DuPont de Nemours, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Jan 2017

[Operator:]

Welcome to the DuPont Fourth Quarter 2016 Earnings Conference Call with Investors. My name is John and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Please note that this conference is being recorded. And I will now turn the call over to Greg Friedman. You may begin.

[Gregory R. Friedman:]

Thank you, John. Good morning, everyone, and welcome. Thank you for joining our discussion of DuPont's fourth quarter and full year 2016 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 Web site, 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 Web site. Our agenda today will start with Ed providing his perspective on the company’s performance and the advancement of our strategic initiatives. Then, Nick will review our fourth quarter and full year financial results and 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:]

Thank you, Greg, and good morning, everyone. Today, I would like to talk about the important progress we made on our strategic priorities in 2016 and explain why that sets us up so well for '17 and beyond. As you know, heading into 2016, we targeted certain fundamental metrics that we believe are the right measures of our performance going forward. Thanks to a lot of hard work throughout DuPont, we improved on all of them. Companywide gross margins improved by 60 basis points. Operating costs declined 11% including a 41% decline in the corporate costs. Operating earnings per share grew 21%. Segment operating margins improved by about 200 basis points with increases in all reportable segments. Capital spending declined 27% and free cash flow improved by $1.6 billion. These improvements were enabled by our leader more accountable organizational structure. We also strengthened our business by improving our focus on the customer and better meeting their needs. For example, in our seeds business, we moved the southern U.S. and parts of Brazil to an agency sales model. Timing of seed deliveries primarily related to the southern U.S. route to market change pushed about 200 million in sales into 2017. That was clearly the right thing to do. The enhancements to our route to marketed ag have improved customer relationships and strengthened our competitive position. We introduced nearly 1,600 new products into the marketplace this year. A good example is our electric corn hybrid. We introduced these seeds in Brazil and in one year they accounted for more than half of our corn sales in the country. Another example is our new lineup of bioactive products serving industries that range from food and grain processing to household products. In addition, we developed new applications of existing products, like leveraging Tyvek for a roofing application which provides moisture protection and installer safety. By continuing to invest in R&D and product development, we aim to turn volume gains like those we had throughout most of this year into sustainable top-line growth. In addition to strengthen our position in the marketplace, we delivered solid results against our strategic priorities, which have made DuPont stronger, more focused, more effective and efficient. The first strategic priority was delivering 730 million in year-over-year cost savings and we surpassed our goal for 2016 by $20 million. We did it without disrupting our businesses. The second priority was disciplined and productive capital spending. For the year, our CapEx totaled $1 billion, down 375 million or 27% excluding Chemours. Capital spending now is back in line with depreciation and amortization and we intend to keep it that way. At the same time, we are fully funding compelling growth projects with solid returns. An example is the 100 million plus we approved last year for probiotics production facility expansions in New York and Wisconsin. The third priority was working capital performance. We set a goal to improve our working capital by $1 billion over the medium term. Our free cash flow this year rose by $1.6 billion. Within that total, business working capital contributed nearly 500 million of the improvement and we will continue to build on this success. We will continue to focus on productivity as well, including our production facilities. Plant efficiency and productivity can unlock significant shareholder value, as I mentioned during the last earnings call. This past fall, Nick and I visited a host of plant sites around the world and what we saw confirmed what we suspected. We have a terrific opportunity to improve throughput rates and our uptime performance to best-in-class levels. These improvements will benefit our customers, our margins and our returns on capital. It won’t happen overnight as it can take two to three years to implement changes like this and see the benefits. And finally, I’ll close with an update on our planned merger with Dow. While our interactions with regulators and any discussions of proposed remedies must remain confidential, I can tell you that we continue to work constructively with authorities and all relevant jurisdictions to secure the necessary approvals to close the merger, which we expect to occur in the first half of 2017. We are very excited about what this merger will mean for shareholders, for employees and for all our stakeholders. With that, now let me turn it over to Nick.

