DuPont de Nemours, Inc.

Good day and welcome to the DuPont Second Quarter 2020 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Leland Weaver. Please go ahead.

Good morning everyone. Thank you for joining us to the DuPont Second Quarter 2020 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. 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 Ed Green, Chief Executive Officer, and Lori Tosh, our Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the slide. During the call we will make forward-looking statements regarding our expectations or predictions about the future. Because the 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. Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to non-GAP measures for reconciliation to the most comparable GAP financial measure as 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. I hope you and your loved ones are safe and well. Last quarter I laid out our priorities for operating in this unprecedented environment. I am pleased to say that the quick actions that we took to protect our employees, ensure the safe operations of our sites, strengthen the financial position of the company, and do our part to combat this pandemic far-working. Additionally, I'd like to acknowledge the tremendous efforts of all of our employees to deliver solid results this quarter in the face of this global pandemic. Laurie will cover the specifics of the quarter, but first I'd like to discuss our performance versus our priorities in the current environment. First and foremost, the safety and wellbeing of our employees remains paramount. We continue to restrict access to our sites, execute enhanced clean protocols, administer quarantines where needed, and enable our employees to work from home where possible. In addition to the extra measures taken in response to the pandemic, our employees have remained laser-focused on safety as we achieved our all-time best safety performance in the second quarter. We remain focused on safely maintaining our operations. Through the incredible effort across our organization, 100% of our 170 manufacturing sites around the globe are currently operating according to plan. We also made nice progress on our third priority, bolstering our already strong balance sheet. As we discussed the last quarter, we launched a successful 2 billion bond offering, which will be used to satisfy the long-term debt maturities that come due in November of this year, and extended and upsized our liquidity facility. Looking ahead, we plan on using 5 billion in special cash payment associated with the NMB and IFF deal to pay down debt, which will leave us in a very favorable position with no long-term debt maturities until the end of 2023. Finally, we believe it is critically important for companies like ours to continue partnering with other industry leaders to deliver essential products needed to support the significant efforts to combat COVID-19. I am proud of what we've achieved thus far with the Tizek Together campaign, which in combination with our efforts to increase our production capacity, has significantly improved the supply of protective garments to health care workers and others on the front line of this pandemic. We also continue to advance other critical priorities across the company. In fact, just last week we published our inaugural sustainability report at the New DuPont. With this report, we are not only able to convey our progress towards our 2030 sustainability goals, but we are also able to highlight our innovations across the company, which create a positive impact in people's lives every day. This is an exciting time for our company and I look forward to the progress we will make in the coming years. Moving to slide 3, I am also pleased with the progress we've made executing the playbook that we implemented in mid-March as the pandemic intensified. We remain committed to a -in-class cost structure and delivered approximately $130 million in cost savings during the quarter, two-thirds of which are structural. We have made great, great progress towards delivering the $180 million of structural cost savings we announced earlier this year, and the majority of the actions to deliver the savings are in place. In addition to these cost savings, we are also realizing benefits from the tail of the Dow-DuPont synergies and the restructuring actions we put in place in 2019. As I've noted before, our cost actions are targeted towards GNA expenses and aimed at enabling a highly productive cost structure, which is appropriately scaled to the size of the organization. While we will continuously monitor our cost structure for optimization opportunities, we will also drive growth through innovation, which remains a key component of our strategy. We are continuing to invest in key areas like sales, application development, and R&D so that when we fully emerge from this softness, we will be well positioned to capture growth. We are also studying the temporary savings that we are experiencing in areas such as T&E to better understand what changes we can make to ensure some portion of these temporary savings become more structural. Additionally, longer term, we are evaluating the most effective approach to the way we work in order to generate further potential savings from consolidation of our asset footprint driven by hoteling or other office sharing initiatives. Cost productivity is an installed mindset at DUPON, and we are consistently scouting for new areas to drive improvement. We also made the decision to reduce 2020 CapEx to approximately $1 billion, which is about $500 million lower than 2019. We are not reducing any safety related capital expenditures and have developed detailed plans for restarting our growth projects to ensure we are able to capture the demand when markets fully recover. Through the first half of the year, we remain on track to deliver our goal. From a working capital perspective, we made good progress reducing our past two accounts in the quarter, which is notable in the current environment. However, the majority of the benefits we generated were from lower sales and high-link facilities versus systemic productivity improvements. Our teams have developed a number of detailed plans to generate working capital benefits beyond those that you would expect in a soft macro environment, and we anticipate these initiatives will favorably impact the second half and enable the greater than $500 million improvement that we are targeting for 2020. Our focus on cash generation not only ensures we have a strong balance sheet, but positions us well to act on our commitment of returning excess capital to shareholders when we and the board feel it is appropriate to do so. I believe that our playbook is working. We have solid plans in place and are keenly focused on all the levers within our control. We are confident in the strength of our businesses and are well positioned for growth when markets fully recover. Before turning it over to Lori, I'd like to make a few comments on diversity, equality, and inclusion. The significant challenge that has been put before all of us as individuals and as a company to confront deep-rooted issues of inequality, racism, and discrimination is one that we must take head on. My leadership team and I are committed to supporting racial equity with an intensified focus on the experiences of black Americans through programs specifically aimed at improving our hiring, training, and talent development practices within DuPont as well as extensive efforts to eliminate barriers to equality for people of color and our broader communities. This is the right thing to do and a necessity for any company that wants to achieve long-term sustainable leadership. I am confident that DuPont will once again be an agent of change to make meaningful and lasting progress in this vital area. Now let me turn it over to Lori to walk through some of the details for the quarter.

