DuPont de Nemours, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Welcome to the DuPont First Quarter 2017 Conference Call. My name is John and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. And I will now turn the call over to Greg Friedman, Vice President of Investor Relations. Greg, you may begin.

[Gregory R. Friedman:]

Thank you, John. Good morning and welcome. Thank you for joining us for our discussion of DuPont's first quarter 2017 performance. Here with me are Ed Breen, Chair and CEO; Nick Fanandakis, Executive Vice President and CFO; and Jim Collins, Executive Vice President responsible for our Agriculture segment. The slides for today's presentation and corresponding segment commentary can be found on our website along with our news release. During the course of this call, we will make forward-looking statements. I direct you to slides 1 and 2 for our disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We urge you to review DuPont's SEC filings for a discussion of some of the factors that could cause actual results to differ materially. We will also refer to non-GAAP measures. We request that you review the reconciliations to GAAP statements provided with our earnings news release and today's slides, which are posted on our website. Our agenda today will start with Ed providing his perspective on the company's performance, then Nick will review our first quarter financial results and first half 2017 guidance. Third, Jim will discuss our Agriculture business. We will then take your questions. With that introduction, it's now my pleasure to turn the call over to Ed.

[Edward D. Breen:]

Thanks, Greg, and good morning everyone. We delivered a very strong first quarter. We drove top and bottom line growth, improved free cash flow and advanced several key initiatives. While we have more work to do, we are very pleased with the progress we made on each of these fronts in the first quarter. A few of the quarter's highlights were

[Nicholas C. Fanandakis:]

