DuPont de Nemours, Inc.

Good day and welcome to the DuPont Fourth Quarter 2019 Earnings Call. Today's conference is being recorded, and at this time I would like to turn the conference over to Lori Koch. Please go ahead.

Good morning, everyone. Thank you for joining us for DuPont's Fourth Quarter and Full Year 2019 Earnings Conference Call. We are making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this conference call. These slides are posted on the investor relations section of DuPont's website and through the link to our webcast. Joining me on the call today are Mark Doyle, Chief Executive Officer, Jean Desmond, our Chief Financial Officer, and Ed Breen, Executive Chair. Please read the forward-looking statement disclaimer contained in this slide. During our call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risk and uncertainty, our actual performance and results may differ materially from our forward-looking statements. Our third quarter Form 10-Q, as updated by our current and periodic report, includes detailed discussion of principal risk and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release. I'll now turn the call over to Mark.

Good morning, everyone, and thanks for joining us. I'll quickly run through an overview of 2019 and how we executed against our key priorities. I'll then cover our priorities and expectations for 2020, including the actions we are taking in light of our expectations for a slow start to 2020. given further price pressure in our nylon business and unplanned outages, which have already been resolved at our largest S&C site. Our teams are intently focused on addressing these items to return to a more normal growth pattern after Q1. Starting on slide two, the team delivered sound full-year results within a macro environment dominated by the China tariff situation, which significantly challenged two of our key end markets, auto and electronics. resulting in both demand contraction and inventory destocking. As we navigated the market uncertainty, our team continued to stay focused on the levers within our control, including price discipline and cost actions, nicely mitigating the impact of volume declines on earnings. Our full-year net sales of $21.5 billion were down 5% in total and down 2% organically, with price up 2% and volume down 4%. While full-year operating EBITDA of $5.6 billion was down 4%, our strong operating discipline resulted in gross margin expansion of greater than 50 basis points and operating EBITDA margin expansion of 10 basis points for the year. Adjusted EPS of $3.80 per share was down 7%, reflecting lower segment income, currency headwinds, and a higher tax rate. This was partially offset by lower depreciation and a lower share count due to both share repurchases completed in the first half of the year from the Dow DuPont program and $750 million of repurchases we made since our separation on June 1st. Slide 3 provides more detail on our top-line results for the year, both the pluses and minuses. Our performance in each of our underlying businesses was consistent with market trends, And this slide highlights the themes we have talked about throughout the year, including our strength in 5G, which is reflected in our interconnect solutions business, the continued momentum in water solutions, and the steady growth of our food and beverage business. We continue to make high return investments in R&D, CapEx, and M&A in these and other areas to drive further innovation-led growth, including opportunities to expand our content in next-generation smartphones, and hybrid and electric vehicles. Offsetting these were lower results in our semiconductor technologies business and our T&I segment, and lower sales in our health and biosciences business, primarily from pronounced slowdowns in North America bioethanol and probiotics markets. Moving to adjusted EPS results on slide four, within our segment results, pricing gains, synergies, and cost savings were more than offset by the impact of softer volumes lower equity affiliate income, and higher year-over-year planned maintenance costs, particularly in the back half of the year in S&C. Currency was a $0.16 headwind for the year. Below the line items had a net neutral impact to our adjusted EPS, driven by an increase in the tax rate, offset by benefits from lower depreciation and amortization, and a lower share count. I'll now cover how we executed against our 2019 priorities on slide five. As I've mentioned, the past year was a challenge given macro conditions negatively impacting about 40% of our portfolio, which led to weaker results versus our expectations going into the year. However, we did deliver strong results in key end markets, such as water, 5G, aerospace, medical, and plant-based meats, where the market fundamentals remain sound. Our continued commitment to a best-in-class cost structure was a key driver of our ability to expand both gross and operating EBITDA margins. We delivered greater than $500 million in annual savings from synergy programs and the restructuring program we launched in the second quarter of 2019. These initiatives did help to improve our operating leverage, but we still have more work to do here. We also made significant progress this past year on our portfolio strategy, announcing our agreement to merge our nutrition and biosciences business with IFF, creating the de facto leader in the food and beverage space with the broadest technology and product offerings. Ed will speak further about this transaction later in the call. Additionally, we further refined our portfolio through the announcement of the divestment of three businesses during the year. Free cash flow conversion was strong this year, and we reported greater than 100% conversion on an underlying basis for the past two quarters. Finally, while I'm pleased that our 2019 ROIC of 29% reflects marked improvement from 2017 when the portfolio was first put together, our 2019 performance was not as strong as our prior year results due to weakened working capital performance, lower segment earnings, and a higher tax rate. Both working capital and segment earnings are key focus areas for improvement moving forward. and critical components of our 2020 priorities, which I'll discuss on the next slide. As noted, we know we have more work to do in some of our key value creation drivers. I am disappointed with our operational leverage as we exited the year and the slow start to 2020, and I'll provide more detail on the actions we're taking to return to growth, which is more in line with our expectations in a moment. Growth through innovation is a key component of our strategy. and we will continue to drive competitive advantage and sustainable top-line expansion through our application development engine and deep customer relationships. Through our differentiated investment, we aim to increase demand by advancing several key technical milestones in our major R&D platforms, such as 5G, microbiome, and auto electrification. To ensure we can