DuPont de Nemours, Inc.

Good day and welcome to the DuPont First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Leland Weaver. Please go ahead.

Good morning, everyone. Thank you for joining us for DuPont's First Quarter 2020 Earnings Conference Call. We're 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 industrial relations section of DuPont's website and through the link to our webcast. Joining me today on the call are S. Rain, Chief Executive Officer, and Lori Koch, our Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the 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 2019 Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risk and uncertainties which may cause such differences. And like 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 Ed.

Thanks, Leland, and good morning, everyone, and thank you for joining us. This is obviously an unprecedented time, and I hope you are all safe and well. Today, we will walk through the discipline plan we are executing as we navigate the current environment, including our overall approach to protecting the health and safety of our employees and maintaining our supply chains and operations. We will also detail a number of actions we quickly implemented to strengthen our liquidity, protect our balance sheet, and generate cash. Because of these swift actions, we are on solid footing and are well prepared to handle the uncertain times ahead. We will also provide comments on the first four results, follow on market dynamics in April, as well as our current assumptions for the next few months. Since the outset of this pandemic, our priorities have been clear, beginning with the safety and well-being of our employees. We have taken aggressive steps to protect our employees by restricting access to our sites, implementing enhanced cleaning protocols, performing contact tracing among our employees, administering quarantines where needed, and implementing work from home protocols where possible. I want to acknowledge the tremendous efforts across our organization in overcoming the challenges created by the pandemic. The determination of our employees from across the globe to maintain business continuity has enabled us to continue to be a reliable supplier for our customers, and the vast majority of our plant sites have been deemed essential in their local jurisdictions and have continued to operate. As a result, many of our manufacturing and other necessary personnel deserve particular recognition. Their extraordinary dedication in this incredibly challenging environment has enabled us to keep our sites and supply chains operating, our second priority for managing in these difficult times. In fact, we have been successful in maintaining our operating base during the global pandemic with only a handful of our manufacturing locations shut down the manufacturing site. We have begun longer-term planning for an eventual return to the work for non-manufacturing employees, which will be done in accordance with all relevant government requirements and continued emphasis on health, safety, and the overall well-being of our employees, customers, and communities. Our third area of focus has been bolstering our already strong balance sheet by enhancing our liquidity position and implementing plans to generate and preserve cash. We will provide more detail on these actions in a moment. Lastly, we continue to do our part to help combat this pandemic. We have donated over 140,000 Tyvek garments and thousands of gallons of hand sanitizer to healthcare and other frontline workers. We have also used our 3D printing capabilities to make face shields and partnered with Cummins to use Dupont filtration technology to help augment the supply of N95 respirator masks. We have also announced a number of initiatives to increase the supply of protective garments by more than 15 million per month since the start of the pandemic, including the increased production of Tyvek garments by more than 9 million per month, primarily by shifting production away from non-healthcare markets, and launching the Tyvek Together campaign through the rapid development of a safe, easy-to-use version of Tyvek, and by empowering others to join DuPont in protecting frontline responders with free access to our designs and usage instructions. These are unprecedented times, and I am personally engaged in the day-to-day work to respond quickly to the changing environment. We take our designation as an essential business very seriously and are committed to doing all we can to support our employees, our customers, our partners, our shareholders, and the communities in which we operate. Slide three details the series of actions we have been operating against since the pandemic spiked in mid-March. The senior leadership team and I are on top of these items daily to ensure we remain well positioned. We have analyzed a number of stress case scenarios. We are favorably positioned to weather an unlikely steep and prolonged downturn while also being equipped to return to growth when the market recovers. Our playbook for this environment is straightforward. Improve cash generation through working capital improvement and deferral of certain capital expenditures. Strengthen our liquidity position and optimize the cost structure of the company. We will provide more color on how we are driving success in each of these areas. Our scenario planning was broad and simulated severe downturn cases to ensure we could protect the company. We are also staying keenly focused on the downside risk in automotive, aerospace, oil and gas, and other industrial markets. With nearly 15% of our sales connected to the automotive industry, This is the largest area of exposure for us, particularly within our transportation and industrial segment. The numbers are unprecedented, with global auto bills down 24% in the first quarter, and the latest estimates suggest that global auto bills will be down more than 40% in the second quarter. In light of this, we developed a plan in the first quarter to begin slowing and idling certain facilities in our network. to align our supply with market demand. Taking these actions will provide significant working capital improvement for inventory reductions over the course of the year, but will translate into near-term earnings headwinds as fixed costs that would otherwise be absorbed in inventory will now flow directly to earnings. For T&I, a very weak top line, driven by the expected decline in auto bills, as well as year-over-year price decline, coupled with the charges associated with these plant shutdowns, is expected to result in detrimental margin in T&I of approximately 55 to 65% in the second quarter. These are not easy decisions, but the confidence to react quickly and decisively is critical, and we will continue this mindset as we move forward. Let me turn it over to Lourdes for additional color on the other actions. a few comments on the first quarter.