Thanks, Ed, and good morning, everyone. Our results for the quarter give me confidence that our business teams are staying close to our customers, understanding the near-term market dynamics of their industries, and responding appropriately. These actions enabled us to deliver results that exceeded the expectations we provided in the first week of May with overall market dynamics very similar at the end of the quarter as they were at the beginning. The diversity of our portfolio, including significant strength in semiconductors, water filtration, high-vect protective garments, and health and wellness, enabled us to deliver top-round results that were down 10% organically in the most challenging macroenvironment that we have seen since the global financial crisis. Additionally, excluding the costs associated with idling facilities as well as a gain in an encore segment, our earnings declines were very consistent with our top-line performance on a percentage basis due to significant processes that we have taken to improve our cost structure. In the quarter, our electronics and imaging and nutrition and biosciences businesses delivered organic growth of 7% and 1% respectively. This was more than offset by organic declines in the other segments with the largest impact in our TNI segment, which is highly exposed to the auto industry. Regionally, organic sales declined -to-high teams in the US and Canada, Europe, and Latin America, while Asia Pacific was up 1% versus last year. Sequentially, the -over-year change in the US and Canada, Europe, and Latin America declined while Asia Pacific showed a slight improvement. These trends are all consistent with what we expected as a pandemic significantly slowed Western economies through the second quarter. Also in the second quarter, we saw parts of Asia, particularly China, begin their recovery. China sales in our core segments improved 6% versus the second quarter of 2019 and 20% sequentially. The top-line growth in E&I and M&B coupled with delivery of our cost savings translated into robust operating EBITDA margin expansion in each of these segments in the quarter, up 190 and 240 basis points respectively. Unprecedented demand weakness in automotive markets, which led to division to idle approximately 50% of our polymer capacity in T&I, as well as soft industrial markets, led to margin contraction in T&I and safety and construction. In total, we generated operating EBITDA of $1.1 billion and adjusted EPS of $0.70 per share. Our decremental margin was approximately 45% in the quarter at the low end of our expected range driven primarily by even greater cost savings than we had anticipated. Excluding the $64 million non-core gain and the $160 million of cost associated with idling facilities, our decremental margins in the quarter were approximately 30%. Free cash flow of approximately $560 million in the quarter led to a conversion rate of approximately 140%. As Ed indicated, we have implemented a number of working capital initiatives that will enable us to continue to drive strong cash flow conversion through the balance of the year. As you saw on our release this morning, we recorded a non-cash impairment charge related to our T&I segment of $2.5 billion. As you know, the automotive markets account for about 15% of our sales. The majority of this exposure sits in our T&I segment with the advanced materials we supply to the OEMs, Tier 1 and Tier 2 component manufacturers. This is a market we watch closely and one that has been significantly impacted by the global pandemic. With auto bills down now more than 30% in the first half of 2020 and IHS projections for further -over-year declines in the second half, we determined that an impairment test was appropriate. In connection with the DabuPont merger in 2017, the carrying value of the Heritage Dupont assets and liabilities were marked as fair value and a significant goodwill and intangible balance was recorded. Specific to T&I, approximately $10 billion of goodwill and intangibles were recorded in 2017 equating to more than 75% of the overall carrying value of the segment. The impairment charge was the result of the unprecedented market dynamics we see today combined with the increased carrying value of the assets resulting from the DabuPont merger. It is important to note that there was no impairment recorded associated with the tangible assets of the T&I segment. Our confidence in the long-term characteristics of the automotive industry and our position as a market leader remains strong. In addition, we continue to expand our application development expertise and take actions to improve our class structure so that we can expand our margin profile when markets fully recover. Slide 5 provides more detail on the -over-year change in net sales. Our organic sales decline of 10% reflects the net impact of significant market weakness in automotive, aerospace, oil and gas, and other industrial and market, partially offset by robust demand in semiconductors, water filtration, type of protective garments, and health and wellness. Within T&I, semiconductor technologies delivered another strong quarter with 17% growth. The semi-demand was broad-based. We saw market strengths in both logic and foundry driven by the ramp-up of advanced technology nodes which played nicely to our product portfolio, as well as robust demand for memory and servers and data centers. The strength and semi also provided a more favorable product mix, leading to 190 data points of margin improvement in the segment. Our nutrition and bioscience business also delivered another strong quarter with very resilient growth across the food and beverage and health and wellness market. Our sales in these end markets, which make up approximately 85% of NMB's portfolio, were up 5% organically in the quarter. New customer wins and initiatives to better position our products in the market through multiple channels, combined with a renewed focus on health and wellness, drove more than 30% growth in probiotics, its strongest quarter ever. Pharma Solutions recorded a strong quarter on increased demand in -the-counter and prescription pharma applications. Growing demand in the meat-free segment and continued strength in animal nutrition and home and personal care applications also contributed to the strong results. These areas of strength were partially offset by significant demand weakness in the energy and industrial markets, which make up about 15% of NMB's top line. The well-known weakness in automotive and industrial end markets continue to impact all three businesses within T&I. Our volumes in the second quarter were down 28%, while global auto builds were down 45%. We saw a similar trend in the first quarter, where our volumes declined to 8% when global auto builds were down 22%. Our total T&I outperformance versus auto builds is a function of a few key drivers. First is mixed with about 40% of the portfolio selling into markets outside of auto, such as healthcare and electronics. Additionally, while we expect to deliver volume growth in our normal inventory environment of about 1.5 times auto builds, the main drivers that are outperformance versus auto builds in the current environment is more a function of where we sell into the supply chain. Our polymer sales, which account for the majority of our auto exposure, are sold into tier 1 and tier 2 component manufacturers, whereas our adhesive business sells directly to OEMs. Our polymer sales outperformed auto builds, which we believe has led to some inventory build in the channel, which we expect to result in a more muted recovery in the back half versus expectations for auto builds. Our adhesive business sales are more directly aligned with auto builds results, and we therefore expect that segment of the business to recover along with the expected pace of recovery at the OEM. Within SMC, demand of those water solutions and Tyvek protective garments remained robust. Water delivered another quarter with double-digit organic growth. The Tyvek protective garment business has expanded to nearly 30% of the safety solutions portfolio, with garment sales up 65% in the second quarter. However, weakness in aerospace, automotive, oil and gas, and industrial markets continued leading to a decline in the safety business overall. Growth in shelter solutions remained pressured as we continued to redirect Tyvek supply to personal protection and stayed home orders across the globe and to the limited demand. Starting to the adjusted EPS bridge on slide 6. Adjusted EPS of 70 cents is down 28% versus the same quarter last year, driven by lower volumes and costs associated with idling facilities, partially offset by the delivery of cost savings and a $64 million customer settlement gain in the non-core segment. As I mentioned, our cost actions from the Dabu Pond Synergies and the 2019 restructuring program coupled with the incremental actions we are taking in 2020 contributed to approximately $130 million of savings in the quarter. Below the line, we saw benefits from a lower share count due to share repurchases we executed in the second half of 2019 and early 2020, and a lower tax rate with the age of 4 in operations. -to-date, our base tax rate is approximately 22.5%, and we continue to anticipate our full year base tax rate in the range of 21 to 23%. With that, let me turn it back to Ed for an update on the NMB and IFS transactions, as well as some final comments on what we expect in the third quarter.