[Nicholas C. Fanandakis:]

Thank you, Ed. Good day, everyone. Beginning with Slide 3, we delivered fourth quarter operating earnings of $0.51 per share versus $0.27 per share in the prior year. For the full year, operating earnings totaled $3.35 per share, an increase of 21% from the prior year. Results for the quarter and the full year reflected disciplined focus on cost savings against a challenging macro environment. Consolidated net sales for the quarter of 5.2 billion were down 2% versus prior year. Local price declined by 2% while currency benefitted sales by 1%. Volume declined 1% as growth in Performance Materials, Electronics & Communications and Industrial Biosciences was more than offset by declines in Agriculture, primarily due to the southern U.S. route to market change. Excluding the timing change in ag, consolidated net sales would have increased 2%. For the full year, sales of 24.6 billion decreased 2%. Local price and currency each lowered sales by 1%. From a regional perspective, we saw organic growth in developing markets in both the quarter and the full year, driven primarily by increased demand in Asia-Pacific. Sales in developing markets represented 34% of total company sales. Turning now to Slide 4. Segment results drove the year-over-year improvement in fourth quarter operating earnings, contributing $0.14 to the quarter, including a $0.04 benefit from currency. Continued execution on cost savings as well as improved demand in most of our segments drove the growth in segment operating earnings. Lower net corporate and interest expenses added $0.06 to earnings in the quarter. Corporate expenses on an operating earnings basis declined 45% in the quarter versus prior year, as a result of our 2016 cost savings program. Exchange gains and losses contributed $0.05 per share to the quarter’s results. The benefit is primarily due to the absence of a currency devaluation in Argentina in 2015, which negatively impacted prior year results. A higher tax rate lowered operating EPS by $0.01 in the quarter due to the geographic mix of our earnings. Now let’s turn to the fourth quarter segment operating earnings analysis on Slide 5. Segment operating earnings increased $150 million or 27% in the quarter versus last year with operating margin expansion of 305 basis points. Nutrition & Health results increased $50 million. Growth in sweeteners and probiotics was offset by declines in protein solutions resulting in volumes flat versus prior year. Cost savings and a $27 million gain on the sale of an asset drove the operating earnings improvement year-over-year. Operating margins in this segment improved 615 basis points. Performance Materials operating earnings increased $47 million. Volume growth continued in the quarter with a 7% increase, driven by demand in global automotive markets. Operating margins in the segment expanded by 275 basis points year-over-year. Electronics & Communications operating earnings increased $11 million. This segment saw a 6% volume gain in the quarter due to increased demand in Solamet paste. New product introductions resulted in share gains in Solamet year-over-year. Operating margins improved by 115 basis points in the quarter. Protection Solutions and Industrial Biosciences each experienced declines in operating earnings in the quarter. Jim will speak to Agriculture performance later and I direct you to the materials we posted on the Web site today for further details on segment results. While not depicted on this slide, I would also like to highlight that for the full year segment operating earnings increased 9% resulting in operating margin expansion of about 200 basis points with growth in each of our reportable segments. Turning now to the balance sheet and cash on Slide 6. Free cash flow improved about $1.6 billion year-over-year with about 1 billion of the improvement coming from higher cash flow from operations and 600 million from lower CapEx. Of the 1 billion improvement in cash flow from operations, more than half was attributable to higher earnings. The remainder of the increase was due to lower tax payments and improvements in business working capital, partially offset by payments under the 2016 restructuring plan. The businesses continued to drive to best-in-class in working capital with an overall reduction of about $500 million in the year. Excluding Chemours, our capital expenditures decreased by 375 million or 27% versus the prior year. We ended the year at $1 billion in CapEx in line with our guidance. In total, the absence of Chemours contributed $400 million of the overall improvement in free cash flow. We ended 2016 with net debt of 2.6 billion, flat versus prior year. Year-end cash balances totaled about $6 billion. For the year, we completed 916 million in share repurchases under the 2016 program. We retired about 13 million shares at an average price of $69.61. Average diluted shares outstanding for the full year were about 877 million and about 872 million for the fourth quarter. On Slide 7, for the full year we delivered 750 million in operating cost reductions, exceeding our commitment of 730 million under the 2016 plan. Operating costs declined 11% year-over-year on an operating earnings basis. SG&A costs declined about 540 million or 12% with most of the decline related to G&A costs. Our corporate costs decreased about $230 million or 41% for the year. Corporate costs as a percent of sales declined to 1.4% versus 2.3% in the prior year. Turning now to Slide 8. I’d like to review our assumptions regarding our key markets and the broader economy in 2017. The U.S. dollar continues to strengthen against most currencies and is expected to be a headwind for us again in 2017. For the first quarter, the impact of currency will be about $0.01 headwind given the stronger dollar versus the euro in most emerging market currencies be offset by weaknesses versus the Brazilian real. We expect global growth of 2.7% and global industrial production to increase 2.4% in 2017. The U.S. is expected to improve versus prior year but we remain cautious amid economic uncertainty and the stronger dollar. Europe’s growth outlook continues to be weak with economic and political uncertainty. China’s slowing continues from the shift of industrial production to services and consumer segments. According to the HIS, global auto growth is expected to slow in 2017 with 1% growth year-over-year. Jim will speak to our assumptions for 2017 in the ag market. With this backdrop, let’s turn now to Slide 9. As Ed said, we expect the merger to close in the first half of 2017 pending regulatory approval. Accordingly, we are providing guidance only for the first quarter of the year. We expect first quarter sales to be about even with prior year and operating earnings to increase about 8% versus prior year driven by benefits from cost savings and the impact of the change in timing for seed deliveries primarily related to the southern U.S. route to market change in agriculture. These benefits are anticipated to be partially offset by the expected reduction in planted corn acres in the U.S. We expect our base tax rate to be in the range of 22% to 23%, an increase from 2016 due to the geographic mix of earnings. Capital expenditures for the year are expected to be 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:]

