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 for DuPont's second 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. 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 Breen, Chief Executive Officer, and Lori Koch, 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 vary. 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-GAAP measures. Reconciliation to the most 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. 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 are 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. Lori 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 well-being of our employees remains paramount. We continue to restrict access to our sites, execute enhanced cleaning 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 NMV 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 Tyvek Together campaign, which in combination with our efforts to increase our production capacity, has significantly improved the supply of protective garments to healthcare 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 three, I am also pleased with the progress we've made executing the playbook that we implemented in mid-March as the pandemic intensified. We remained committed to a best-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 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're 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 toward G&A 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 instilled mindset at DuPont 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 a quarter, which is notable in the current environment. However, the majority of the benefits we generated were from lower sales and idling 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 the 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 Laurie, 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 in 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, private protective garments, and health and wellness enabled us to deliver top-running results that were down 10% organically in the most challenging macro environment that we have seen since the global financial crisis. Additionally, excluding the cost associated with idling facilities, as well as a gain in a non-core segment, our earnings declines were very consistent with our top-line performance on a percentage basis due to significant cost actions that we have taken to improve our cost structure. In the quarter, our electronics and imaging and nutrition and bioscientist 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 T&I segment, which is highly exposed to the auto industry. Regionally, organic sales declined mid to high teens in the U.S. and Canada, Europe, and Latin America, while Asia Pacific was up 1% versus last year. Sequentially, the year-over-year change in the U.S. and Canada, Europe, and Latin America declined, while Asia-Pacific showed a slight improvement. These trends are all consistent with what we expected as the 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 the decision 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 in 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 costs 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 in 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 year-over-year declines in the second half, we determined that an impairment test was appropriate. In connection with the Dow DuPont 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 Dow DuPont 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 cost structure so that we can expand our margin profile when markets fully recover. Slide 5 provides more detail on the year-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 markets, partially offset by robust demand in semiconductors, water filtration, Tyvek protective garments, and health and wellness. Within E&I, semiconductor technologies delivered another strong quarter with 17% growth. The semi-demand was broad-based. We saw market strength in both logic and foundry, driven by the ramp-up of advanced technology nodes, which plays lightly to our product portfolio, as well as robust demand for memory and servers and data centers. The strength and slimy also provided a more favorable product mix, leading to 190 basis 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 markets. Our sales in these end markets, which make up approximately 85% of N&B'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 over-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 N&B's top line. The well-known weakness in automotive and industrial end markets continued 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 just 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 one and a half times auto builds, The main drivers of our 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 build. Our adhesive business sales are more directly aligned with auto build results, and we therefore expect that segment of the business to recover along with the expected pace of recovery at the OEM. Within S&C, demand of those water solutions and tie-up 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. Broken shelter solutions remain pressured as we continue to redirect Tyvek supply to personal protection and stay-at-home orders across the globe limited demand. Turning to the adjusted EPS bridge on slide six. 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 upset by the delivery of cost savings and a $64 million customer settlement gain in the non-core segment. As I've mentioned, our cost actions from the Dow DuPont 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 relating to foreign operations. Year-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. additional key milestones. In May, DuPont, NMB, and IFF filed their respective initial registration statements and are 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 processes in 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 27th. 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 first quarter 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 N&B, as well as the impact of supply constraints across our Tyvek enterprise. 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 discreet 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 island facilities, as well as the absence of prior year gains in our E&I and non-course 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, Joanne. 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, you know, 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 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 U.S. So it's more than one line. We're going to add line eight, 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 wanting to make so many more garments. As Laurie 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. it takes the lines down for two three weeks um and we're going to rotate through quite a few of those during this quarter um and then we'll be hopefully in you know really good shape um you know as we move over the next year after we do that um and then line eight uh we delayed some of that capex um 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 re-crank 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, you know, kind of when we started up. So we'll have all that, you know, capability as we move forward.

Yeah, okay. So that sounds like it really is just maintenance versus a major overhaul, which completely makes sense.

No, no.

It's just some maintenance. Yeah. Yeah. Yeah, no, that's fine. 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 resi 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. But we sit in the supply chain a little bit later, as Lori mentioned in her remark. 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 there are 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 Laurie 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, you know, things are running hot also. And we continue to run pretty hot on the semi side. So, you know, 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, you know, back here for third quarter, certainly in the fourth quarter.