Thanks, Lori. Slide 7 highlights the progress we have made since announcing the NMB and IFS transaction in mid-December. During the quarter, we completed additional key milestones. In May, Duton, NMB, and IFS transactions, we have made significant progress in the process of filing the respective initial registration statements and advancing the review process with the SEC. IFF and Dupont also named the Executive Committee of the Future Combined Company, which will include key Dupont NMB senior leaders. In addition, the company has announced two independent Dupont appointees to the Board of Directors of the Future Combined Company. We have made meaningful progress regarding regulatory approval. We cleared the U.S. process in March and have since received approval in China, Serbia, and Colombia. The clearance process and the remaining required jurisdictions are well underway. Earlier this week, IFF filed its definitive proxy relating to the IFF shareholder approval of the transaction. The IFF shareholder meeting is set to take place on August 27. I remain excited about this combination and see tremendous opportunity for growth and greater innovation as businesses come together. The teams are energized and all the critical milestones remain on track for a first quarter of 2021 closing. Let me wrap up with a few comments on our expectations for the third quarter. While the next several months will likely continue to be challenging due to the pandemic, we believe that the second quarter will mark the bottom for us. However, our return to pre-pandemic levels will be measured and will certainly vary across our end markets. In markets like automotive and residential construction, we have seen an inflection in demand heading into the third quarter but believe the recovery will be gradual. Additionally, markets like oil and gas, aerospace, commercial construction, and other key industrial segments continue to see significant weakness. As a result, the approach of operating many of our sites with a focus on cash generation to better match supply with demand will remain unchanged. We expect third quarter to look very similar to the second quarter with sales slightly up sequentially driven by modest recovery in automotive and residential construction mostly offset by seasonal patterns in NMB as well as the impact of supply constraints across our Tyvek enterprise as we perform routine maintenance on the assets. It is worth noting that within E&I Semi is holding up stronger than we initially estimated but we remain cautious about the potential of some elevated inventory in the channel. We expect operating EPS in the range of 71 cents to 73 cents a sequential increase from the second quarter driven by the improving top line. Sequentially lower costs associated with idling facilities will be offset by a slightly weaker mix in S&C due to required downtime in Tyvek and the absence of gains associated with the customer settlement and a discrete tax item recorded in the second quarter. We estimate our year over year decremental margins for the third quarter to be in line with the second quarter at around 45% on an as reported basis. Again impacted by costs associated with idling facilities as well as the absence of prior year gains in our E&I and non-core segments. However on an underlying basis we estimate our decremental margins will be approximately 25% an improvement of more than 500 basis points versus our second quarter underlying decremental margins driven by sustained execution of our structural cost savings. We will continue to stay focused on execution and remain confident that we will emerge from this crisis an even stronger company. I'll

now turn it to Leland to open up for Q&A.