Thanks, Ed. Slide four highlights our strong position. We have always valued a strong balance sheet, and that mindset led our actions as the severity of the downturn came into focus in mid-March. We sought the certainty of access to liquidity, as well as a firm plan for refinancing our November 2020 bond maturities by quickly putting the wheels in motion to obtain bank financing as commercial paper and credit markets were initially constrained. In short order, we were able to secure a new $1 billion 364-day revolving credit facility, which replaced the $750 million facility that was set to expire in June. While we expected to remain untapped, extending and enlarging this facility provides greater certainty to meet our general business needs. We also obtained a $2 billion delayed draw term loan to ensure we had a pass to pay off the November maturity, but have since replaced the bank commitment with a short-dated bond, which I will discuss on the next slide. With these new credit facilities in place and our strong cash position, we feel very comfortable with our liquidity. We also have opportunities ahead of us for further cash generation through working capital improvement and proceeds from divestitures. We have identified working capital as a key area for improvement and expect to deliver more than $500 million of working capital improvement in the year, and we are off to a nice start in the first quarter by reducing our use of cash by $300 million versus the prior year. Each of our businesses has a series of targeted focus areas to deliver our working capital improvement, including inventory reductions through initiatives such as SKU rationalization, and shifting from a make-to-stock model to a make-to-order model in certain businesses. Within accounts receivable, our teams have increased their focus on past due accounts, and across both accounts receivable and accounts payable, we continue to optimize terms with our customers and vendors. In the quarter, we closed the sale of our compound semiconductor solutions business, generating over $400 million in gross proceeds. We are also taking the prudent action to pull back on certain capex, reducing our spend by about $500 million versus the prior year. We elected in mid to late March to pause share buybacks after we had repurchased approximately $230 million in the quarter. While shareholder remuneration remains a critical component of our financial policy, this was a practical action at the time in order to conserve cash. Lastly, our board recently approved the second quarter dividend of $0.30 a share. We remain committed to our dividends and are confident that we will be able to maintain it through these challenging times. Moving to slide five, as I mentioned, just last week we launched a successful $2 billion bond offering, which has replaced the delayed draw bank facility we previously secured. The proceeds of this three-year bond offering will be used to satisfy the debt maturities that become due in November of this year. The newly issued bonds have a stated maturity 2023, but includes a provision that accelerates the maturity when we close the IFS transaction. With the receipt of the special cash payment from the NB and IFS deal, we remain committed to paying down our debt by $5 billion. With this deleveraging payment, we will have no long-term debt maturities until the end of 2023. Getting bonds in place to pay off the November maturities will be net neutral to our debt position as of the end of the year, and significantly improves our liquidity position. We have a manageable debt load and we are in a position to maintain a strong balance sheet both now and post the NMV IFS transaction. We continue to hold strong investment grade ratings from each of the leading rating agencies and intend to maintain a balanced financial policy that has positioned us well. Turning to slide six, we remain committed to delivering our structural cost savings targets. In March, we indicated that we would be doubling the incremental cost actions that we plan to deliver in 2020 from approximately $90 million to $180 million. We are not impacting the long-term growth of the company through the actions we are planning. It is important to note that the bulk of the savings we have identified are targeted at reducing functional G&A costs, thus maintaining our investment in sales and R&D. We plan to maintain our competitive level of R&D spend of approximately $900 million in 2020, which will help to ensure that we are well-positioned for growth once markets recover. These cost reductions will enable us to achieve a best-in-class functional cost structure. In addition to the structural cost savings, we took a number of actions to control cost increases, including the decision to forego merit increases for 2020 and implementing a hiring freeze. We're also seeing reductions in cost associated with capital projects as we pull back on our capital and lower spending across the company. These actions were implemented quickly, and we are seeing the benefits. Before turning it to Ed, I will comment on the first quarter results on slide seven. Our teams executed well to deliver a solid quarter above our expectations in each of our core segments. We delivered net sales of $5.2 billion, down 4% in total and down 2% organically, with price flat and volume down 2%. We saw strong demand across a number of key end markets, including protective garments, water filtration, electronics, and probiotics. Growth margin improved more than 150 basis points on a year-over-year basis on favorable mix and the benefits from our productivity actions. Operating EBITDA was $1.3 billion, down 8% from the year-ago period, driven primarily by the absence of $75 million of discrete gains in S&C and E&I, as well as lower volume and price in T&I. Adjusted EPS of 84 cents per share was down 9%. Turning to slide eight for more detail on the segment. The solid first quarter results in our nutrition and bioscience business are clear in the numbers. Solid top line growth and robust operating leverage led to an operating EBITDA margin improvement of more than 200 basis points. The operating leverage in NND was primarily driven by the recovery of the probiotics business, which delivers a margin above the segment average. Probiotics had its strongest quarter ever as key initiatives to strengthen the North America market were implemented and consumer demand for immune health strengthened globally. NND also saw increasing demand in food and beverage, home and personal care, and animal nutrition markets. a trend we continue to see in April. Likewise, 8% organic top-line growth in our E&I segment was a solid result. Strength in the quarter was led by double-digit growth in interconnect solutions driven by higher material content in premium next-generation smartphones and high single-digit growth in semiconductor technologies on new technology ramps within logic and foundry, coupled with robust demand for memory in servers and data centers. These areas of strength were more than offset by the absence of a $50 million prior year gains resulting in operating EBIT's decline of 12%. The results of our T&I business were generally as we had anticipated with a very difficult environment for both price and volume. As Ed mentioned, we expect further challenges looking forward as the audit industry slows dramatically as a result of the COVID-19 pandemic. We delivered net sales of $1.1 billion, which included a volume decline of 8% and a price decline of 4%. We anticipate a similar year-over-year pricing trend in the second quarter. Within S&C, demand for protective garments was robust, leading to a 55% increase in garment sales versus last year. Our Tyvek team is working tirelessly to get our protective garments in the hands of healthcare and other frontline workers, including, in many instances, donations of these garments. We are working closely with our channel partners to increase the speed and availability of personal protective equipment, and we are taking great effort to prohibit opportunistic pricing of these vital supplies. Despite the strength of protective garments, sales in the safety solutions business declined mid-single digits as demand weakened across industrial, aerospace, and defense markets as a result of the COVID-19 pandemic and challenges in the oil and gas industry. Similarly, shelter solutions sales declined no single digits as construction activity was impacted by state-owned orders issued across the globe. Demand continued to be strong in water solutions, which drove mid-single-digit organic growth in the quarter. SMC operating EBITDA margin of 28.8% was the highest it has been in several quarters, driven by the continued focus on price improvement, cost action, and productivity. Versus first quarter 2019, operating EBIT was down due to the absence of a $26 million gain, which was recognized in the prior year. Turning to the adjusted EPS bridge on slide 9, you'll see that our adjusted EPS declined 9% to $0.84 per share for the first quarter. Organic top-line growth in our E&I and in the B segment, as well as further execution of our cost savings and productivity actions, was not able to offset the 6 cent headwind we saw from nylon pricing pressure in our T&I segment, as well as the absence of prior year gains in our E&I S&C segment, which reduced adjusted EPS by 8 cents. Below the lines, we saw a 500 basis point increase to our base tax rate driven by discrete items in the first quarter. We expect our full year base tax rate to be in the range of 21 to 23% driven by the first quarter discrete items. With that, I'll turn it back to Ed.