meet additional demand generated by these programs, we will continue to implement key capacity expansions. R&D initiatives and investments in innovation will also contribute to our 2030 sustainability initiatives, and we look forward to reporting progress towards these goals. Our operating model enabled us to be agile and proactively respond to the dynamic market environment in 2019. This will be just as, if not more, important in 2020. Particular focus areas this year are continuing to advance productivity initiatives using digital tools and process simplification and right-sizing the organization. With a high-performing operating model, focus on innovation, and defined targets for working capital improvement, we expect to enable further improvement in both ROIC and free cash flow conversion. Active portfolio management remains a key component of our strategy. Ed will address this in more depth during his remarks. Slide 7 details the actions underway as well as those actions we expect to put in place in response to both the macro environment and our operating challenges. We expect that the completion of the Dow DuPont synergies and the 2019 restructuring plan will provide approximately $215 million of gross cost savings in 2020. These programs are well-defined, and the teams are executing the actions needed to deliver these savings. We are also planning further cost reductions this year to enable us to better maintain our operating leverage as we committed. These actions will also start to address the stranded costs we expect following completion of the NMB transaction. We anticipate approximately $90 million of savings from these initiatives. In addition, we have launched a project to consolidate our asset footprint, which we expect to generate a total of greater than $150 million of savings over a three-year period, with the first impact beginning in 2021. I will share more information on these items as they continue to take shape. Before I turn the call over to Jean to discuss the fourth quarter, I'll cover our first quarter and full year guidance, starting with organic growth on slide eight. For the full year, we expect sales of $21.5 to $22 billion, which is up slightly on an organic growth basis. We anticipate a return to more normal growth and all our core segments except T&I, which is being impacted by continued weakness in the automotive market and nylon industry headwinds, which I'll cover when reviewing EPS expectations. E&I is expected to deliver 2% to 5% organic growth as memory markets return to a more normal growth profile in the back half of the year. Next-generation smartphones with higher content of our materials continue to penetrate the market and we already started to see these volumes in the second half of last year. N&B is expected to grow 3% to 4% organically, with strong volumes across all three businesses, led by a return to growth in our probiotics business from the actions we're taking to win new business in North America, as well as the strong Chinese market, continued acceleration of our offerings into the alternative meat market, and strengthened food enzymes. S&C is also expected to grow 2% to 3% organically from continued strong demand in water solutions, further pricing gains, and resolution of the raw material supply shortages that limited production in the back half of last year in safety solutions. Non-core is expected to decline 3% to 5% organically from lower demand for trichlorosilane to the hemlock semiconductor joint venture and for serona and carpet and apparel applications. Moving to full-year adjusted EPS expectations on slide 9, this year we expect adjusted EPS of $3.70 to $3.90 per share, as higher volumes, cost reductions, and productivity improvements are offset by net headwinds from discrete items in 2019 and lower nylon prices coupled with a weaker nylon mix. From a quarterly perspective, these headwinds are most pronounced in the first quarter, which I'll cover on the next slide. I'll now go into further detail on the nylon dynamics we're facing. Nylon industry fundamentals were weaker in the second half of 2019 as the lower demand coupled with improved industry supply reliability negatively impacted our discretionary pricing power. We anticipate a similar operating environment as we enter 2020. and forecast T&I segment prices will be down about mid-single digits, primarily due to lower year-over-year nylon prices and weaker mix, resulting in pricing headwinds of approximately $200 to $250 million. For context, in 2018, T&I segment earnings were up 20% as steady demand, coupled with industry-wide supply disruption and force majeures in nylon 6-6 and key raw materials, fueled higher prices with our pricing peaking in the first quarter of 2019. With the supply issues resolved and weak auto build forecasts for 2020, market prices for nylon have been pressured and are expected to continue to decline as the year progresses, with the most significant impact in the first half of 2020. Additionally, weakened demand in our core markets has resulted in a shift towards more opportunistic, lower margin nylon sales so that we can fill our assets, resulting in a weaker mix of products sold. We have and continue to implement a series of actions to moderate the pricing impact, focused on productivity and asset utilization. While we anticipate a challenging 2020 for T&I, we remain constructive on our mid- to long-term outlook. Aerospace, healthcare, and auto electrification continue to provide steady demand for and our deep innovation capabilities have us well positioned for renewed growth as markets recover. In summary, our T&I expectations for this year are disappointing, but I'm confident that we will continue to take the right actions to drive sustainable long-term growth. Moving to Q1 on slide 10, as I noted, our growth headwinds are most pronounced in the first quarter and predominantly encompass declines from lower discrete item gains weakened nylon dynamics, and unplanned outages in S&C. Once we get past the first quarter, we expect the nylon headwinds to abate given the peak of nylon pricing was in Q1 of last year. In addition, our Kevlar assets that are causing the headwinds in S&C are already back up and running. These dynamics, coupled with the 2020 cost actions that will start to ramp after the first quarter, give us confidence that we can return to a more normal pattern of growth beyond the first quarter. This quarter, we anticipate sales to decline in the mid-single digits and adjusted EPS to be in the range of $0.70 to $0.74 per share. The top and bottom line declines are driven by nylon headwinds and the unplanned outages in our S&C segment. Additionally, there were approximately $80 million or $0.08 per share of discrete items in the first quarter of 2019 that will not repeat. Jean will cover some additional guidance detail in her comments, and in the appendix we have provided segment-level commentary as well as some additional modeling specifics. I'll now turn the call over to her.