Yeah. Understood.

Thanks very much.

If I could just add something by a comment. So our July sales were 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. Really just our call of when the recovery really starts and when we start to see that manifest in order placement.

Yep, makes sense. Thanks, guys. 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 Maureen. Just two from me. On electronics and in SEMI in particular, did you address, A, just kind of what you're seeing from a macro standpoint kind of in the channel, but B, 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 are you 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... You know, maybe everyone misread the momentum a little bit in this industry, but the work at home, the data center usage, you know, I know a key competitor of ours saw pretty much the same results. So I think it's across the board. The industry, you know, 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 You know, if they continue like that, we're going to continue like that. But, you know, 18% growth, I just don't see that, Jeff, holding at those kind of rates. I mean, you know, we grow 5%, 6%, 7%. I think that's pretty nice. So I do think there's going to be some, you know, 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 they're 5G-enabled phones. And we have, you know, a lot more content in the 5G phones because we do all the antenna technology. So, yeah, we definitely have visibility for that. You know, 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. Laurie, 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 sequential 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 hands-on to 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 going up to $3.50, and then as you get all the way to an enabled 5G phone, we see upwards of potentially another dollar on top of the 350 that we expect. Nice play for us to be able to offset some of the costs that we expected within the overall handset.

Great. Thanks for the color. Appreciate it. Thanks, Jeff.

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

Hey, guys. Good morning.

Hey, Steve.

You 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?

Yeah, so I think from a margin perspective underlying, so it takes... 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, is that you're saying kind of the same thing?

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

Sure. Okay, so that's the message there. I still don't quite understand why TNI wouldn't be, you know, kind of better, why 2Q wouldn't be kind of the trough quarter. I mean, I understand that, you know, things aren't maybe coming back as fast as you would have expected, but kind of tough to kind of understand why 2Q wouldn't be the trough. I mean, 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, you know, how negative you're kind of being here on this market.

So we definitely see QQ as – we will see sequential improvement in T&I as we head into Q. Just 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 – assuming the reopening continues. It's really more of a function of where we sell into this than anything else. So we usually, once you start seeing the OEMs start back up again, you're about a quarter behind because of where we sell in with customers versus direct to OEMs. So as we had mentioned earlier, if we're being conservative on that ramp, I'm stating that upside because we have no share concerns. But I think it's indicative, too, if you kind of look in the first half, we pretty well outperformed the auto 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 OEMs, enabling us to have volume declines that were less than the overall auto bill decline.

Got it. Okay. Thanks a lot.

We will now take our next question to Steve Burns from Bank of 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. And do you see any impact on the R&D productivity from that challenge? And with respect to headquarters 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? Is that a lot of 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. So from an R&D standpoint, And by the way, just to use one example, our biggest location is the experimental station 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 nighttime 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 that 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's 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, you know, working remotely. So, you know, we really, we've put a team together and we're really looking at, you know, how do we handle our office footprint around the globe going forward? Now, by the way, I'm a big believer in, 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, you know, can we do, you know, kind of sharing of offices and all that and reduce the footprint as we move forward. So, you know, we're taking a hard, hard look at that and 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'll be a resolution, a settlement. There's basically two plaintiffs that are handling 100 or so outstanding cases. We've been in conversations, and let me just say I'm highly confident there'll be a resolution and not too distant future on that.

Thank you.

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

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

Good morning.

Hey, Scott. I know it's kind of hard to predict these things, but, Ed, do you have a gut instinct of when you think your B&I plants will be back up before running 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.

From an item mill perspective, we took about $130 million in Q2. We do see sequentially less underlying from the cost actually associated with taking the assets down into Q3 and then even more so into Q4. 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. If we need to accelerate our existing plans, we can do that. 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 $1 billion for 2020, and 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 kind of longer-term, you know, 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?

Yeah, no, Scott, I think there definitely is, and by the way, Lori 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, you know, 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. 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 studying 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, it sounds encouraging. So good luck, guys.

Thank you. Thank you.

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

Hey, good morning. Nice quarter. Thank you. In nutrition and biosciences, you drove 240 basis points of marginal improvement. What drove that improvement? And, you know, beyond 2020, Ed, given you'll be on the IFS 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?