Thanks, Lori. Slide 10 shows the progress we have made since announcing the NMB and IFF transaction last year. I remain very excited to bring these two businesses together to create a global leader. Since the announcement of the transaction in mid-December, teams have been hard at work. As I told you in January, the executive steering team and leaders for key work streams, including separation and integration, our financials, IT separation and stand-up, legal entity work, and talent selection are in place, and things are progressing as planned. In fact, as of March, we have received antitrust clearance here in the U.S., and our draft EU filing was submitted on April 20th, and we are now working with the European Commission to formally notify the transaction and obtain antitrust clearance. Also, the new leadership team will be announced later this month, and IFF intends to hold its shareholder vote in September. In summary, the teams are energized and all the critical milestones remain on track for a Q1 2021 closing. Let me wrap up with a few comments on what we saw in April, as well as our expectations for the second quarter. food and beverage, probiotics, electronics, and protective garments. There is some increased demand in these markets as a result of the pandemic, but these businesses are market leaders in their space, and there is undoubtedly underlying growth driving these results as well. However, as we have highlighted, these areas of strength are expected to be more than offset by the well-known softness in automotive, aerospace, oil and gas, and other industrial markets. In April, our sales were versus last year. Earlier I mentioned the actions we are taking to run our T&I business for cash through this period of significant demand weakness. These actions will result in near-term earnings headwinds as fixed costs that otherwise would have run to inventory will flow directly to earnings. Likewise, actions to 55% on lower volume, nylon pricing pressure, lower utilization, and costs associated with idling facilities. Excluding our decision to idle facilities, our decremental margins would be in the range of 35 to 40%. While it is still impossible to predict timing, our markets will eventually stabilize and return to growth, and we will be well positioned for the recovery. In the interim, we will continue to prioritize the safety and health of our employees, safely maintain our operations, strengthen our balance sheet, and partner with other industry leaders to combat this pandemic. I'll now turn it over to Leland to open up for Q&A.

Thanks, Ed. Before we move to the Q&A portion of our call, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. We will allow for one question per person. Operator, please provide the Q&A instructions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you'd like to ask a question. Our first question will come from Steve Tusa with JP Morgan.

Hey, guys. Good morning.

Good morning.

Good morning, Steve. A lot of companies are calling out, like, gargantuan temporary cost savings. You know, 3M talked about $350, $400 million or something in the second quarter alone. Honeywell talked about, like, a billion dollars. I see kind of the structural cost, which is positive, obviously, because that kind of, you know, carries forward. Can you maybe frame anything that may be temporary that, you know, can kind of defend the margins in the near term?