Thank you. If you wish to ask a question at this time please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. In order to give everyone an opportunity to ask a question we would ask that you limit yourself to one question and one follow up question. Again please press star 1 to ask a question. We

will now take our

first question from John Inch from Gordon Haskett. Please go ahead.

Thank you. Good morning everybody. Good morning John. Good morning guys. I would like to ask you about the Tyvek line maintenance. Is this routine say for the summer or because you have older equipment I'm just hypothesizing and it's been running full out. Obviously you would not want to have the line going down in a period of strong demand so maybe just a little more color there would be helpful.

Yeah John there's multiple

lines basically in two locations over in Luxembourg in Europe and in our Spruance facility in the US. So it's more than one line. We're going to add line 8 actually which we have a CAPEX program against for future demand. But a couple of our lines are extremely old lines. We got those up and running at way higher rates than we had been running them at before because of the pandemic and want to make so many more garments as Lori mentioned you can see our garment sales were up 60% or so. So we've really been cranking it out a couple of the older lines and we just need to be doing some maintenance on them. The maintenance is not long but it takes the lines down for 2-3 weeks and we're going to rotate through quite a few of those during this quarter and then we'll be hopefully in really good shape as we move over the next year after we do that. And then line 8 we delayed some of that CAPEX. We had to delay it because Luxembourg the government actually shut us down during the pandemic and towards the end of the year we'll recrank up the CAPEX on that program to get that line up and running and we'll have that up in like a year and a half from when we started up. So we'll have all that capability as we move forward.

Yeah, okay. So that sounds like it really is just maintenance versus a major overhaul which completely makes sense. As a follow up, Ed, how did July trends look and by extension not to put you on the spot but how conservative do you think you're being with your third quarter sales commentary of sales up slightly sequentially?

Yeah, so John, look, our July sales were similar to the average. We kind of were running in the first quarter but the big difference was that we saw Resy orders starting to pick up as we got into the middle of July. We're starting to see auto orders pick up for us as we kind of got into the middle of the month and so we, but we sit in the supply chain a little bit later as Lori mentioned in her remarks so we're expecting to see the sales impact from that hit more towards the back half of the third quarter and then certainly as we go into the fourth quarter. So are we being a little conservative? Possibly because they're two key end markets for us but it's just hard to tell exactly how much actually makes it into the quarter but there's no doubt we're seeing demand lift on the order front in those two segments and then as Lori had mentioned also, the semi-market is holding up. We thought we might see some softness in the third quarter because some build in the channel. We still think there is some we're a little cautious on that. I know some of our competitors are saying things are running hot also and we continue to run pretty hot on the semi side so could we be a little bit conservative? Possibly but again it's hard to tell when things actually hit in the sales number during the quarter but I think it's building momentum back half of third quarter certainly in the fourth quarter.

Yeah, if I could just

add

if I could just add something by a comment. So there are July sales for the average of two Q not one Q and then if we are being conservative and the markets are recovering a little bit more quickly than expected then we will participate in that upside. So we have zero concern that we've got market share issues. It's really just our call of when the recovery really starts and when we start to see that manifest in order placement with.

Yeah, makes sense. Thanks, Josh. Appreciate it. Thanks, Rob.

We will now take our next question from Jeff Sprague from Virtual Research. Please go ahead.

Thank you. Good morning Ed and Maury. Just two from me on electronics and in semi in particular did you address what you're seeing from a macro standpoint kind of in the channel but be most important how you're positioned relative to the various manufacturers and I'm thinking in particular kind of this seemingly ongoing share gain that's going on by Taiwan semi how you're positioned there and is there opportunity for share gain in some of these OEM players?

Yeah,

I don't necessarily like talking about specific customers but I think we're in a very strong position that is a large customer of ours so let me just say it that way and there's clearly maybe everyone misread the momentum a little bit in this industry but the work at home, the data center usage I know a key competitor of ours saw pretty much the same results so I think it's across the board the industry was growing at that rate last quarter, 18% but we're positioned very well with a couple of the very big players in the industry so they're seeing nice momentum also as I see they reported their numbers so if they continue like that we're going to continue like that but 18% growth, I just don't see that Jeff holding at those kind of rates, I mean we grow 5, 6, 7%, I think that's pretty nice so I do think there's going to be some over the second half of the year here a little bit of a downdraft from those growth rates I would think but still growing nicely