Thank you, Ed. Beginning with slide 3, First quarter operating earnings per share of $1.64 represents an increase of 30% versus the prior year. Our results for the quarter reflect strong top and bottom line performance in the segments, along with benefits from favorable exchange gains and a lower tax rate versus the prior year. Consolidated net sales for the quarter of $7.7 billion increased 5% versus prior year, driven by a 4% increase in volume and a 1% benefit from local price. Nearly all of our segments had sales growth in the quarter with Agriculture, Performance Materials and Electronics & Communications leading the way. As you can see on slide 4, from a regional perspective, we saw growth in Europe, Asia Pacific and Latin America, while sales in North America were even with the prior year. Our developing markets improved significantly with 15% growth year-over-year and they represent 31% of the total company sales. Increased demand for polymers in automotive and growth in consumer electronics and semiconductors drove the improvement in Asia Pacific, while warmer weather conditions drove earlier-than-normal demand for seeds in Europe. Turning to slide 5, segment results drove the year-over-year improvement in first quarter operating earnings, contributing $0.24 to the quarter. Top line organic growth in most of our segments and continued execution on cost savings improved segment operating earnings. Exchange gains and losses contributed $0.07 per share to the quarter's results. The benefit is primarily due to the absence of the prior-year currency devaluations in both the Ukraine and Argentina. A lower tax rate added $0.04 to the operating EPS in the quarter, primarily reflecting a benefit associated with the adoption of a recent accounting pronouncement. In January 2017, the company adopted this new guidance regarding the accounting for certain aspects of share-based compensation. Lower net corporate and interest expense added $0.02 to earnings per share in the quarter and lower average shares outstanding contributed $0.01 to the quarter. Now, let's turn to the first quarter segment operating earnings analysis on slide 6. Segment operating earnings increased $274 million or 16% in the quarter versus last year, with operating margin expansion of 250 basis points. Half of the improvement in segment results was driven by Agriculture, which Jim will speak to shortly. Performance Materials operating earnings increased $82 million. Volume growth for the segment continued in the quarter with an 11% increase, driven by demand in global automotive and specialty copolymers in packaging products, as well as timing benefits from the second quarter. Volume growth was slightly constrained by ethylene sales as we prepare for the turnaround of the cracker in the second quarter. Operating margins in this segment expanded by about 410 basis points year-over-year. Electronics & Communications operating earnings increased $30 million. Volume grew 15% in the quarter, driven by demand in consumer electronics and semiconductor markets, showing solid improvement following a weak 2016 as well as stronger photovoltaic material sales. Operating margins improved by 440 basis points in the quarter. Nutrition & Health results increased $17 million. Growth in probiotics and emulsifiers was offset by declines in protein solutions and systems and texturants resulting in volumes flat versus prior year. The business continues to focus its portfolio on higher growth, higher margin products such as probiotics and cultures. In protein solutions, volume declines resulted from business-specific actions to exit certain low-margin markets, coupled with inventory destocking in the U.S. Plant productivity, mix enrichment and cost savings drove the improvement in operating earnings. Operating margins in this segment improved 235 basis points. Industrial Biosciences operating earnings increased $12 million. Top line growth of 6% reflected volume and local pricing gains in biomaterials and bioactives. Operating margins expanded by 250 basis points in the quarter. I refer you to the materials we posted on our website today for further details on segment results. Now, let's turn to the balance sheet and cash on slide 7. Negative cash flow of about $2 billion reflected agriculture's typical seasonal cash flow outflow in the quarter. Our free cash flow improved by more than $200 million year-over-year, with most of the increase coming from cash flow from operations. Lower capital expenditures contributed about $25 million of the improvement. The improvement in cash flow from operations is primarily due to the timing of tax and other payments. The first quarter of 2016 included a prepayment to Chemours for delivery of certain goods and services. In relation to working capital, the businesses continued to drive towards best-in-class. Working capital levels at the end of the quarter improved in comparison to the same period of the prior year, primarily from inventory and accounts payable. Net debt increased in the quarter over our ending 2016 balance, which reflects our normal seasonal shifts. Primary uses of cash in the quarter related to the funding of our seasonal agricultural working capital requirements, growth investments and dividends. When compared to the same period in the prior year, net debt improved by $500 million. On slide 8, I wanted to highlight the continued improvement we saw in operating costs year-over-year. Building upon our productivity improvements as a percentage of sales, operating costs declined about 130 basis points year-over-year on an operating earnings basis. SG&A costs declined about 80 basis points, with most of the decline related to G&A costs. Turning now to slide 9. I'd like to provide our guidance for sales and operating earnings for the first half of 2017. This is more a representative view of the company's performance given the significance of agriculture and the length of the planting season in the Northern Hemisphere. We expect sales to increase low-single-digits percent versus prior year, and operating earnings to increase about 16% to about $2.90 per share versus prior year. The increase in sales is driven by the change in timing of seed deliveries from the fourth quarter 2016, which primarily benefited the first quarter and strengthened our global automotive, consumer electronics, semiconductor and photovoltaic markets. Sales growth is expected to drive the increase in operating earnings. Incremental earnings are net of the expected reduction in plant corn acres in North America and higher product costs in Performance Materials and Agriculture. Currency is not expected to impact the first half guidance. We continue to expect our base tax rate to be in the range of 22% to 23%, an increase from 2016 due to the anticipated geographic mix of earnings. For the half, the expected tax rate will be at the higher end of this range due to geographic mix. In addition, as we stated in January, capital expenditures for the full year are expected to be in line with annual depreciation and amortization. With that, I'll turn the call over to Jim to provide an overview of the results for Agriculture. Jim?

[James C. Collins:]