Yeah, Steve, thanks for the question. And obviously we've spent a lot of time on this topic. So as you know, we upped our structure of cost savings in the last month or so from $90 million to $180 million. In addition to that, Remember that we have another 165 million that is a structural change to the cost of the business that's coming out from the Dow DuPont merger and putting those businesses together. So, in total, we have about 300 and, you know, give or take $30 million coming out of the system permanently. On top of that, we have about another 80 to $100 million of what I would call you know, opportunities that are, you know, T&E reduction, external contractors spend at our facilities. And, you know, we've eliminated the merit increases. We freeze hiring. So, things that were in our plans, there's about another, you know, give or take $80 to $100 million that won't get spent that was baked into the plan. So, you know, when you kind of sit back and look at it, we have benchmarked every function in the company. every business in the company, and we are getting the G&A expenditures to best-in-class benchmarking with the best companies out there. Remember that four years ago when I arrived, we took about a billion dollars of structural cost out of DuPont, and during the Dow-Dupont merger, we took another billion dollars of structural cost out of the business on top of what we're now presently doing. So I think if you look at it, you know, we're going to benchmark very, very well through this. And again, I wanted to really attack the structural costs so that they're permanent in the business. Another point, though, that I would make, we did not touch the growth programs in the company. We left all of our sales organizations totally intact. And we left all of our R&D spend, which is 4% of sales, $900 million, totally intact. And, by the way, I think we're running our R&D machine very, very well. We benchmark every single program. What's the return going to be on the program? Are we spending what we said? Is the timing the timing we said it would be? So we're going to come out of the downturn, I think, in a very strong position. You know, we're still cranking out a lot of new products through this. So I think we've balanced this thing very well.

Our next question will come from Scott Davis with Milius Research.

Hi. Good morning, Ed. Good morning, Lori. Good morning.

Hey, Scott.

It's nice to hear your voices. Hope everybody's doing okay.

Yeah, good to hear you also.

Yeah. Hi, Ed. I was encouraged by that comment on April down low teens, and I guess my question, I was hoping you could give us some granularity on, perhaps by segment, on what those numbers were, because that does sound like a pretty good result versus what we're hearing from others so far, at least.

Yeah, thanks, Scott. So as we mentioned on the call, April was down kind of low to mid-teens. It was a similar result that we saw in Q1 kind of carry into April. So we saw continued strength in E&I, continued strength in N&D. The strength in E&I is primarily coming, again, from semiconductors, as we see increased usage in the data and server space. T&I and S&C were down significantly. More than what they were down in Q1, you know, in line with what you would expect with what's going on in automotive. You know, automotive right now we expect it to be down about 45% in Q2 versus down 25% in Q1. In S&C, continued strength in Tyvek within the garment space. So garments alone, which are about a third historically of Tyvek, they've kind of come up now to almost half of Tyvek. We're up about 55% in the quarter, so really nice strength there. And we've announced some capacity expansions to enable that to continue to grow into Q2. But the headwinds that we're seeing in aerospace and oil and gas are more than offsetting that, as well as construction with all the stay-at-home orders. So net-net April down, as we mentioned about low to mid-teens, was very similar in market results to what we saw in Q1.

Our next question will come from Vincent Andrews with Morgan Stanley.

Thank you, and good morning. Glad everyone's well, and I appreciate the shout-out to New York City in the cover slide. I assume that's not a coincidence. Maybe just a follow-up on the transportation and maybe just a follow-up on the transportation industrials. You know, you said bills were down 24% in one queue, but your volume is only down 8%. Was that sort of trade loading of some sort? Does that have to reverse in the second quarter such that your auto performance would actually be much worse than that 40% that you're seeing in decline in global auto builds?

Yeah, so I think – so underneath the 12% down, 8% volume that we reported in T&I. So there was strength that we saw in the healthcare segment that offsets some of the weakness that we saw in mobility solutions. So mobility would have been down more than the results that we reported for the corridor. Having said that, though, we continue to expect to see our performance outpacing auto bills just driven by the content for vehicles. So we've given a number in the tax of about one and a half times that we would look to exceed auto bills just driven by vehicles. The extra material content that we have as we see ramps towards light weighting as well as electric vehicles. So that's kind of what led to our results throughout PACE. You know, there is a little bit of a timeline between when you see auto builds decline and when you see back to chain where we primarily fell into with our polymers. So we did see a little bit of acceleration in Q1 as people were loading their supply chains in advance of the downturn. So I think our results in Q2 will more mirror what you're seeing from an end market perspective.

Yeah, and just to add on to that, to make it clear, this is a business in T&I that we are truly running for cash performance in this period of time. So we are purposely are hurting our earnings by $90 to $100 million if we kept running the facilities As they do, for instance, in the semiconductor industry, our earnings would literally be $90 to $100 million better. But we're going to draw down the supply chain here and generate, you know, $200 to $250 million of cash performance in the company. So we will be temporarily shutting down about 50% of our polymer production. of capacity in the business. And I think it's the right decision, a smart decision to do that. And we'll come out of it stronger and have a better uptick when things return a little bit more to normal.

