerospace, and personal protection, partially offset by softness in construction and U.S. residential markets. Our pricing strength continues to steadily improve. In this quarter, we delivered 3% growth with improvement across all of our product lines, which was the direct benefit of targeted actions to drive value and use pricing across our portfolio. Operating EBITDA for the quarter was up 20%, driven by cost synergies, local pricing strength, and higher volume, partially offset by higher raw material costs. Transportation and advanced polymers delivered solid top and bottom line growth amid challenging and market conditions that impacted our volume growth, which was down 5%. Automotive and electronics end markets, primarily in Europe and Asia Pacific, were down due to inventory destocking. However, even given a tough macro environment, we were able to continue to deliver significant pricing strength with improvement of 8% in the quarter. Operating EBITDA grew by 7%. driven by local price increases and cost synergies partially offset by higher raw material costs and lower volume. In summary, I'm excited about the performance of our portfolio this year, which enabled full-year organic sales growth of 5% and operating EBITDA growth of 18% or 12% when excluding the benefit from non-operating pension OPEB expense. This results in an operating leverage of greater than our medium-term target of 1.5x and enabled our adjusted operating EBITDA margins to expand to greater than 28%. Looking beyond the first quarter, we continue to see strength in most of our end markets, including semiconductor, aerospace, health and nutrition, industrial, and infrastructure, and expect to regain volume in certain end markets that are at a period of destocking in late 2018 and early 2019. The strength of our customer-driven innovation, additional contribution from capacity expansions, and continued focus on productivity will enable us to again drive operating leverage and improve returns. For the full year, we expect sales to be about flat on an on as reported basis impacted by portfolio and currency headwinds on an organic basis. As we move beyond the short term softness we're seeing in the first quarter of 2019, we anticipate our sales growth for the remainder of the year to balance out, to be in line with the low end of our medium term targets that we set out art, our investor event in November. resulting in full-year organic growth of about 2% to 3%. We expect operating EBITDA for the year to be slightly down on an as-reported basis, excluding the anticipated declines in equity affiliate income and negative currency. We expect 2019 operating EBITDA growth of 3% to 5%, driven by cost synergies, local pricing strength, and volume gains partially offset by raw material headwinds. More comments on our 2019 expectations can be found in the appendix. With that, I'll turn it over to Jim to cover agriculture.