Thank you, Nick. Within Ag, our priorities this year continue to be centered on building a strong, innovative business that is a leader in the industry both now and in the future. Those priorities are, first, achieve our sales, operating earnings and cash commitments. Second, drive rapid and successful technology launches. And third, prepare to close the merger and execute on integration plans in preparation for the intended separation. Now, in accordance with our conditional approval from the European Commission, we are also preparing for the successful divestiture of certain assets of our crop protection business to FMC after the closing of the merger with Dow. Our first quarter results show that we are delivering on our first priority and we are off to a solid start in the first half of the year, which is driven by the Northern Hemisphere and the Brazilian safrinha planting seasons. In the quarter, sales grew 4% while operating earnings increased by 12%. Our price and volume both improved by 2%, and the increases led to about a 240-basis-point improvement in operating margins. Our price growth was led by double-digit increases in Brazil, driven by the continued penetration of our Leptra corn hybrids, which now account for almost 40% of our Brazilian safrinha volumes. Increased European sunflower seed sales also added growth to the top line from both price and volume, and we realized additional pricing gains from the continued launch of our Pioneer brand soybeans with Roundup Ready 2 Xtend technology. Our seed volume also increased due to the shift in timing of seed deliveries, which benefited the first quarter by approximately $140 million. However, this growth was partially offset by the expected shift from corn to soybeans in North America. Now, our crop protection business continues to outperform the industry, led by strong performance in Asia and Europe. Growth was driven by insecticides, including the return of Vydate volumes. We are still experiencing higher-than-normal inventory levels in Latin America specifically Brazil, but continue to believe the global industry is stabilizing. As shown on slide 11, we are excited about our new seed and crop protection product pipeline, which is anticipated to deliver approximately $20 billion of aggregate peak sales for our future combined Ag business. As evidenced by our first quarter performance, last year's advancements from this pipeline are performing very well. This planting season, we launched more than 50 varieties of our A-Series soybeans, including 30 varieties with the Roundup Ready 2 Xtend technology. We are executing on our plans to drive new product volumes and we forecast the A-Series soybeans to comprise over 40% of our North American soybean volume by 2018. Additionally, we continued to upgrade our corn hybrids and we now expect almost 70% of our North American corn volume this year to be from hybrids released in the past three years, enabling a favorable mix. Within our crop protection business, we have recently received regulatory approval for three key products, including FeXapan; our over-the-top dicamba application on Roundup Ready 2 Xtend products; Vessarya, an important new fungicide for Asian soybean rust in Brazil; and the expansion of our Zorvec fungicide into additional global markets. We also continue to expand our seed treatment portfolio with the launch of Lumisena, a fungicide used on soybeans and sunflowers in the U.S. All of these products will continue to support growth in crop protection post merger with Dow. We also continued to expand Encirca, our digital Ag offering and expect to more than double the paid acres again in 2017. Now, looking forward to the first half, we expect sales to increase by mid-single-digits percent. Top line growth will be driven by pricing gains realized by our new product introductions and volume growth across our soybean, sunflower and insecticide portfolios. Seed volumes will benefit from the timing of seed deliveries, but will be partially offset by expected declines in corn acreage in North America. In the first half, we forecast operating earnings to grow by high-single-digits percent, driven by increased volume and favorable pricing. We expect operating margins to expand in the first half driven by price and volume gains, but the growth will be partially offset by higher soybean product costs related to higher commodity prices during production and increased royalties. Finally, in the quarter, we advanced our merger and integration plans. I have been spending time with both organizations to really understand the cultures and together, we are defining our new culture that will build upon and blend our strong heritages. This is important work and will lay the foundation for our future Ag company. I look forward to updating you on the progress we have made against this and all of our 2017 priorities next quarter. With that, I'll turn the call back over to Greg.

[Gregory R. Friedman:]

Thanks, Jim. Well, we'll now open the line for questions. John, if you could please provide the instructions.

[Operator:]

Thank you. We will now begin the question-and-answer session. In order to include as many of your questions as possible, management requests that you limit yourself to only one question. If you have additional questions, you may re-enter the queue. And our first question is from Jeff Zekauskas from JPMorgan.

[Jeffrey J. Zekauskas:]

Hi. Good morning.

[Edward D. Breen:]

Hi, Jeff.

[Jeffrey J. Zekauskas:]

Hi. I noticed in your Ag results, your depreciation and amortization costs went from $145 million to $78 million year-over-year or a $76 million movement downward, and also your pension costs came down from $146 million to $109 million. And on your non-operating pension, they went up maybe $20 million, so maybe your operating pension went down something like $57 million or $58 million. Can you explain those changes?

[Nicholas C. Fanandakis:]

Yeah. Jeff, this is Nick. I think you have to look at the change we made in the pension plan last quarter and the impact that had on the overall pension cost as a big part of that. We also did see, from the non-op standpoint, we did see a discount rate reduction, which would have driven up the non-op pension costs for the period. On the Ag depreciation amortization, we fully amortized licensing agreements and so you saw the reduction because of that.

[Jeffrey J. Zekauskas:]

What are the annualized benefits of those, the reduction in amortization and your change in pension accounting?

[Nicholas C. Fanandakis:]

Yeah. I don't have that handy, Jeff. I'd have to get back to you on that piece.

[Jeffrey J. Zekauskas:]

Okay, great. Thank you so much.

[Operator:]

Our next question is from Vincent Andrews from Morgan Stanley.

[Vincent Stephen Andrews:]

Thanks, and good morning. Just wondering, the volume performance in E&C and PM obviously was very strong and it was good in the fourth quarter, but the sequential improvement – it seems to me that it was better than you expected. It certainly was better than we expected. Can you talk about what specifically drove it? And I guess if you're guiding it to normalize a bit in the second quarter, maybe you could just walk us through those dynamics and help us better understand what's going on volumetrically. Thanks.