And your next question will come from Steve Byrne with Bank of America.

Yes, thank you.

Thank you. I appreciate the near-term focus on these urgent issues I just wondered if that impacted any progress you made on your PFAS liabilities. Didn't hear much about that and just want to know whether or not you could give us an update on that. The arbitration with Chemours, the litigation of the Ohio MDL and any movement towards getting a little more collaborative on this front.

Yeah, thanks. Thanks for the question, Steve. So on the PFOA front, as you know, we had two trials of the case, you know, the small amount of cases remaining. My personal opinion is there will be a settlement there. We'll get those cases in Ohio behind us. And I'm highly confident that will occur. As you know, You know, Chemours, the judge ruled in our favor that this will go to arbitration. Chemours did appeal that to the court. But, you know, the law is so heavily on our side on this issue that, you know, arbitration will occur here. As I said before, I like the arbitration process just because it's a quicker process than going through the court system. So, you know, we feel very, very good about that. But, again, my opinion is there probably will be a settlement with Chemours that will occur here at some point in time. We'll renegotiate the agreement we have between the companies. There are some very key guideposts in any agreement that we would come up with that are important to us. We will not do an uncapped deal, and it would be a deal that would play out over multiple, multiple years, because I don't see any liabilities on PFOA that are significant at any point in time. But there will be liabilities that will play out over multiple years as we, you know, do remediation at these certain sites and all that. And then one other point I would just make, you know, remember that I think a lot of the hoopla around PFOA with us, and I certainly acknowledge this, you know, that it's a little bit of a cloud over us, is that we are being named in, you know, a fair amount of the firefighting foam cases. But it's very important, and I know, Steve, you've written extensively about this. We never made firefighting foam. We had one surfactant that was used for 10 years out of a 70-year period. So I think we're a very, very minor player, if at all. in firefighting foam. And I think the biggest issue for DuPont is to get out of those cases and be able to, you know, wrap that up, I think is the biggest thing because the rest of the PFOA is very limited to four manufacturing sites where we used it in the process in the manufacturing. So, again, that will play out over the next year or so. But on the other two items, the Ohio one, the Chemours one, I think you'll see, you know, some action there in the coming months.

Next question will come from John Inch with Gordon Haskett.

Good morning, everybody. Good morning, guys. Good morning, guys. You have a prominent, I'll just say a prominent reputation as a deal guy. However, I think folks often forget you kind of cut your teeth in operations at Motorola. How have you and Laurie gone about coming up with more than double the cost saves versus prior management in only a few short weeks and months? And often companies that start down more of a heavy lifting restructuring path, think financial services, lots of different sectors, they actually find there's more and more that they could do without sacrificing, you know, core ops or productivity or the quality or whatever. Are you guys finding, you know, similar opportunities as you go through the processes or is it still kind of a little bit too early to make that judgment call?

Yeah, thanks for the question, John. And, you know, Laurie, jump in in a minute also if you would like. And, Barry, thank you for saying, you know, about working on cost and operations. That's actually what I like to do the most, even though maybe reputationally it's different than that. I love running the businesses. So, I mean, I'm a big believer in benchmarking. I'm a big believer in keeping G&A costs really lean and mean. By the way, I've talked to many CEOs during the COVID-19 year, and I actually think we're finding additional ways to potentially structurally save costs in the company. I'm pretty impressed at how efficient We're running the company in the stay at home policy for most of our non-manufacturing employees. So I think there's some lessons we're going to learn here on our real estate footprint as we move forward. But, you know, we always intended to take out more costs. And remember, when NMB leads the portfolio, It's important that we reduce our G&A cost structure in a company so that we're still best in class when that revenue in EBITDA leaves the company. So what we've done is we've really benchmarked very significantly around what are we going to look like post the N&B transaction. One of the other things we're doing, which will probably translate into better costs, is we're really going through the company and looking at every single SKU in the company and really looking at a rationalization there. I've done this in every other company I've run and there's always very significant opportunity. We've already completed it in our water business and we've taken the margins up a thousand basis points in the water business and a big part of that was the rationalization of SKUs through the business. kind of the path that Lori and I are on right now in the company. And I think we'll continue to get opportunities from that. Lori, you want to comment?

Yeah, I think, you know, our next area of focus, we've obviously run a lot of costs out of SARI over the last few years. So we're looking and shifting the focus towards COGS. So there are definitely areas of opportunities in COGS. We spend about $13, $14 billion there. There's opportunities to increase our reliability, increase our uptime, increase our yield. So that's definitely an excellent area of focus for us that will help us to continue to expand margins.

Our next question will come from Jeff Sprague with Vertical Research.