And you mentioned improving handsets in the back half, obviously Q2 was a tough quarter for handset industry, do you feel like you have decent visibility on what happens in the back half at this point? And maybe you could kind of address

what's

going

on with content Yeah, so there's two things going on, we've got the product some key product launches coming up with our customers for the holiday season and their FlyG enabled phones and we have a lot more content in the 5G phones because we do all the antenna technology so we definitely have visibility for that obviously smartphone sales year over year have been down but we'll start to get the lift from these new launches and then the lift from the content from going into 5G Laura you might want to mention kind of the difference between a 5G and a non-5G phone just to put it in perspective

Yeah, as Ed had mentioned as we look to the third quarter we'll see a successful lift within the interconnect solution primarily sells into smartphones just driven by the seasonality as the new phones come to market in the back half of the year. We do expect that the overall handsets do be down versus prior year but we'll pretty much offset that decline with the higher content that we have in the newer smartphones. So as Ed had noted, we sell into a normal premium smartphone about $2.50 a phone in the newer models coming out we have an extra dollar up to $3.50 and then as you get all the way to the enabled 5G phone we see upwards of potentially another dollar on top of the $3.50 that we expect It's a nice play for us to be able to offset that we expect within the overall handsets

Great, thanks for the color. Appreciate it. Thanks Joe

We will take our next question from Steve Tusa from JP Morgan. Please go ahead

Hey guys, good morning We mentioned in the slides that the delivery of cost reduction offsets absence of prior year gain in electronics and imaging Does that mean that you will have a flat margin year over year or is that we should expect flat profits year over year?

I think from a margin perspective underlying the cost that we'll see with idling facilities in 3Q and then the prior year total gains of around 60 million between E&I and non-core, that's margins to be about flat, maybe up a bit, underlying

Okay, so I guess just in E&I, you're saying kind of the same thing?

Yeah, E&I the same thing. I said the gains were in E&I and non-core they're about equally.

Sure, okay, so that's the I still don't quite understand why T&I wouldn't be kind of better, why 2Q wouldn't be kind of the trough quarter. I understand that things aren't maybe coming back as fast as you would have expected but kind of tough to understand why 2Q wouldn't be the trough Are you saying that 2Q is the trough there or are we kind of stuck at the bottom for another quarter? I'm just trying to kind of parse out how negative you're kind of being here on this market

So we definitely see 2Q as we will see sequential improvement in T&I as we head into 2Q Right now as we see the order book, it's going to be more towards the back end of the quarter and then really a nice to do assuming the reopening continues It's really more of a function of where we sell into the chain than anything else. So we usually, once you start seeing the OEM start back up again, you're about a quarter behind because of where we sell in with the customers versus direct to OEM So as we had mentioned earlier, if we're being conservative on that ramp, we're not going to be stating that up side because we have no share concerns But I think it's indicative too if you kind of look at where in the first half we pretty well outperform the audit bill number and that's a function of where we sell into the chain like the polymer players didn't pull back as much as the OEM enabling us to have volume declines that were less than the overall audit bill decline

Got it. Okay, thanks a lot We will now take our next

question to Steve Byrne from Box America. Please go ahead

Yes, thank you. I was curious to hear what fraction of your staffing at headquarters and in R&D during the quarter were working remotely Do you see any impact on the R&D productivity from that challenge and with respect to headquarter staffing? Just curious about what you've learned from this. You've obviously accomplished everything the headquarters needs to do with that staffing working remotely. Where do you think that goes down the road? Does that, will that staffing remain remote or is that kind of what you're talking about, changing the locations or figuring out another way of housing all of that staffing?

Yeah, it's a great question from an R&D standpoint And by the way, we want to just use one example. Our biggest location is the experimental station in, you know, in Delaware where a couple thousand people work there. A lot of our scientists that do just great work and they are going back into their labs. Very few of them though are using the office space that they have, but they are doing all their lab work. We have set it up where we are actually doing different shifts. So not every employee is in the labs at the same time. So we have an early shift that goes until about noon and then we have a second shift that goes in for the whole afternoon into the evening. And we even have quite a few of our scientists going in during the night time into the wee hours of the morning. So we can limit the number of people in a given lab at one time. And by the way, we have many, many, many labs. So they are functioning. They need to be in those facilities to do a lot of their work and that's occurring. One of the things that I think every CEO is seeing in this environment though, back to your point about the corporate office and many of our other offices, we've been able to really work very well remotely. And by the way, remember, DuPont is going through a massive deal with IFF and NNB and all the integration work and separation and car financials and tax work. And we're right on schedule with it despite most of the people working remotely. So we've put a team together and we're really looking at how do we handle our office footprint around the globe going forward. By the way, I'm a big believer you should be in the office interacting with people. I do think if you do this long term, you'll lose something. But I don't think it has to be where you're there every single day. Our people are working extremely hard remotely. So we're kind of doing a whole study on can we do sharing of offices and all that and reduce the footprint as we move forward. So we're taking a hard, hard look at that. And we'll

probably make some decisions before we exit the year.

And Ed, can you provide any update on the Ohio-MDL litigation settlement? I don't know, you had a couple of law firms that you're working with. Just wondering if anything is an obstacle at this point or whether you're still thinking about a resolution there relatively soon.