[Edward D. Breen:]

Yes, it's Ed. It was higher than we thought. Sales were up 13%. I would add, by the way, the comp was a little easier in the first quarter from last year. We had a very light first quarter last year, but the strength was pretty broad based. Consumer electronics was very strong, semiconductor was strong, photovoltaic was strong and so it was pretty broad based. Again, I don't think consumer electronics is going to necessarily stay up at that level through the year, that's certainly not what the macro forecasts say, but it definitely was better than we were planning on.

[Operator:]

And our next question is from David Begleiter from Deutsche Bank.

[David I. Begleiter:]

On the Q2 guidance, a little bit lighter than we had, was there much – can you comment on is it higher raw material costs are holding you back a little bit, maybe some pull forward of some earnings into Q1? Any further thoughts on the Q2 guide?

[Nicholas C. Fanandakis:]

Yeah. David, this is Nick. If you look at Q1, Q2, I think you really have to look at it at the half-year point and that's kind of how we've depicted it for you for the reasons that I'll talk. I mean, when you look at revenue, there's some revenue – Northern Hemisphere of Ag is a big part of obviously the first half. And trying to cut it between what's going to happen in the first quarter and the second quarter, extremely difficult to do. In Performance Materials, you had a rather strong first quarter auto builds, up dramatically, and probably the first quarter is going to be the highest quarter for auto builds of the whole year. Couple that with some of the raw material things you're seeing; you're seeing some increases in some of the raws around Performance Materials, around benzene and butadiene in the second quarter, but again that could be just a peak in the quarter and we see things coming to a more normalized level as you go forward beyond that. You also have the ethylene cracker, the turnaround that's going to happen in the second quarter for Performance Materials. So you have a number of dynamics that are playing there that are impacting first, second quarter kind of balance or shift and that's why I'd like to talk about it as the first half, you see a 16% increase year-over-year.

[Operator:]

Our next question is from Steve Byrne from Bank of America.

[Steve Byrne:]

Yes. Thank you. So, Ed, you've had a year and a half to mull over this merger and to figure out what configuration creates the most value. And to this end, when does it make sense to define a business by the end market it serves versus the underlying chemistry? For example, both Dow and DuPont sell significant products into autos and electronics end markets. Why would one be in materials Co and the other one in specialty Co?

[Edward D. Breen:]

Well, you are correct. I've had a long time to mull a lot of things over with the merger, but the good news is we're getting close and we're highly confident on our August merge date. As far as the portfolio goes, as we've mentioned before on calls when we're asked, that's a decision of the DowDuPont merge Co Board when we get together. And if there's something compelling to board as far as the mix of business goes, we can certainly look at that and address it. But I would remind you, it also takes two-thirds vote of the merge Co board to make a change to the portfolio.

[Operator:]

Our next question is from Robert Koort from Goldman Sachs.

[Robert Andrew Koort:]

Thank you very much. Ed, I was wondering if you could tell us when we might hear the names of that new board. And then secondly, in the U.S., your volumes were relatively anemic. Is there something in particular to the quarter or any particular end markets or would you expect to start seeing a little bit more percolation in your North American volumes?

[Edward D. Breen:]

Yeah. I would think the board is going to be announced in the very near future, certainly at least 30 days before we merge, but possibly even before that. And the business being – you just saw our growth in all other regions around the world was very strong, Asia, Europe. Europe, up 5% and U.S. flat, but it was all predominantly or mostly all Ag. And Jim could comment on that. If you actually look at our specialty products, we were up a little bit in the U.S., but the pressure was on the Ag side there.

[James C. Collins:]

Yeah. Bob, this is Jim. That shift that we're seeing in the market from corn acres to soybean acres clearly affects our volumes in the first quarter, and soy business tends to favor second quarter just timing of those shipments. The other thing we had going on is we've pursued kind of a value, not a volume strategy in North America, so – and there was a lot of discounting going on in the marketplace and we didn't go chasing after a lot of that volume. And so that showed up in those volume numbers as well.

[Edward D. Breen:]

And I think you'll see about – if you take Ag out of U.S., Canada and look at it, you'll see a 2% to 3% growth rate in the rest of the businesses.