Thanks. Good morning, everyone. Hope everyone's well. Thanks, Jeff. Okay. Just kind of thinking about the trajectory of this thing. Obviously, a lot of your businesses are fairly short cycle, so it's unclear how much visibility you have. But do you see April being the low watermark in terms of kind of sales declines? Or, you know, are we looking at kind of the possibility that, you know, auto stays weak and some of the pockets of strength like electronics maybe, you know, soften up a bit? And maybe as part of that answer, Ed, you know, you made a comment about planning for kind of an unlikely steep and prolonged downturn. Obviously, none of us have a crystal ball here, but appreciate your perspective on, you know, really what you think this does look like and, you know, kind of the path back up and out of this current drawdown.

Yeah, let me hit the high-level scenario planning we did first, Jeff, and I appreciate the question. And by the way, I was a CEO through the 08-09, and Jeff, you know this, I took over Tyco in 2002 on the brink of bankruptcy, so I've done a lot of scenario planning in the past and never thought I'd have to do it again. But we actually did two cases for for ourselves and for our board that we presented to the board of directors. And by the way, I don't plan on this happening at all. But it was truly just scenario planning. We did a scenario where what if revenue was down 30% for at least one year, we did 20% down on volume 10% down on price, which, you know, we're practically the world would be coming to an end. But we did it anyway, just to say, hey, here's how the P&L would look. Here's how our cash position would look. And by the way, we would be fine through a period like that. We did another scenario, and I don't even want to say this one to you, but it was even worse than the 30% one. Let me just say it that way that we also presented to the board. And I'm just a big believer in, you know, don't be naive here. If things are tough for a longer period, how do you run the company through it and make sure the company's healthy? So I feel very, very comfortable with where we sit and where we put the liquidity of the company through this scenario. And oh, by the way, when the NBIFF deal happens, you know, we get $7.3 billion of cash. And as Laurie mentioned in her prepared remarks, we're going to use $5 billion of that to pay down. So we'll be in a normal operating environment, our debt profile will actually be better than it is in current DuPont. And remember, we will still have $2.3 billion of excess cash left over from that 7.3 billion that we'll have available to us. So we're going to be in just a phenomenal position from that standpoint. Laurie, would you like to comment a little more detail?

Yeah, so I think to your question on the second quarter, so, you know, we do at this point where we see the second quarter as the lowest through the year. So, you know, as we mentioned, the sales in April were down low to mid-teens. We have a hard time seeing total Q2 sales being worse than down mid-teens. So as we see it now, the Q2 should be the low point.

Yeah, I think also – You know, you mentioned the E&I business, I could see the semi business obviously downturn a little bit, going maybe into the third quarter, you know, it's been running very robust in the first quarter is running robust in the second quarter. But you know, all indicators are that, you know, that will turn down a little bit. So I could see that happening. But as Laurie just said, I think mid-teens down revenue is probably the bottom of what we're seeing based on what we know as of today.

And your next question will come from David Begleiter with Deutsche Bank.

Thank you. Good morning. Ed and Laurie, just on the CapEx, good morning. On the CapEx reductions, what types of projects, I assume growth projects, are being cut back? I assume these are temporary deferrals. Are you running close to maintenance levels at these current CapEx guidance targets? Thank you.

Yeah, so high level, David. Thank you for the question. So last year, we spent $1.5 billion on CapEx, and we planned on spending $1.3 billion this year. And remember, we're higher than our DNA because we had – Three or four key growth projects all hitting at the same time that we feel really good about. So that's the reason for the 1.5 last year and even higher this year or high for us at 1.3 this year. We have reduced that to $1 billion. So 1.5 last year down to $1 billion this year. By the way, everything that we've delayed is simply a delay. We're not canceling it because we want to, you know, turn these back up when appropriate. But the two of the bigger ones that we cut back on was Tyvek Line 8, which is our biggest CapEx program by far. It's over $400 million. And we spent a fair amount on that last year. That will come online in a couple years. That is a big, big project for us. And the demand on Tyvek, even at SCORM, it's because of medical supplies and all that is, you know, very important to us. So, anyway, that was one. We cut back on our Capcom expansion just temporarily. That was another one. And some of our maintenance CapEx, we slowed down just a little bit also. So, that's what gets us down to the $1 billion. One thing we did not touch at all, and I certainly would never do this, is any of our safety programs that we're spending CapEx on at our facilities, we've maintained at 100% of the spend level. And then another area, I'd say, the other big one, besides slowing down a couple of the growth projects, was some of our ERP, you know, pro software programs. We also slowed those down. nice to have from an efficiency standpoint, but you know, we're six months later on and it's not the end of the world. So that's kind of the big buckets on what we did. And by the way, as we see things pick up, obviously, we'll go right back to, you know, spending against those growth programs.

Yeah, if I can just quickly comment on the Tyvek Line 8 that we had to pause due to some regulations in Luxembourg where the construction is taking place. We did mention our prepared remarks, but just to reiterate that we were able to put in place an incremental capacity expansion to be able to meet the current Tyvek demand. So we not only added in the first quarter alone, we usually had about 16 million garments. We went up to 25 million garments, and that was through a combination of incremental capacity in our current asset as well as pulling products from non-healthcare markets. In the second quarter, we announced our Tie Back Together campaign, which will allow us to add another 5 to 6 million garments. So we've got new capacity coming online, even though we delayed the startup of the new line because of the regulations going on in Luxembourg.