Thanks, Nick, and hello, everyone. I’ll provide a review of our full year results, give an update on our performance this year opposite our three strategic priorities and share our expectations for the first quarter. Now throughout 2016, our ag business executed well in a tough environment and delivered results which were above the guidance that we provided. Full year sales declined 3% driven by 2% lower currency and 1% lower volume. Now full year sales were negatively impacted by the timing of seed sales primarily related to the southern route to market change in the fourth quarter. If we exclude the change in timing of fourth quarter seed sales, our full year sales would have decreased by 1%. Our year-over-year operating earnings rose 7% driven by lower costs, partially offset by lower volume and the negative impact of currency. Operating earnings margin expanded for the year by about 170 basis points. Now moving to our performance on our strategic priorities of 2016 which were first to achieve our cost reductions and earnings commitments; second to deliver on our new product pipeline; and third, plan for the synergy delivery and ensure the readiness for the new ag business. Now our results exceeded expectations in 2016 even in light of the route to market change, which has strengthened our business by extending our advantaged go-to-market strategy to the southern U.S. We also extended this winning strategy in the Brazilian market. Now our strong results were enabled by advancements from our innovation pipeline. In North America corn, our newest classes of genetics demonstrated strong harvest performance and products released in the last two years accounted for more than half of our volume. Led by the launch of Leptra, we grew volume nearly 70% in the Brazil summer season and enabled a multipoint share gain. In soybeans, our T-series comprised greater than 80% of our lineup in North America and we launched our first varieties developed with the AYT 4.0, an advanced proprietary soybean breeding approach focused on increasing yield. Within crop protection, Rynaxypyr insecticide delivered sales growth in Asia Pacific, Europe, and North America and our Zorvec fungicide launch went better than plan. Lastly, we finalized our integration plans this past year with recent activity focused primarily on ensuring that we deliver our commitment of $1.3 billion in post-merger cost synergies. We strongly believe that bringing our successful seed and crop protection businesses together as Dow-DuPont and becoming one activation will increase our ability to innovate, meet customer needs and deliver returns for our shareholders. Now turning to the outlook for 2017, we expect the economic environment in the ag sector to remain challenging with commodity prices under pressure due to record yields and crop production. As farmers look to relative economics between crop alternatives, we expect them to favor soybeans over corn in North America which is generally less favorable to our overall earnings. Our order book in North America is tracking with our expectations and is consistent with the projected planted acre shift to soybeans. In Crop Protection, we expect the industry decline to ease in 2017 but continue to be negatively impacted by high inventory levels, a strong dollar, and the continued penetration of insect-resistant soybeans. This season we are expanding our launch of Roundup Ready 2 Xtend soybeans and anticipate FeXapan, our over-the-top dicamba application, to be approved in time for spring planting. We expect continued Leptra penetration in Brazil as we continue one of the fastest ramp-ups in our history. We are planning a limited commercial introduction of Pioneer brand Qrome products for the 2017 U.S. growing season. Now this will allow selected growers to begin to benefit from this new corn technology and will allow customers to see and understand the value of these elite new products in their local geographies. We are also expanding our A-series soybeans in North America which are the highest yielding line of soybeans in our history. Within the digital ag program, growers received value from Encirca Services on more than 2 million paid acres in 2016 and we expect this to approximately double in 2017. Now our approach stands apart from competitors in that our nitrogen, fertility, and seeding solutions can deliver measurable profit gains for our customers enabling a premium value offering. For example, in over 120 nitrogen service trials, Encirca beat the standard grower practice 74% of the time with an average yield increase of 6 bushels per acre using an average of 9 pounds less nitrogen per acre. In Crop Protection, we will launch Vessarya, expanding our portfolio of fungicides to Asian soybean rust, and will continue the highly successful launch of Zorvec. Turning to the first quarter of 2017, we expect the ag segment sales to be up low-single digits percent over 2016 and operating earnings to be up in the mid-single digits percent range as favorable impacts from the shift and timing of seed deliveries and pricing are partially offset by the anticipated corn-to-soybean acreage shift in North America. Within Crop Protection, we anticipate expanded availability of our carbamate products, Vydate and Lannate, and earnings growth as volume increases and we complete the wind down of activities at our LaPorte facility. As farm margins continue to tighten, the need for high yields becomes even more imperative and we are confident that our portfolio can address this need through our pipeline of new genetics, unique trait combinations and innovative crop protection solutions. In 2016, we executed on significant cost reductions which enabled DuPont Agriculture to perform well in current conditions and positions us to emerge stronger when markets improve. So with that, I’ll turn the call back over to you Greg.