Thanks, Mark. Turning to slide 9, here are the highlights for the agriculture division. Fourth quarter sales increased 1%, while organic sales rose 9%. Operating EBITDA grew 4%, meeting our guidance of $2.7 billion, and operating margins expanded by 30 basis points. Our 9% growth in organic sales was driven by a solid combination of higher local price and volume gains. The local price gains were consistent across both seed and crop protection and were led by Asia Pacific and Latin America. We worked hard to offset five points from currency pressures, primarily from the Brazilian Rai. Volume increased 4% driven by gains in crop protection from new product sales and an early start to the safrinha selling season in Latin America. Partly offsetting the organic sales growth was portfolio reductions of 3%. The portfolio change was a result of the Brazil seeds remedy that we executed in last year's fourth quarter to complete the merger. Our crop protection business led the way with 10% organic sales growth from new product sales. Crop protection volumes grew 5%, driven by strong sales of Asaria, the leading treatment for Asian soybean rust in Brazil, Paraxalt, a novel insecticide for rice-brown planthopper control in Asia Pacific, and Enlist herbicides. These gains more than offset declines in US and Canada on higher channel inventories and fall applied chemistry. Local price rose 5% as we responded to continued currency pressure which in the fourth quarter was 4%, primarily in Latin America. Seed organic sales increased 8%. Price increased 5% in a competitive market. Volumes improved by 3%, including early safrinha sales in Latin America of PowerCore Ultra and PowerCore Enlist, and expected market share gains in soy and corn. Corn seed sale volumes increased also grew in US and Canada due to the timing of shipments. The remedy loss in Brazil reduced seed sales by 6 percentage points. The ag segment operating EBITDA increased 4% to $233 million. The improvement reflected sales gains and synergies, partly offset by higher unit costs, investments to support new product launches, and higher commissions to support higher sales. The higher unit rates reflected higher seed costs and higher raw materials and crop protection, as well as rising freight and warehousing expenses. We also recorded approximately $14 million in one-time benefits, including a product line sale. Both periods had nearly $60 million in licensing and collaboration agreements. So turning to the operational highlights on slide 10. we've made meaningful progress against our five priorities to deliver shareholder value. In 2018, we delivered operating EBITDA of $2.7 billion, up 4% in a tough market. We raised the Ag Division's synergy targets, and in the third and fourth quarters began to see proof points that we are recovering our share in the Brazil corn market from the remedy. In addition, we launched a strong set of new product launches in crop protection that are delivering top and bottom line growth. The highlight for the year clearly was receiving Chinese regulatory approval for two key traits, Enlist E3 for soybeans and Chrome for corn. We are extremely excited about both approvals, which have been in the queue for quite some time and are a great demonstration of the strength of our innovation capability. Enlist E3 the most advanced weed control trait technology for soybeans, is the larger opportunity of the two. We expect that Enlist E3 commercial sales will begin in 2019, although the exact timing will vary by country. In the second half of 2019, we will continue to invest in the commercial sales effort. Robust ramp-up plans and extensive seed production will ensure that Enlist E3 soybeans are broadly available to farmers in 2020. Chrome, on the other hand, already has been introduced on a limited basis in the Western Corn Belt, but likewise will be ramping up production this year. In other words, we are actively laying the groundwork this year for a full commercial launch of Enlist E3 and Chrome next year. We also have begun reaching out to our strategic business partners about out-licensing Chrome, Enlist, and E3 in the future. In fact, we have already completed initial licensing agreements with several key players. Today, we have provided guidance for the first half, which incorporates the northern hemisphere selling season. Based on what we're hearing from our customers and due to our unique direct farmer route to market, we've also estimated the split between the two quarters. First half sales are expected to decline by low single digits percent. But excluding currency, we expect first half sales to rise by low single digits. We expect currency to be a headwind for the half led by the Euro and the Brazilian Rai, compared to a tailwind from currency in a prior year period. Organic sales growth is expected to be driven by new product launches, partly offset by higher channel inventories and some reduction in first-year sales associated with implementing our multi-channel, multi-brand strategy as we move customers to different products and brands. The first half operating EBITDA is expected to be flat as gains from organic sales and cost synergies are offset by higher unit costs. Higher unit costs are driven by new product launches, whose margins will improve as they reach the economies of scales, royalties, and higher ingredient costs out of China, which we will lap mid-year in 2019. The first quarter is expected to see a sales decline in the low single digits percent. Excluding currency, we expect a sales increase, of low single digits percent. We expect first quarter sales to be negatively impacted by timing, including an early start to the Supremia season in the fourth quarter, and delayed planting decisions pushing sales into the second quarter. From a planted area perspective, we expect a shift from soybeans to be neutral to our results. While some soybean acres are expected to shift to corn, much is expected to shift to cotton and wheat. First quarter operating EBITDA is projected to decline by the low single digits percent. EBITDA drivers are similar to the first half. In closing, we're excited about the progress we are making and look forward to giving you further updates on what to expect from us as we get closer to SPIN. I'll now turn it over to Lori to open the Q&A.

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

Thank you. If you would like to ask a question, please press star followed by the digit 1. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. We ask that you limit yourself to one question only. Once again, star 1 to ask a question. And our first question today will come from PJ Juvicar with Citi.

Yes, good morning. Thank you. A question on Dow Chemical. You know, in polyethylene, it seems like the industry had destocking occur in 4Q as oil prices came down. So where are converter inventories today? And then on to producer inventories, I guess the last number we saw from ACC was 4.9 billion pounds of producer inventory, which was quite high. So did the industry not slow down plants? And where do Dow's inventory stand? Thank you.