And our next question will come from Jonas Ansgaard with Bernstein.

Good morning. Good morning, Jonas.

I was wondering about your cash use, your buybacks. At what point would you feel comfortable resuming the buybacks again? I'm not really asking for a specific week, but how are you thinking about it?

Yeah, I certainly haven't thought about it in weeks yet. So we did about $230 million of buyback in the first quarter, 6.1 million shares. And I guess the way the stocks come back, we bought them back at a pretty nice price. So I obviously feel good about that. And as we said, we suspended it. We have not canceled it. If things are picking up through the second half of the year, we'll certainly look at the share buyback again. As I said a few minutes ago, the balance sheet's in great shape. We're going to get the cash from the, you know, the IFFNB transaction. So, you know, we know that's coming at the beginning of next year. So we'll be in a strong position to, you know, reassess that with the board. So it's really just, to spend for the time being, make sure things don't get worse here. And, uh, you know, as Lori said, you know, I think hopefully the second quarter is the low quarter. Um, you know, maybe dress obviously into the third quarter, but, um, you know, pick up from there. And then we, we have that money coming from the, uh, the deal. Uh, by the, I'd also just mention on the, um, NB and IFF front, you know, as we said in our prepared remarks, we are in great shape. I talk to Andreas, the CEO of IFF, every single week. The teams are right on track with everything we need to do. You know, we did get US antitrust approval. We're in the process with the EU now. And as you know, in this deal, there really is no antitrust issues. So all the teams are right on schedule. which is pretty amazing considering a lot of work at home policy going on right now at both of the companies. So, we will definitely progress on the schedule we're on for a February 1 close. And, you know, we're going to have the shareholder vote in September. And, you know, I feel great about that. And we also have a shareholder that owns, you know, give or take 23, 24% of the shares voting in favor of the deal. So, you know, just in great shape.

Your next question will come from John McNulty with BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. Good morning. So with some of the economies actually starting to open up a little bit, I guess, can you speak to whether you're seeing any incremental demand pull? And I guess to that, You spoke earlier in the call as to, you know, maybe there was a little bit of inventory to kind of work through, whether it was yours or your customers in the auto side. Can you speak to kind of a broader, the broader situation with regard to inventories and what you're seeing in the channels and how long it may take to actually work through that?

Yeah, I'll let Lori answer the second part of that. Let me just touch on the first part of your question, John, and give you kind of one data point. You know, the China economy is coming back first. And by the way, it was interesting, within three weeks of the, you know, being able to come back in China, all of our production facilities were up and running after the new year. It was very impressive, by the way, including one in Wuhan that we have. So, we're pretty much back to, you know, not quite full capacity, but darn near close to it with our 13 production facilities in China. But let me give you a data point. In the first quarter in China, our sales were down organically 1%, which actually surprised me that it was that good, considering we were shut down for a few extra weeks. But in April, our sales are up, you know, six to 7% in China. So we're clearly seeing the comeback there. And again, things aren't totally back to normal over there, but from a minus one to a plus six or seven is pretty impressive. Just to give you a little more granularity around that, and similar to comments that were made a little bit ago, E&I is up double digit. N&B is up double digit. And by the way, the real performance in N&B is probiotics in China is double digit growth. T&I and S&C are kind of flat. You know, so that that's kind of the breakdown of it. So, you know, I just see economies, you know, everyone getting out of their homes again, and the economy starting to work. That's the numbers we're seeing over in the China market. But Lori, do you want to comment?

Yeah, I think, you know, the inventory discussion is best had within T&I and E&I, as you had mentioned. So T&I, we talked at the beginning of that call that potentially there was a little bit of pre-buying in Q1 into the polymer chain that caused our results to be a little bit better than where the auto bills were. You know, one of the key indicators that we look at in China is the vehicle alert index. It measures kind of inventory in the chain at the dealer level. And we did see some normalization as we got towards the end of 2019 and then into January. And then it spiked to a pretty high amount, I think, in the 80s in February and then came back down nicely in March. And so I think right now, as we see it, there's not a lot of excess inventory in the auto chain. Obviously, we're just having issues with demand with auto goods expected to be down 45% in Q2. On the E&I side, I would say there is some of the customers building their supplies to ensure that they have adequate safety stocks that have benefited Q1, probably benefiting a little bit of Q2, especially within the semi-chain. So I think those are kind of the landscape of inventory. So probably about normal, there were some spikes in Q1 and T&I that were actually normal and probably a little bit elevated in E&I.

Our next question will come from Court with Goldman Sachs.

Thank you very much. Good morning.

Good morning.

Good morning. I saw you getting fed up. You know, net price mix was flat. I'm wondering if you could comment a little bit. I guess in T&I and S&C, you do have some petrochemical backbones. What did the raw material bill look like in the first quarter? And I guess we're still seeing some softness in nylon and some other things. So how do you sort of see that price mix development into the middle part of the year?