Yeah, 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. And also, cost actions 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 way on the combo, look, 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 it 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 five percent in the quarter and the piece that drug it down to a one percent in aggregate was really industrial and markets that we play in um You know, so we'll have to look at that as we move forward. But, you know, it's just a consistent industry. I would also point out, I think I said this on the last earnings call, you know, the multiple that IFF trade that. And by the way, the IFF value or the NB 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, you know, four 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, you know, 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 got to, you know, come out elegantly and integrate the company well, but that opportunity is there. And in this case, I truly believe we have the revenue synergies we've talked about with what we can offer to a customer. You know, 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, you know, I think we had a chart out when we announced the deal, you know, 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, you know, just use that as one example, 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 when we get it, you know, get going on it, you know, and hope February 1 is our date to consummate the merger next year. Again, as I think Lori said, the vote, the shareholder vote is on, August 27th. So, you know, another month from now, that'll be done.

Right. And a quick follow-up, you know, 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 U.S., but if that's the latter, would that be a positive for your assembly business?

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

Great. Thank you. Yep, thanks.

We will now take our next question from Jonas Oskarge 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 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 us, products in areas we're working on from an R&D standpoint really goes towards the UN sustainability goals. So, 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've put a lot of effort into that over the last few years. We're 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, you know, 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, you know, 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 the way, 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 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, ultrafiltration, 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 our next question from David Begliefer from Deutsche Bank. Please go ahead.

Thank you. Good morning. Ed and Lori, just on Tyvek, how are you thinking about the growth of this franchise going forward given recent events? And are you doing any debodomacking 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 stockpiles, 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 de-bottlenecking 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 de-bottlenecking, that's where we were 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. And just on... And 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, you know, as Lori mentioned in her remarks, our sales in T&I were, you know, kind of less than half of the downturn of autos. So, you know, 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 your next question from John McNulty from BMO Capital Markets. Please go ahead.

Yeah, 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 working capital improvement. Can you speak to kind of the types of targets that you're looking for in terms of working 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 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 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 Laurie, you might want to 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 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've reduced past dues versus prior year by about 40% in the quarter. So really nice 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 sitting there and your optimism on getting some transactions done either 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 and it's just slower in this environment. You know, doing due diligence, people visiting sites, you know, 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, you know, getting that done. I just don't want to put a date on them. I thought we'd have a couple done by this phone call. And, you know, hopefully we get them across the finish line. But we definitely have interested parties that we've been talking to. Mostly strategic players, you know, which is a good sign, I think. Got it.

Thanks very much for the caller.

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 IFF shares? You've given yourself a lot of flexibility between a spinoff and split off here. Are you tilting towards one versus the other?

You know, I can't say yet 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, you know, what the numbers look like, you know, when we get there. But look, I think the good news overall, John, I mean, the shareholder vote's happening in a month. The deal is definitely happening. You know, I know earlier in the year, people were curious, you know, is this thing going to stick and all that with everything going on? So, The deal's 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. 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 and the biocides businesses, which are the weaker areas within NMB recently?

Yeah, so that was within the 15% of the portfolio that we had noted that was weak 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. TJ, your line is open, please.

Yes, hi, good morning. Thank you for taking my question. Ed, 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, PJ, 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, 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'll be excess cash. And of course, in our own just operations generating cash. So, you know, I really love our position going into 2021 because we're going to have cash available, you know, 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. You know, if I look at the new DuPont XNB and I look at where the multiple of the companies are, 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. You know, 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, knowing where we're going to be sitting from a balance sheet and 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 T&I or E&I. But With the recent charge that you took in T&I, does that set that division back a little bit? And maybe whenever the M&A market opens up, would E&I be the frontrunners? Thank you.

Yeah. Let me just answer that. No, I don't feel any different about T&I. By the way, it's a great – auto is a great industry to be in. It's just, you know, 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. You know, if we, 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 the step up. So no, I don't feel any different about it. And look, we're starting to see the rebound and auto come back here and, you know, you know, I think 2021 will be a decent year for auto, not back to, you know, 90 million auto builds, but, you know, 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 with you know, in all the industries. And it's just not on our plate at this point in time. We want to get the N&B deal done, keep it on schedule, which we are. And, you know, but we always have that flexibility, you know, 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.