Yeah, I think, you know, look, I think there will be a resolution settlement. There's basically two plaintiffs that are handling 100 or so outstanding cases. We've been in conversations and I'm, let me just say I'm highly confident there will be a resolution and not too distant future on

that. Thank

you.

We will now take our next question from Scott Davis from MNF Research. Please go ahead.

Hi, good morning Ed, good morning Lori.

Good morning.

I know it's kind of hard to predict these things, but Ed, do you have a gut instinct to when you think your DNI plans will be back up or when you'll need them again? Kind of a cadence, I guess, is what I'm looking for. Yeah,

yeah, yeah, go ahead, Lori.

Yeah, so from an item from a NL perspective that we took about 130 million in Q2, we do see sequentially less underlying from the costs actually associated with taking the assets down into Q3 and then even more so into Q4. So fortunately we have the flexibility that whenever we do see the demand recover that we can be pretty agile and take those assets back up in two to three weeks. And so if we need to accelerate our existing plans, we can do that. So Q3 will look a little bit more of uptime than Q2 and then we'll see even more uptime as you head into Q4.

Okay. And then CapEx, I mean you took it down to one billion dollars for 2020 and it's one of the knocks on your business structure is just the capital intensity of it, but is there a sense, I mean, Ed, how do you think about how you become more capital efficient in a longer term? I mean, obviously productivity has to play a role, but is there a possibility that a longer term DuPont could become less capital intensive and perhaps closer to the billion dollar run rate than the billion five-ish levels?

Yes, no, no, Scott, I think there definitely is and by the way, Laurie and I have been very focused on that issue as we look out over multiple years. I think we can reduce the CapEx. It just so happened that we hit a period between probiotics, Kapton, Tyvek, where we were very constrained on capacity and it just so happens they happen to be three of our most capital intense businesses. So I would just put it in, we kind of are hitting a hump on the high end for a couple of years and as we model out over three, four, kind of five years, we can drift that CapEx back down. We're also, I don't want to get into all the details, we're also looking at some outsourcing of some of the earlier change stuff in our portfolio that I don't feel we have to do and we can outsource that to somebody else and we're doing that hard too. There's a couple areas we know we can do that in and that'll reduce the CapEx on our end also. So it's a big focus of ours to get that number back down around DNA on a consistent basis. It's a great question. We understand

the importance of that. Well, sounds encouraging. So good luck, guys. Thank you.

Thanks, Scott. We will now take our next question from Mike Sisson, Wells Fargo. Please go ahead.

Hey, good morning. Nice quarter. In nutrition and biosciences, you drove 240 base points and margin improvement. What drove that improvement? And beyond 2020, Ed, given you'll be on the IFF board, what do you think the normalized growth rate for this business could be and remind us how you think IFF combination can support that growth?

So maybe I can hit the margin piece first. So we did drive really nice margin list in NMB and a lot of it was driven just by favorable mix and so we had mentioned that our probiotics were up about 30%. That's definitely the highest margin piece of the portfolio. So we really had nice improvement there. Also, cost action helps with the margin list. So NMB would have shared in a portion of that 130 million of cost reductions that we saw in the quarter.

Yeah, and just by the way on the combo, a couple key principles. We're going to have pretty massive R&D capability in the combined company. So we're not doing any cutting there. Most of our synergy work, as it is at DuPont, is really going to be on the G&A side. So we're going to have really nice scale to be launching consistently new products into the market. We've had great feedback from customers on our ability to do a lot of application development work with them with the extensive portfolio we're going to have. So I feel very bullish on that. And as you can see, generally as an industry, it just holds up very, very well. I think Lori mentioned this in her prepared remarks, 85% of the portfolio, which is really food and beverage centric, grew organically 5% in the quarter. And the piece that drug it down to a 1% in aggregate was really industrial end markets that we play in. So we'll have to look at that as we move forward. But it's just a consistent industry. I would also point out, I think I said this on the last earnings call, the multiple that IFF trades at, and by the way, the IFF value or the N&B value is basically still about where we announced the deal at, which is $26 billion of value for a DuPont shareholder. And IFF's multiple still sits 400 to 500 basis points below the top, what I call the top few players in the industry. So I think we as a combo, if we prove success rolling out the new company, there's great margin expansion capability just with the IFF share price and clearly the number one position that we're going to have. Again, we've got to come out elegantly and integrate the company well, but that opportunity is there. In this case, I truly believe we have the revenue synergies we've talked about with what we can offer to a customer. One of the areas growing, it's still a small business, but one of the areas really growing for us right now is the meatless meat market business. And I think we had a chart out when we announced the deal, IFF has four or five products that sell into that industry. DuPont has four or five products that sell into that industry. So our ability to innovate, just use that as one example, to innovate in that industry as it moves forward is just way more significant than anybody else. So I think it's going to be a really awesome company what we get going on. And February 1 is our date to consummate the merger next year. Again, as I think Lori said, the shareholder vote is on August 27, so another month from now and that'll be done.

Right, and a quick follow-up, TSMC announced a new fab to put in Arizona in 2Q and I'm not sure if that's a one-off or an ongoing trend to bring capacity back to the US, but if that's the latter would that be a positive for your semi-business?