Hi, PJ. This is Jim. As the quarter progressed, obviously we saw that deceleration in oil pricing toward the end of the year. In the last couple of weeks of December, were pretty quiet in terms of the export markets. And so I think that's what led to the buildup that you saw in the U.S. inventory numbers. Some of that's starting to turn around in the first quarter. We're seeing some pricing movements in January, February. So we're kind of up three, up three in January, February. I would say the bulk of the new capacity came on in the back half of 2018. If you look forward into 2019, you don't have that much new capacity coming on. So I expect operating rates are going to improve 200 to 300 basis points through the year. But clearly, we've got to rebuild some margins in the quarter. So I think it was mostly sentiment at the end of the year that drove that buildup in inventory. And I think what we will see is as we come out of Chinese New Year, you're going to see a pull on the demand side that's going to start to rebuild those volumes and margins. Volume was up 4% for us in packaging, especially plastics. And at a Dow DuPont level, you know, we still saw strong demand in China. We were up 10%.

And next, a move to Vincent Andrews with Morgan Stanley.

Thank you. Good morning, everyone. Jim, could you expand a bit on the E3 soybean? What does broadly available mean? How many millions of acres are you targeting in 2020 and 2021? And what type of costs will be associated with the launch and presumably maintaining, still selling the other secondary herbicide-tolerant trait? And do you envision the potential ever to stack those two traits together? Thanks.

Yeah, great, Vincent. Thanks for the question. You're right, we're real excited about those two approvals after such a long wait. You know, we have, we're ramping up the parent seed production for those two traits this year, so 2019 will you know, really be a, you know, very limited, continued limited commercial launch based on the quantities of the materials that we had. We could, you know, we could essentially have a couple million units or a couple million acres out there of both Enlist and Chrome from our previous work. But we'll drive that really hard. As we get into 2020, you could see as much as 10% of our soybean lineup in North America into the Enlist. balanced by, you know, the other offerings that we have. On the crop protection side, on the cost side, you know, we've got a lot of experience already with the Enlist-Enlist Duo combination that's out there. We're spraying it on corn and spraying it on cotton. So we don't anticipate, you know, growers already have good sense for what that treatment per acre will cost them. And, you know, we've seen a tremendous uptake on that. So demand is high, and we're excited about it, and we're going to ramp this up as fast as we can.

And Jeff Stokakis with JP Morgan will have our next question.

Thanks very much. I think that three months ago you thought that cash flow from operations in the fourth quarter would be about $7.5 billion, and I think it came in at roughly $5 billion. What was the difference between your expectation and what actually took place And how do cash flows from operations look in the first quarter?

Yeah, Jeff, this is Howard. Good morning to you. Let me start with the fourth quarter versus same quarter a year ago. When you look at cash from ops in the quarter, it was $5.1 billion. On a reported basis, that was up versus $1.8 billion. But we had the ARS securitization accounting change, so you've got to do an apples to apples. When you make that adjustment, cash from ops in Q4 was up $900 million. which is over 20%. You're right on your point about the full year number. I would say just a few pieces of math to make sure that you've got all the math right. Merger-related costs were about $3 billion for the year, all in. Pension contributions were about $3 billion. The over 2.2 of that was voluntary that we did, just setting up the capital structures of the three companies. The one surprise delta versus the third quarter when we last talked was really working capital, specifically inventory. There was about a billion dollar higher inventory in the fourth quarter. Three drivers for that, all about equally balanced. One, you heard Jim Collins talk about the organic growth in ag sales. So we had a really strong fourth quarter versus a year ago. So that was about a third of the delta. We passed the CRT and SADARA that Jim Federling talked about. So we ran that asset really hard, and so that built up some inventory. And I would say we exceeded our expectations. We did not expect to pass it in the first go, and we did. And then the third was just the selectee stocking that Ed talked about in a couple of the chains. That was the delta, and it was about a $1.1 billion higher than expectation.

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

Thank you. Good morning. Could you walk around the world from an activity standpoint in January and February? Is destocking completed? Where is the worst in terms of slowdown? And specifically in China, are you expecting a new year planned shutdown to be the usual or maybe longer than expected given the tariff and trade uncertainty? Thank you.