[Operator:]

Our next question is from Christopher Parkinson from Credit Suisse. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC Great. Thank you. Just given the recent changes to portfolio composition of the combined entity as well as amount of shift in the timeline, can you just update us broadly on your revenue synergy targets, including any just broad teams' segment initiatives and just rough estimated cadence, if there is any yet? Thank you.

[Edward D. Breen:]

Yeah. We've estimated the growth synergies which, by the way, I'm really excited to start working on here in the near future. We've tagged a lot of areas we're going to go after, but as you know from a legal standpoint, some of this were not allowed to get the teams together and talk about in detail yet, but the biggest area for upside revenue opportunities is clearly on the Ag side and I'll let Jim comment on that in a moment. But we're also very excited. We've got six or seven programs kind of lined up on the electronics side by putting the two businesses together. Again, we can't get into the detail yet, but we have some good ideas there. We're going to have a much broader offering to our end customers in that area. Then on the Materials side, as was mentioned, we've got some real good opportunities on the auto side with the breadth of the portfolio from both Dow and DuPont. But, Jim, you could give a little more detail on Ag.

[James C. Collins:]

Sure. I think several of the growth opportunities sit in managing our retail branding strategy associated with the different seed brands that we'll have out there. I'm excited about pursuing some mixture opportunities by looking at the old company's portfolio of actives ingredients and seeing how we might make unique mixtures for the market to create more choices in some of these areas. I like the strength. When I start to compare the two companies and I think about relative markets, for instance, some company is – one company is a little stronger in one country versus another, but now you bring a broader portfolio into that country and we're able to leverage it. And then, finally, just thinking about pipelines both on seed and crop protection going forward, how do we lever that to get them out faster, create more opportunities in the marketplace, especially when we're looking at Enlist, that E3 Chemcast (32

[Operator:]

Our next question is from Don Carson from Susquehanna Financial.

[Don Carson:]

Jim, following the sale of semi crop protection chemical business to FMC, can you update us on the original $1.3 billion Ag synergy target? What is that now? And then, can you also remind us for every million acre shift in the U.S. from corn to soy, what's the earnings impact on Ag?

[Edward D. Breen:]

This is Ed. Let me hit the first part of that and Jim can handle the second. As far as the synergies go, we're at the $3 billion target number. We obviously always knew there would be a remedy coming, didn't know exactly what it was, but we had clearly been overshooting internally on the target. So our new targets are that materials Co is going to have $1.6 billion of synergies. Ag is going to have $1 billion of synergies. So Jim is down $300 million because of the remedy, but Materials is up $100 million. And then we're up in spec Co now to $400 million in synergies, which gets us to the $300 million – $3 billion, excuse me. And we literally have a little over 500 projects on the synergy work laid out in the playbook ready to go, identified how much it is, what it is and who are the personnel responsible for accomplishing that. So, we're excited to get going on that once we merge.

[James C. Collins:]

And, Don, on that shift from corn to soybeans, our order book is tracking pretty consistently with the estimates that we're seeing from USDA, about a 4% decline in corn acres and inspecting about a 7% increase in soybean acres. And as we take a look at that, for every million acre or so change in that shift, it's about a couple of cents impact per share, and that changes a little bit up and down based on cost of goods and the relative volumes, but overall I think it's in that ballpark.

[Operator:]

And our next question is from Frank Mitsch from Wells Fargo.

[Unknown Speaker:]

Hey, guys. It's (35

[Edward D. Breen:]

Yeah. Well, just to clarify here that transaction, we'll close the merger in August. And in the fourth quarter around November, we'll close the FMC transaction. So we've got a little bit of time. We're doing a lot of planning around it as we speak. We've worked on synergies on that coming into our business, but synergies will be lower than normal because we are planning on adding additional R&D capability on to the FMC part of the platform to really juice that up. And so, we're doing a lot of thinking and work around that right now. I also remind you we have about 95% of that – the FMC platform coming over, but it does not include the Omega-3 business, which we did not want in there. So, a lot of sales planning going on, planning around increasing R&D capability. And we're – probably the one area we're most excited about, we were at DuPont working our way into the pharma market, and FMC has a great presence and a nice percentage of their portfolio is in the pharma area already. So we can leverage our R&D work into their sales channel platform and that's one of the real nice upsides for us.

[Operator:]

And our next question is from P.J. Juvekar from Citi.

[P.J. Juvekar:]

Yes. Hi. Good morning.