It should be, yes. And my gut is talking to our customers that you'll see more announcements like that.

Great, thank you. Yup, thanks.

We will now take our next question from Jonas Oskarj from Bernstein. Please go ahead.

Hi,

morning

guys.

Good morning, Jonas.

Hey, I was hoping to take a step back. I mean, we are living through the probably most influential event in our lifetimes. The world is changing a lot. And given that you're a diversified company, are you seeing any place where you're changing your strategy in the next couple of years?

Not, Jonas, not significantly, but remember, one of the things we've been working on, and I'm really glad we got our sustainability report out if you want to take a look at that now, it's online, is that a lot of our products and areas we're working on from an R&D standpoint really goes towards the UN sustainability goals. I think we're second only where our scientists are working, where we're developing products for, I think is in the sweet spot of a lot of things that are changing in the world. So from that standpoint, yes, we put a lot of effort into that over the last few years, we kind of redirect our thinking towards that area. And so I think secularly I feel good about where we're investing our money. So I wouldn't say the pandemic changed anything. It's kind of been something we've been working on the last few years. And I think that's going to play out well for us. It's why we think in normal times we can outgrow GDP because of the areas we're going to be focused on.

Okay, as a follow up to that, if you don't mind, we're seeing a lot of discussion about hydrogen, particularly from the European Union. And some of the hydrogen investment has to be water purification. Is that something your water business is doubling down on? Is that an opportunity for you guys?

Yes, yeah, it is. And by the way, that's a business and by that goes to our sustainability goals. That's one of the key ones is global clean water. That business, as you saw, is growing very nicely. And we would love to add to that portfolio both R&D capability, which we're adding people, application development people we're adding in that business. And if we could do any more bolt on acquisitions, we would be thrilled to do it in that space. And if I was, it was strong across home applications, desalination and industrial wastewater. Every one of those segments is doing very well.

Yeah, and if I can just add the acquisitions that we made at the end of the year really have put us as a leader across all the three types of filtration technology. So reverse osmosis, ultra filtration and ion exchange resin. So we're well positioned to take advantage of any inflections in the market.

Okay, thank you. Thanks, Jonas.

We will now take the next question from David Begley from Deutsche Bank. Please go ahead.

Thank you. Good morning. Ed and Laurie, just on Tyvek how are you thinking about the growth of this franchise going forward given recent events? And are you doing any debalmaging with the current plant maintenance?

Yeah, so I think the growth, we see a lot of upside in the growth and even when the pandemic is behind us, we see further upside with the garbage just given that a lot of the local and national governments will look to either establish or replenish their stockpile so that the benefit that we're seeing isn't temporary. In longer term, obviously, we need to add capacity to continue to participate in the growth and we're doing that. So once we are able to restart the Tyvek Line 8 project at the end of the year, that ultimately will add incremental capacity for us. As far as the debottlenecking is concerned, we did a lot of that in the first half to enable the improvements that we saw in Tyvek Garment. So combined with a couple initiatives of bringing some new assets online as well as debottlenecking, that's where we're able to double the production of Tyvek Garment. So always looking to get incremental capacity off the line just given the asset is sold out.

That's very helpful. Just on T&I, you mentioned an inventory bill that could impact Q3 in the auto area. Would that be done by the end of Q3 or could that leak into Q4 as well?

No, I would think that that would be done. I don't think it's overly significant. But as Lori mentioned in her remarks, our sales in T&I were kind of less than half of the downturn of the autos. So we're concerned just there's a little bit. But we also, as we said, we lag in the supply chain a little bit. So I would think by the time we're going into the end of the third quarter, into the fourth quarter, we're totally fine.

Thank you very much.

Thanks David.

Thanks David. We will now take our next question from John McNulty from BMO Capital Markets. Please go ahead.

Thanks for taking my question. It sounds like you've got a lot of things in the works in terms of improving cash conversion. And you highlighted a greater than $500 million work in capital improvement. Can you speak to kind of the types of targets that you're looking for in terms of work in capital enhancement as you're looking forward? Like I said, it sounds like you've got a lot in the works, but can you help us to quantify how to think about that going forward?

Sure, yeah. So we've got, for this year, we've got a target of greater than $500 million. And then even beyond that, we've still got entitlement as far as improving our underlying productivity to probably deliver another $500 million. So we said, you know, it's not going to come out in one year, but we saw a billion dollar total working capital opportunity. So once we get past that, those two large improvement opportunities, they're going to be a couple years until we're complete with those. With the free cash flow conversion targets that we've set of at least greater than 90%, and we've been greater than that in the past, and so our history is right around 100%. That sort of dictates that you maintain flat working capital to be able to deliver that metric. And so any upside that you see as far as top line growth that may negatively impact working capital, we're going to have to offset that with ongoing productivity. And so our largest opportunity sits within inventory, which is where a lot of our efforts are targeted around improving inventory productivity through SKU rationalization, through reorder point examination, through better demand planning. So that's one of the larger opportunities for us as we go forward.