Yeah. Thanks, David. This is Ed. Let me give you a little color on it. The softness we saw as we moved through the fourth quarter from a geography standpoint was mainly China and secondarily a little softening in Europe, the rest of the world kind of holding up exactly where it had been. And if you break that down kind of by end market, we saw softness clearly in China. auto and we saw it in consumer electronics but mostly on the smartphone side and a little bit additional softening on u.s residential which didn't surprise us actually no all three of those weren't overly surprising based on forecasts and other companies comments so that that was where it was at i would say a high portion of what we're seeing right now to your question is a destocking activity going on uh it's hard to peg exactly uh when you flush that through the system but i would say it's probably going through the first quarter and somewhere into the second quarter, you kind of work your way through that and you get kind of back to normalized level. So as you look at the forecast by way on the DuPont side, that's kind of what we teed up a lighter first half of the year, second half of the year, about where we'd spec with the leverage to the bottom line on our growth rate, you know, very similar to what we said at the guidance at the November investor meeting, but a little bit more muted in that first quarter and into the second quarter based on the destocking. And maybe just one overall comment also. If you look at all the DuPont end markets, I would say when you break that down to percentages, about 75% of the portfolio did exactly what it did all year. And then the soft areas I just mentioned was maybe 25% of the portfolio where we're seeing that destocking take place. And again, that will correct itself over the next few months.

And next, we'll move on to Chris Parkinson with Credit Suisse.

Great. Thank you. It seems there are a few moving parts within specialty with certain end markets trending fairly well and others showing at least some degree of weakness. Can you just parse out the key growth trends specifically for nutrition and biosciences and maybe just hit on anything on E&I and S&C and just whether or not any near-term cautiousness, would you characterize that as being driven by China trade tariffs versus something else you're seeing in that end market? Thank you.

Yeah, Chris, this is Mark. Let me take that one. I mean, high levels N and B, we're seeing strength in most of the segments. The food and beverage market continues to be solid for us. Probiotics obviously continues to be a star driving growth in Asia in general, and that includes Asia, especially food ingredients. Our systems offerings are continuing to gain position there. The area of weakness is more on the industrial biosciences side, and this is really connected to, we think, temporary factors, including U.S. residential construction. We have a lot of sales of the Sirona product into the carpet market, and that was impacted. And then the sort of dynamics in the oil and gas industry have an effect on our microbial control business. And so those are the two areas that we're tracking. and expecting to see some improvement. In terms of the other segments you mentioned, I mean, ENI is kind of a continuation of what we've been saying for the last couple of quarters, which is photovoltaics has continued to be a tough space. Although volumes are coming back, we're still suffering a lot of pricing pressure there. We are expecting that to improve through 2019. And SEMI continues to be a bright spot for us. Consumer electronics market was down in the fourth quarter, as we mentioned, from smartphones. But we are expecting, again, a recovery in the second half of this year. And safety and construction, you asked about. I'd just say across the board, a lot of strength and markets there. And that's a real bright spot for us through 2019. U.S. residential construction is less than 20% of the safety and construction space. That's the only soft spot for us right now in S&C.

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

Yeah, thanks for taking my question. Jim, in Matco, it seems like there's a lot of levers that you're looking to pull to try to shore up things. I guess as we look through the year and you get a little bit past this destock phase, I mean, look, the first quarter numbers looked pretty difficult. Can we get to a period where you're down high single digits for the year in that business with all the levers that you're pulling? And maybe can you walk us through some of those levers that you do have at your disposal now?

Morning, John. So I'd say a couple of things. You know, in the core business, we were down about $120 million in the quarter. The things that we're trying to do right now, obviously, pricing has stabilized and is starting to improve on plastics, and I'm seeing some signs of that on PMDI as well. And so that will help us as we build through the quarter. Second quarter, third quarter are typically the strongest demand quarters, so we'll build into that. So we're going to have to see kind of a mirror image on the first half of the year to what happened in the back half of 18. But that's what we're driving towards. As I mentioned on the broadcast, we are off on capex. So we finished the year at 2.5 billion of capex. And I think we're going to stay at those kind of levels on capex. So that helps our cash. As we continue to separate out the three divisions, that's going to obviously help some of the costs burn and help us get the stranded costs out through the year as well. And then we're going to defer some spending. It won't be anything that will damage plant reliability. We'll still continue to do maintenance and those kind of things, but we'll defer some discretionary spending that we don't need to do right now into the latter half of the year or even into 2020, depending on how long the macro continues.