[Gregory R. Friedman:]

Thanks, Jim. We’ll now open the line for questions. John, please provide the instructions.

[Operator:]

Thank you. We will now begin the question-and-answer session. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Our first question is from Jonas Oxgaard from Bernstein.

[Jonas Oxgaard:]

Good morning, guys.

[Edward D. Breen:]

Good morning.

[Jonas Oxgaard:]

That was a nice beat there. It’s always good to start the year going strong.

[Edward D. Breen:]

Thank you.

[Jonas Oxgaard:]

So on the merger, as I know you’re constrained with can and cannot say, but is it mainly ag that we’re worried about? And if you don’t mind in general terms on how do you address the concern on innovation that the European Commission has raised?

[Edward D. Breen:]

Jonas, let me make a couple of comments on it that I think we can obviously say publically and there’s many things we can’t say publically with the negotiations we’ve been in. But the main concern is in the Crop Protection area and that’s where we’ve been focused on a remedy package. And the way to resolve the question on innovation is not just some product but also some R&D resources that go with the product and that’s how you address that part of the concern.

[Operator:]

Our next question is from David Begleiter from Deutsche Bank.

[David Begleiter:]

Thank you. Good morning. Ed, with the merger now pushed back probably to Q2, has the ultimate three-way separation also been pushed back for maybe mid-'18 to maybe late 2018?

[Edward D. Breen:]

Yes, David, the spins will happen within 18 months of the time we do the merge so that the 18 months won’t change. We’ve got a very detailed timeline between Dow and DuPont to achieve that. When we first came out, we said 18 to 24 months but we’re highly confident we can pull it off within the 18-month window. And clearly we’re doing actions now pre-merge that just continue to build that confidence because we have more time, especially around legal entity work and IT-type work which is the long poles in the tent.

[Operator:]

Our next question is from Chris Parkinson from Credit Suisse.