Yeah, so the majority of our benefit from lower RAS within the oil dynamic would be within T&I and S&C. So from a full-year perspective, we do expect, if oil prices were to kind of stay where it is, about a $200 million benefit in RAS, primarily in those two segments. We're actually seeing some raw headwinds within N&B and some of the food-based ingredients. So pricing in T&I in Q1 was down 4%. That's primarily nylon. It was actually a little bit better than what we would have thought just given demand was a little bit lower, and we had a better mix of nylon sales. If you recall last quarter when we did earnings, we talked about price being headwinds being from two components, one, actual nylon price decreases, and two, untapable nylon mix as we sell more of the opportunistic nylon. So in Q1, we actually didn't sell as much opportunistic volume for that benefit. It's a price a little bit. Within S&C, we continue to do really well with deriving value and use pricing. We continue to see price lifts within S&C in Q1. So we'll expect that dynamic to continue into Q2. Back to T&I real quick. So sequentially, we do see nylon price declining Again, into Q2, we see a similar kind of down, mid-single-digit price overall in T&I in Q2. Sequentially, I think the most of the headwinds will be mainly behind us as we get through Q2, and as we go to the back half of the year, we should be about flat from an all-on-price perspective.

Next question will come from John Roberts with UBS.

Thanks, and glad you all sound well. Ed, the T&I segment was originally part of New DAO, and then it was moved to DuPont after it was thought to be a better fit with DuPont. Could we revisit the thinking on that, and is there anything tax-wise that would preclude you from reopening discussions with DAO?

Yeah, so remember what we really, we still did move a key part of the T&I business over to Dow, which really fit more with them with exactly what they did. So we kept the part, and again, it's 60% of T&I is auto, but we're, DuPont's a big player, obviously, in the auto and market, not just in the T&I business. So strategically, You know, I think the fit with us was better there. But remember, the other 40% of the T&I business is other really great end markets, as Laurie mentioned, one of them being medical, which has held up obviously very, very well through this period of time. So, you know, look, I'll just say overall, I like where the DuPont portfolio is. Having said that, we always have optionality in the portfolio. I think we're aware of every possible scenario out there. And if something down the road, Looks like it'll create significant value for us, i.e., the NB-IFF deal. You know, we certainly will look at it. We're not wed to things being, you know, exactly the way they are. Our key is to create shareholder value over the long term. Having said that, in the environment we're in right now, Laurie and I and the team are very focused on the operations of business, generating cash, and we're really spending our time on that at this point in time. I would highlight, you know, just on the deal front, it's interesting to note, and I'm not surprised by this at all, that the value of the N&B deal is almost exactly where we announced the deal when we announced that the value of N&B was $26.2 billion. I didn't actually rack and stack it in the last day, but it's somewhere in the $25.5 of billion range where the stock price is trading at. And again, not surprised by that because the NMV business, as you could see in the first quarter, had a tremendous quarter. We had 3% organic growth in the business. So those types of businesses are going to hold up extremely well in any environment economically, and I think therefore afford a nice multiple in that sector, which I think it deserves. When you really then look at it, most of you about all of you have written about this when you look at rename code DuPont and want to trade that on a multiple basis, it's pretty incredible to disconnect that sits there. So I think therein lies a big opportunity for our shareholders over the next year.

And our final question will come from Chris Parkinson with Credit Suisse.

Great. Thank you. Thanks for speaking to me, and I'm glad to hear everybody's doing all right given the circumstances. Lori hit on this a little. Thank you. Lori did hit on this a little, but just as it pertains to the safety and construction segments, just given the differential current growth rates across the subsegments, can you just offer us some additional framework on how we should be thinking about the mixed effects and the potential for detrimental margins, and then also just any insights on just how you're still thinking about the longer-term margin profile of that business. Thank you very much.

Yeah, so we had posted really strong margins in Q1, as we had mentioned, so 28.8%. I mean, a piece of that was the favorable mix that we're seeing, so Tyvek is towards the high end of our segment margins when you compare it across the different businesses in S&C. So the highlights within S&C continue to be Pyvex and our water solutions business, so really nice growth, I think 6% organically, 14% as reported with the benefits of the water acquisitions that we made at the end of the quarter. The headwinds are obviously within Shelter, which is in the low end of the margin for the business, so it would be below segment margins, as well as where we fell into oil and gas and aerospace. So the detrimental margins in S&C for the quarter would be a little worse than what we mentioned underlying for the company, really primarily from slowing down some production sites. So we had mentioned within T&I that we're actually taking item mills of about $90 to $100 million that are flowing directly into COGS in the quarter versus rolling through inventory. In S&C, we're not taking production down to the point where we need to take idle mills, but therefore we are having a lower volume run across our plants, causing higher unit rates, which are what are causing the decrementals to be a little bit worse than what we said for the total company. But continue to see longer term the ability to drive those 28%, 29% segment margins for S&C.

Thank you, everyone, for joining our call. For your reference, the copy of the transcript will be posted on DuPont's website. This concludes our call.

Again, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.