[Edward D. Breen:]

Good morning.

[P.J. Juvekar:]

Your price cuts in seeds are flat. Can you talk about how much price mix you got from two specific products, your Leptra corn and Xtend soybeans? And how much (37

[James C. Collins:]

Yeah, P.J. So you mentioned a couple of key pricing opportunities that we definitely have had and it's allowed us to improve mix. One is Leptra in Brazil coming out of the safrinha season and as I mentioned earlier in my comments, we had double-digit growth in pricing there. And in North America, you're right. We are seeing some lift in – with the opportunity with Roundup Ready 2 Xtend and beginning to fully deploy that trait. And then we will see some benefits from access to Intacta in Brazil going forward. So, I think all of that is good. Clearly, in North America, I mentioned there's been a lot of discounting as well. So on average, about flat, you're right. And what was the second question? Latin America, sorry. So, you're right. We still are seeing some elevated levels of inventories in Brazil, primarily mostly with our insecticides portfolio, but we really are working through those now. We made production adjustments to compensate for that. And I'd say we get through this season, we ought to be trending back to more normal levels. Everywhere else in the world, I'm feeling pretty good about where we sit inventory-wise on our crop protection and seed business.

[Operator:]

And our next question is from Jonas Oxgaard from Bernstein.

[Jonas I. Oxgaard:]

Morning, guys.

[Edward D. Breen:]

Good morning.

[James C. Collins:]

Good morning.

[Jonas I. Oxgaard:]

So, in Performance Materials, I think you guys have previously said that you are mainly present in the high-end auto market, so particularly the luxury cars here in Europe and U.S. But in your guidance today, you're talking about how auto sales are driven by China. Can you talk a little bit how that geographic mix makes a difference for you?

[Nicholas C. Fanandakis:]

Well, we're not in high end; we're in high-value use products. So, for instance, we're not on the bumpers or something like that, but you're in under the hood where they have the extreme temperatures, et cetera. So, it's not luxury ends; it's just high-value end use sort of products. In being that, we would be impacted by the overall auto builds in general and so we did see a rather strong growth in auto in the first quarter. We also continue to see some market share gain as people adapt our products in replacing metal parts under the hood.

[Operator:]

Our next question is from Laurence Alexander from Jefferies.

[Laurence Alexander:]

Good morning. Coming back to the Ag business, with the divestiture, can you give a feel for the cadence of tailwinds that your business has from the ramp of recent product launches and how do you compare the strength of what you're seeing in 2017 compared to what you expect for 2018 and 2019 based on what you will be launching in the expected ramp schedules?

[James C. Collins:]

Laurence, clearly in our performance right now, there are some insecticide sales that are tied to the products that are part of the remedy. But don't forget, we're also getting some new products back into our current mix, Vydate, in this quarter now fully back in by the end of the year., we'd expect to be back to close to 100% supplied for the market on Vydate. So, I've got some offsets coming there. But, really, you step back from current and take a look at the pipeline. And as I mentioned in my comments, that pipeline that's in the slide deck is the pipeline that will be a part of the new company at merge, and there's $20 billion worth of peak sales coming out of that pipeline over the planning horizon. So, remember, we retained essentially the near-term products, late-stage candidates that were in the pipeline that we'll be launching here over the next several years. So, actually, I'm quite excited about what that potential looks like.

[Operator:]

And our next question is from Alex Yefremov from Nomura Instinet.

[Aleksey Yefremov:]

Good morning. Thank you. Want to ask about Encirca. How big do you expect this business to be in terms of sales by the end of this year? And what are your long-term goals perhaps in three years to five years? Do you expect this to be one of your major growth drivers for your Ag business in the long term?

[James C. Collins:]

Great question. We sold Encirca services on over 2 million acres in 2016 and I think our original plan for last year was about 1.5 million that we talked about, so we outperformed our plans. The team is excited about the start for this year and we expect to double that again in 2017. So we're on about that cadence. What also affects that ramp rate is the number of different services that we offer. So, right now, we're offering about five unique types of services to six unique types of services and we have programs in the pipeline that are coming. So each one of those gives us a new revenue opportunity to add to the overall mix. And then, we're constantly looking out there at the industry for other folks to collaborate with as we go through this. So, I'm excited about the next few years. We've begun to model the revenue growth consistent kind of with our recent performance into that and we'll keep you posted as the program rolls out.