[Chris Parkinson:]

Thank you very much. Over the last several quarters, you’ve clearly done a solid job on both cutting costs as well as dramatically improving procurement. As you’ve now had the opportunity to further drilldown into some of the opportunities, can you just offer some further perspective on any new or simply enhanced opportunities you’ve encountered over the past year or so, and how that visibility could lead towards further improvements within the combined entity? Thank you.

[Edward D. Breen:]

Yes, thanks for the question, Chris. I would say, look, we’re always going to stay focused on cost efforts and being lean and mean, as I’d like to say. And clearly we’ll ramp those activities up with the merger with Dow and the $3 billion program which I’ll say is the floor, not the ceiling on what we’re working towards. So clearly there will be a lot of effort in that area that we’re very focused on and continuing to line up our actions there. There’s really two areas I’m very interested in personally with the senior team that I think are our next big opportunities. One, I alluded to actually in our prepared remarks and on the last earnings call, it’s the capacity release and reliability centric focus in our manufacturing footprint. We’ve asked and are working with all our facilities to come up with their entitlement program and we’re really focused on the big ones. And the big facilities happen to mostly fall into one of these specialty products company. But there are more big complex facilities, like where we make Tyvek for instance. And we’re really convinced now that we have great upside opportunity in the hundreds of millions of dollars to have improvement there. So that’s a big focus going forward. We just started focusing on that in the last four months or so. The other area that we’ve really got a focus on I think we can gain good momentum is a shift in our R&D throughput. And the background to that I think is important. The percentage products that were replacement products was a higher mix in the portfolio in recent years and what I would call growth R&D projects. And we’re shifting that mix to more growth projects with good returns behind them. That doesn’t happen in one year and by the way, the production facility thing doesn’t happen in one year either. But if we can continue to make a shift in that area over the next few years, we can affect the top line of the company organically and improve the gross margin line nicely, which we did this year. We had some good wins to get the gross margins up 60 basis points, but that’s where the two big opportunities are past cost actions.

[Operator:]

Our next question is from Jeff Zekauskas from JPMorgan.

[Jeff Zekauskas:]

Thanks very much. It sounds like in your negotiations with the EU, the EU either wants you to spend more on R&D or divest more assets. To their requests or the way you see regulatory evolving, does that mean that you’re 3 billion in cost savings is now reduced or altered? And in terms of the delay in the merger, is the delay related solely to the EU extra 10 days? In other words, as a base case the merger should close May 1st or is it more complicated than that and that date closer to June 30 is more reasonable?

[Edward D. Breen:]

Yes, Jeff, just the first part of your question. We had hearings very recently with the European Union and we’ve showed them just going back to your comment about sort of innovation and R&D spending. We are not reducing at all the scientists that work on discovery and new product development. The reason – one of the key reasons obviously we like the merger here is to create an ag company that has more R&D resources for new product development. So where we would make some reductions in areas like regulatory approval type stuff where you don’t need two of that and the footprint which is very local around the whole globe in the ag business. So we’ve been through that in a lot of detail. We did ask for a 10-day extension because we’ve been in detailed negotiations. It’s a lot of paperwork that needs to get done. And we’re just letting you know that yes, it could be just 10 days into March 14th but we still got to wrap up all the other jurisdictions and some of them tend to wait until you get a couple of the big ones out of the way. So by the time that follows on and you get that all finished up, my gut is we’re in the second quarter and that’s why we guided where we did.

[Operator:]

Our next question is from Vincent Andrews from Morgan Stanley.

[Vincent Andrews:]

Thanks. Good morning, everyone. Jim, could you give a little bit more detail on the seed order book and maybe just what you’re seeing out in the marketplace from a competitive perspective around pricing in both corn and soybeans versus your expectations and remind us what your price card look like coming into this year in your performance against that? Thanks.