And next I'll move to Steve Byrne with Bank of America, Merrill Lynch.

Hi, thanks. This is Ian on for Steve. Wanted to follow up on the outlook in material and in Dow and Corteva and appreciate you aren't giving guidance for these segments today. But I think some investors might be a little confused about the first half and one quarter outlook. taking into account there should be significant synergies in both these businesses. So any color you can provide on the bridge to how we should think about full-year EBITDA for those segments would be helpful. Thank you.

Yeah, on material science, what I would say is we continue to see the businesses grow at about one and a half times GDP. So that, from a demand standpoint, I do not see a demand problem. Most of the pressures that we felt toward the end of the year were really oil price and spread compression pressures on top of the negative sentiment that was developing through the fourth quarter. And so obviously we're turning a corner on that right now and trying to rebuild that. And I think it'll take us through the first quarter and into the second quarter to get that built back. Having said that, the new capacity that's coming on in our industry this year is not all that much. Most of the new capacity, the biggest amount, came on in 2018. So at these rates, it looks like operating rates are going to continue to increase throughout the year. And then obviously, I'm not trying to predict oil price, but oil price hit the low 50s. in terms of dollars per barrel. So if we see any strengthening in the oil price, that will be helpful through the year.

And, Ian, this is Jim Collins. For Corteva, you know, it's really kind of the same story for the first quarter and the first half, kind of three core messages. And you're right, we've got, you know, some good sales growth. We've got the synergies flowing through. But those are being offset, you know, first by some pretty significant currency headwinds. You'll see in the outlook, you know, kind of about well over – $300 million of top line hit, mostly due to the Brazilian RAI, but we pick up a lot of Euro exposure to here in the first half, along with some of those Eastern European countries. In addition to that, We have a little bit of timing going on. We had some shift of some revenues that kind of moved early into that Supremia season and into the fourth quarter. And then these market facilitation program payments that resulted out of USDA's work with the Trump administration on helping growers. Some of these guys had a lot of cash right there at the end of the quarter, and so they went out and bought up a little bit early. So we saw some North American volumes that hit early. And then I'd say maybe the third offset is cost of goods. We're picking up some raw material costs from shipments in from China as they've worked on some of their environmental reforms, and it's moving some of those raws up. And then as we increase the penetration of some of these new products, our royalty rates are moving up on us a little bit. That explains a half. We're not really, you're right, talking about full year at this point. We'll give you some more color on that a little bit later. I think think about the year that we'll be generally up on EBITDA and we'll be able to talk about that as the full year really unfolds.

Next, we'll hear from Jonas Oxgaard with Bernstein.

Good morning, guys. One of the bright spots last year was the pricing in transportation, which is up quarter after quarter after quarter. But in your guidance for the year, you say it looks like you expect overall pricing to be about flat. And you talk about transportation being offset by electronics, but electronics is only down about 1%. So are you expecting the transportation price gains to cease? Or how should we think about this?

Yeah. Hi, Jonas. It's Mark. I'll take that one. You know, we're expecting to continue to see some pricing this year roll through in transportation and advanced polymers based on continued tightness in the nylon chain. And, you know, our performance continues to be strong there in terms of both finding new applications for high temperature and specialty nylons. And we expect the industry is going to continue to, you know, kind of operate at about the same levels as 2018. So I think we'll see some more pricing. We do have some price pressure in E&I that came through in the fourth quarter associated with photovoltaics largely. And as you said, it doesn't offset the pricing gains in the other segment. And so net-net, there's some benefits there that'll probably continue through 2019.

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

Thanks for taking my question, guys. Good morning. I just wanted to review my assessment of the guidance. It looks like on first blush, the Q1 operating EBITDA maybe in the four or five to $5 billion range. And I know it's difficult to guide explicitly. And then the full year, it looks like, you know, could be down a little bit. I guess, is that right? Or are you expecting year on year growth in both full year Q1, sorry, Q1 and full year EBITDA? Thanks.