[Operator:]

Our next question is from James Sheehan from SunTrust Robinson.

[James Sheehan:]

Thanks. Could you break out what your crop protection prices and volumes were in the quarter as well as your second quarter outlook? And also, you made some comments specifically on insecticides, how was your herbicide outlook?

[James C. Collins:]

Herbicides, I'd say we're excited about our presence in corn and soybeans. We probably felt a slower start this year in cereal herbicides, some of the Northern European cereal crops were a little bit slower and I think you'll – several of the others in the industry have talked about that as well. Overall, in crop protection, I think our volumes – I feel good about that. Volumes have been up and prices are still a challenge. It's a tough market and we've talked about that before that especially as we get commodity prices down in the low end of their trading ranges, growers can typically substitute or go on a cheaper side with some of their crop protection, because it's about the last thing that they apply. And they take care of fuel and land and rent and seed, and usually it's that last purchase of crop protection that takes the brunt of that. So we're seeing some of that in this season.

[Operator:]

Our next question is from Sandy Klugman from Vertical Research Partners.

[Sandy H. Klugman:]

Thank you. Good morning. You just have stronger-than-anticipated auto and electronic markets. Has there been any change to your initial guidance for GDP growth at 2.7% and IP growth at 2.4%? And then, we could conceivably see a 600 million bushel to 700 million bushel carryout for U.S. soy in 2017, 2018. What kind of cost tailwind could this provide for your Ag business next year and should we expect some of these benefits to also filter through to Nutrition & Health?

[Edward D. Breen:]

Well, let me get the first one, then I'll turn it to Jim for the second. When you look at the – some of the macros that you point to, industrial production and GDP, in general, we see those in line with what we said at the first of the year. Industrial production I think is up slightly. It went from the 2.4% that you mentioned, we're now in the 2.5% range for industrial production. But obviously, some of this is going to vary dependent upon which part of the world we're talking about. And so, it depends on the geographic presence. We are seeing some strong growth in Asia Pacific. It's actually the best region overall from a growth perspective, looking at some of those macros, with industrial production now estimated just under 5%, 4.8%, and it's really led by China where the industrial production is viewed at about 6%. GDP there is in close to the 5% as well, 4.8%. So it really depends on the region of the world as we look at it. And then, Jim, why don't you handle the second part?

[James C. Collins:]

Yeah. On cost of goods, you're right. If you look back into 2016, you saw that spike in soybean prices over the summer. I think growers were very excited about that, but we're typically contracting and buying our soybeans at about the same time. So, as we talked about in the script, you could hear it in our first quarter discussion. We faced some headwinds from COGS, especially in soybeans. So some of that is the commodity price that's built into there. But the other part of that story is the royalty rates that we pay on those products. So, if you think about the carryout, as you suggested, going forward in 2017 purchases, we'll expect to buy beans cheaper as we contract, assuming the commodity prices stay in about the range that they're in right now. However, that could be offset slightly by the fact that our royalty rate is going up as we ramp a larger presence in the Roundup Ready 2 Xtend profile as well as Intacta acres in Latin America.

[Operator:]

And our next question is from Arun Viswanathan from RBC Capital Markets.

[Arun Viswanathan:]

Great. Thanks. Just wondering on 2017 how you're tracking versus your internal kind of cost reduction targets and what your future ongoing view is there, as well as on the cash that you are building now, what we could expect for that use post-merger. Thanks.

[Nicholas C. Fanandakis:]

Well, on the cost reductions, we're tracking very well against the goals that were set originally. You saw in the quarter, we had our period costs. Our total fixed cost was $26 million below what it was in the prior year, and that $26 million had some costs incurred in it that were somewhat unusual, if you will, or certainly weren't anticipated in the prior year when we set the targets. For example, you had the variable compensation increase that occurred in the quarter given the strong earnings performance that are showing thus far in the year. You also had the route-to-market changes that we've made in Ag that we've spoken about, which is very positive from an overall earnings and strategic direction, but did add some additional fixed cost to us that we now need to overcome as well. And so the $26 million reduction in year-over-year cost is right in line with what our target was for the year and so we're feeling very good about being able to realize all those. And the second part of your question was what again? I'm sorry.

[James C. Collins:]

Cash for the merger.