I'd also mention, or Laura, you might want to just give a number around this, but one of the things going into the pandemic I was personally very worried about was just past due balances, and we have had massive improvement on past due, which I kind of find interesting in this environment, because I wouldn't have thought that, but Laura, the teams around the world, we put a big, big focus on that as I thought it could become a little bit more of an issue, and we've actually made great progress.

Yeah, we did. We reduced past dues versus prior year by about 40% in the quarter. So really nice improvement there, just as Ed had mentioned with a lot of the customers looking to delay payments or miss payments because of the pandemic. We've actually went to the other side and reduced it. So great performance there.

Got it. No, that's hugely helpful. And maybe just as a follow-up, it looks like in terms of asset values, they've come up a lot in the market. It sounds like a lot of the bid asks that are out there in terms of M&A are maybe narrowing. Can you give us any update on the non-core businesses that you have kind of sitting there and your optimism on getting some transactions done either kind of in the back half of the year? Yeah,

it's been one of my more frustrating ones. We have interested parties in every one of the assets. We're in negotiations on everyone. It's just slower in this environment. We're doing due diligence, people visiting sites, doing the environmental studies. So hopefully we'll make some progress here in the back half of the year on that. But we're totally focused on getting that done. I just don't want to put a date on it. I thought we'd have a couple done by this phone call. Hopefully we'd get them across the finish line. But we definitely have interested parties that we've been talking to. Mostly strategic players, which is a good sign I think. Thanks very much

for the call.

We will now take our next question from John Roberts from UBS. Please go ahead.

Thank you. Any updated thoughts on how you'll distribute the new FF shares? You're giving yourself a lot of flexibility between a spinoff and split off here. Are you tilting towards one versus the other?

I can't say we'll make that decision as we get later into the fall. I mean, I've always just done a spinoff. But I don't want to put a leaning on it right now. It just depends what the numbers look like when we get there. But look, I think the good news overall, John, the shareholder vote is happening in a month. The deal is definitely happening. I know earlier in the year people were curious is this thing going to stick and all that with everything going on. So the deal is in great shape from that standpoint. And again, we'll see where we're trading at, what's going on at the time. And we'll make a decision then. And you just can't make it right now because you don't know the facts.

And then could you give us an update on the ethanol enzyme in the biocides businesses, which are the weaker areas within N and B recently?

Yeah, so that was within the 15% of the portfolio that we had noted that was weakened in N and B. So that portion of the portfolio along with microbial control was down significantly in the quarter. As we look to the back half, we would think you would see kind of a flattish in the second half, but we'll see how the market continues to play out.

Thank

you.

Thanks, John. I think we're going to take one more question.

Perfect. We'll now take our next question. T.J. Yudhikert from Citi. Your line is open.

Yes, hi. Good morning. Thank you for taking my question. And many companies have deferred their buybacks. And I know right now there is cash savings aspect of it, but there's also the perception of buybacks in the middle of the pandemic. So with your strong free cash flow from the working capital release, when do you think you can come back in a meaningful way in share repurchases?

Yeah, T.J., it's a great question. I think we'll probably assess it again in the kind of early fall. Take a look at it. Remember, we're going to get over $2 billion of excess cash from the IFF deal at the beginning of kind of going into 2021. So we know we have that coming. Back to the prior question, hopefully we have some decent cash coming in from the non-core asset sales. So that will be excess cash. And of course, in our own operations generating cash. So I really love our position going into 2021 because we're going to have cash available from multiple angles and no debt payments until November of 2023. So we're going to have a lot of flexibility and so I think we'll be reassessing that, as I said, in the early fall and make a call on that. If I look at the new DuPont X N and B and I look at where the multiple of the companies at, which is give or take eight times, I can't imagine at some point here we're not going to be doing some share repurchase. Hopefully we're not trading around eight times moving forward. But if X is not worried about the pandemic, I'd be buying shares back right now. So again, we'll assess it again in the fall and know where we're going to be sitting from a balance sheet in a very strong cash position.

Great. And one quick follow up on M&A. I know it's tough to do M&A right now but in the past you had talked about potential deals in either TNI or ENI. With the recent charge that you took in TNI, does that set that division back a little bit and maybe whenever the M&A market opens up, would ENI be the frontrunners? Thank you.

Let me just answer that. No, I don't feel any different about TNI. By the way, it's a great auto, it's a great industry to be in. The pandemic took it down. But remember, I think Lori covered this well. The charge we had to take was because we had to step up the assets so significantly in the Dow-Dupont merger that there just was no wiggle room there. So it's a non-cash charge. Any weakness we would see, we were kind of on the teetering edge because what we had to do when we did the merger and step up. So no, I don't feel any different about it. And look, we're starting to see the rebound in auto come back here. I think 2021 will be a decent year for auto, not back to 90 million auto bills but it's going to lift up rather nicely here. So I feel good about that. And look, as I said, we're all hands on deck operationally right now. We're not looking at something big, structural right now. There's too many moving pieces in all the industries and it's just not on our plate at this point in time. We want to get the NMB deal done, keep it on schedule, which we are. But we always have that flexibility in the future if there's a great opportunity for our shareholders.

Great. Thank you.

Thanks, PJ.

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