Yeah, Arun, maybe we can take it offline. I mean, we don't give an exact number. I would say when you look at the slide operating EBITDA, we're getting down low teens percent, but it's really three different stories, right? It's something that, you know, the Jim Collins discussion around Corteva around stronger second quarter versus first quarter because of the seed shift with, you know, with the commodity prices. Fetterling already covered the Matco piece around building margin back. So the first quarter is probably going to look more like a mirror image of Q4, although with a little bit of the averaging effect because we entered December at the low margin point of the quarter. So that's how we enter January and we're rebuilding back. I mean, Jim talked about the three and three polyethylene in January and February and then already some announcements out on isocyanates. And then I'll let Either Ed or Mark, talk about SPECCO, if you want to give any more color on that.

Yeah, no, look, I think the SPECCO one, I think the first quarter will be our lightest. Probably bleed a little of that destocking I talked about still into the second quarter. And then, you know, we're expecting normal trends second half of the year for a growth rate from it. even the standpoint in leverage, as we talked about at the investor day, at least, you know, 1.5 times on the leverage side. So, you know, we'll build back there. And it's very clear, talking to our channel partners, that, you know, the destocking has taken place, you know, by just one data point, because the biggest weakness we saw was auto, and it was auto in China. And, you know, the auto builds were down 18%. but car sales actually were down 13%, so you kind of see it at the high macro level that the destocking is taking place, which probably is good once we get through it.

And next, we'll move on to John Roberts with UBS.

Thank you. Did you only give full-year guidance for specialty code because Dow and Corteva don't plan to give full-year guidance given the less predictability of their businesses, or Do they plan to give full year guidance when they're independent?

I'll cover Matco. This is Howard. I mean, no, we do not plan on giving full year guidance for Dow. I would tell you that we tried that last year. We gave the full year guidance. I would say the bulls didn't like the numbers we gave. The bears didn't like the numbers we gave. We met. the guidance that we delivered back in January. So we're gonna do it one quarter of time. We'll try to give you all the moving parts as best as we know, and then you can insert the margins per the different capacities that you would expect.

Yeah, and for Corteva, clearly a lot of moving parts in the market, so we're feeling good about giving first half, which is the bulk of our business in 2019, so it's pretty indicative of how our year's gonna start. But we'll be giving a lot more color on how we view full year as we go forward at the interactions we'll have with you guys. And we'll keep updating that as it unfolds.

And our final question today will come from Robert Court with Goldman Sachs.

Thank you for squeezing me in. Ed, I think you talked about, you know, destocking ending sometime in the first half. And I guess I'm struck by, you know, on the Dow side of things, there's, supply chain procurement officers that maybe thought they could buy something cheaper, so that's part of why there's destocking there. You mentioned the auto markets in the DuPont business. What other conditions are out there that leads to such an extended destock cycle, and how do you calibrate when it returns? Is that the order books you see out there? Is it a hunch? Is it some historic precedent? What gives you that comfort?

Yeah, one data point I would point to, there's a lot of third-party forecasts out there on some of these different end markets. And, you know, auto builds globally, and maybe just use IHS, they're still talking about auto builds being down 3.5% first quarter, about 1% second quarter, then building up to 4% to 5% in the second half of the year. So you could kind of – I think as an indicator of kind of how you'd see the destocking take place more so than the downturn in the auto bills. I think on the smartphone side, there's four or five forecasts out there talking to – You know, the cell phone makers and, you know, some are slightly up, some are slightly down. But I'd say, you know, cell phone sales look like they would flatten out in 2019. So, again, the stocking is happening now, but it's not like there's a continuing drop in demand in the business. And I'd also say on the housing side, although that's the smaller of the three soft areas, There's clearly forecasts out there, third-party forecasts, that say housing is going to be up 2% on the year, but actually down 1% in the first quarter. So, again, I think those trends all foretell a little bit extra severeness with the destocking and slight down market, and that will recover.

Thank you, everyone, for joining our call. We appreciate your interest in Dow DuPont. For your reference, a copy of our transcript will be posted on Dow DuPont's website later today. This concludes our call.

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