[Nicholas C. Fanandakis:]

If you look at the cash position that we have, we're feeling good about where we are. Free cash flow improved by $200 million as we mentioned. This is our normal usage of cash type season where we have the need for supporting the Ag working capital needs in this part of the year. Overall, working capital, we're seeing things continue to be positive. Our balances, if you look at our trade working capitals at the end of the quarter versus the same period last year, we saw improvements primarily in inventory and accounts payable. Those were the two areas we saw most of the improvement. But if you were to look at the turnovers, for example, and calculate the working capital turnovers, it's about a 10% improvement of where we are this year versus last when you adjust for the Chemours working capital impact.

[Edward D. Breen:]

Yeah. And then, I would just add specifically as we get to merge, obviously, we'll have to take that up with the DowDuPont Board at that point in time. And one of the things we'll have to visit with the new board on is share repurchase as one example because that has to be a decision of the new board. So, we'll be making those decisions later in the summer.

[Operator:]

Our next question is from Duffy Fischer from Barclays.

[Duffy Fischer:]

Yeah. Good morning. Two questions. First on Ag. Jim, as you're now selling the Xtend, what do you think the farmer behavior is going to be around bundling your FeXapan with that versus do you think the farmer is going to make an à la carte decision where the brand of herbicide doesn't matter from where they buy the seed? And then the second one is, shutting down the world-scale Cooper River plant, what does that tell us about the future of the competitive dynamics in Kevlar?

[Edward D. Breen:]

Jim?

[James C. Collins:]

Yeah. Great. Duffy, this is Jim. The FeXapan is, as you know, one of several products that will be on the market to be at – that will be – have a label to be able to apply over-the-top of Roundup Ready 2 Xtend soybeans. So, we brought the offering. It's an opportunity to represent a full spectrum of choices to our customers. And I think as they step back and look at the value proposition that we're able to put together, we hope they choose our products. But we don't have any of those kind of programs that you're talking about. And then I just think the performance of the product, but in addition to that, it's the stewardship, right? It's the field-level support that our team is able to bring to that grower to help – shepherd them through the launch of this new technology is going to be important part of that as well.

[Edward D. Breen:]

Yes. And the second part of your question, Duffy, the Cooper River shutdown was I think pretty simple for us from a dollars and cents standpoint. We're going to get a really nice cost savings from it. We have capacity in our large Spruance facility and we're going to be moving our production there. And we're also – Spruance and specifically those lines on Kevlar and, by the way, Tyvek also is where we're really working on our capacity release program we've talked about on the operations side. So we expect to be able to even free up more capacity on the existing lines, so the leverage we're going to get on our gross margins is pretty nice in that area and that's why we made the decision.

[Gregory R. Friedman:]

And we'll do our last question.

[Operator:]

It's from John Roberts from UBS.

[John Roberts:]

Thank you. First, a question on Ag and then I have a follow-up on Materials. I think you've been planning on three major locations in Ag with a headquarters in Wilmington. With the divestment to FMC, does that structure still make sense?

[James C. Collins:]

Yeah. This is Jim. It does. We'll always talk about having a light presence as a headquarters presence here in Wilmington. A lot of the corporate functional needs that DuPont already has today are based here, so things like tax, treasury and audit, investor relations, core HR capabilities. And so, we wanted to tap into the talent that we had here in Wilmington and utilize that. The remedy part of that divestiture obviously was a big chunk of the DuPont crop protection R&D resources that are based at Stine and there had always been a plan, as we had been evaluating options there, for where those resources might migrate, whether we would keep a small core here in Wilmington, but also utilize facilities in Indianapolis and Des Moines. So the remedy really doesn't change the plans around the headquarters, but it does modify those resources that we might have available that would be moving from R&D.

[John Roberts:]

And then in Performance Materials, a little surprised, price was flat. Oil is up a lot from where it was in the first quarter of 2016 and prices for most polymers have been moving up over the past year. And then over in Protection Solutions, we have a lot of polymer-based materials as well. Price is actually down 2%. So, is that a mix effect or what's going on there with price?

[Nicholas C. Fanandakis:]

Well, a lot of that is a mix effect. You also have the constraints that we have because of the oncoming tar and the planning ahead for that in the market and the ability to sell those pounds as a result. So the big part of it is, is that prep as well as the mix effect.

[Gregory R. Friedman:]

Okay. Well, that concludes our Q&A session today. Thank you for dialing into the call and thank you for your interest in DuPont. John, back to you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.