[James C. Collins:]

Yes, great. Thanks for the question. Taking a look at the order book, it would show consistent with what we’re seeing out of USDA around a shift in corn acres to soybean acres. So we’re feeling that shift as we start out the year. Our soybean business and soybean acres are also up consistent with that shift and I think we’re probably even up slightly there as a result of some – what I think was pretty impressive product performance that we saw last fall at harvest. So as we’re picking a little of that up, unfortunately we’ll see a little bit of a timing issue there. We’ll tend to see more of our revenue and earnings from the soybean business land in the second quarter. It’s just kind of the timing the way soybean shipments occur versus corn. So overall if we think about pricing in especially North America corn card prices as we’ve talked about before are about flat. Our route to market gives us good visibility of that pricing. We ought to get some benefit from a stronger mix as we continue to rotate out hybrids and we’ve talked about in the last year as much as 50% of our lineup was being replaced by newer genetics. That number will continue to grow now as we’ve got good traction on that. And overall if I step away from this – before I leave North America, it’s still going to be a competitive market and we know that we got to be ready to respond if necessary. If I back away from just North America and I think about pricing just overall globally, I’d say overall generally favorable. We’re going to pick up mixed benefit from Leptra, continued penetration in Brazil. We had 70% growth in our business in Brazil last year and a big chunk of that was Leptra. So the mix effect of more of that genetics coming into the portfolio. And then we’ll be launching Roundup Ready 2 Xtend, so we ought to feel some benefits there. I mentioned corn genetics and even though a little bit attributed to that route to market change as we get better visibility of what’s going on in the marketplace.

[Operator:]

Our next question is from John Roberts from UBS.

[John Roberts:]

Good morning. The ag business is seasonally low in the U.S. in the December quarter. So was the minus 4% volume you posted for the U.S. and Canadian region, was that roughly flat to slightly negative for the non-ag business, again, given ag is probably seasonally low?

[James C. Collins:]

Yes, you’re right. If you look at that fourth quarter volume response, it is related to our seed business. It’s that route to market change and some of the seasonal delivery timing. Globally that performance also still related to our soybean performance in Brazil, we continue to struggle there. We’re looking forward to having the Intacta offering going forward, but especially this last quarter Intacta affected Crop Protection volumes as well a little bit there. But if I compare fourth quarter volumes in the seed business versus crop protection, you’re right. Crop Protection would have been up year-over-year in the fourth quarter; had a pretty strong run and most of that was North America and Asia. Good performance in insecticides in Asia Pacific.

[Edward D. Breen:]

And maybe just to add on to that, because you asked about the rest of DuPont. Without that route to market change in the fourth quarter, DuPont organically would have been up 2% on sales. So the other segments were – I won’t go through each one but they were either kind of flat to up some on the organic, but it would have put us on a positive. So that shift is what did that in the fourth quarter. Let me just address – Jeff, I apologize. You asked a few-part question there and I think it’s important to highlight that we’re still very committed to the $3 billion in cost savings being the floor. We’ve also taken into account that we’re going to be remedies. We always took into account the remedies would probably be in the area that I highlighted to you. So we’re very confident in that number with the remedy package.

[Operator:]

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

[Stephen Byrne:]

Yes. Thank you. We’re hearing concerns out of the channel about the restrictions on this label that Monsanto’s dicamba formulation has with respect to wind speed and rain and buffer and so forth, question would be is your – are you expecting something similar for FeXapan or could it be something more favorable? And how does all of this play into the opportunity for what might be an approval on the Enlist package that Dow is developing?

[James C. Collins:]

Thanks, Steve. Clearly, we’re watching that situation as well. We’ve collaborated as technology partner with Monsanto. We’re in licensing those traits. We had good visibility of our product performance this past year. We think those buffers are appropriate given early days and new technology. We modeled our FeXapan product registration as an exact mirror image of Monsanto’s registration, so very likely we’ll have exactly the same buffer requirements downwind, buffer requirements that they do. And I’d also say we’re targeting customers that we work with that we know are great stewards of our products and we’ll work with this on those stewardship requirements as well. So we’re putting an extra layer of help and support out in the marketplace to answer questions and make sure we’re ready to respond. But overall we’re excited about the technology and it’s a brand new tool that growers are going to have to control what’s becoming a pretty tough issue out there with resistance management. As far as Enlist goes, I really can’t comment on any of the specifics associated with that. You’ll have to talk my Dow colleagues.

[Operator:]

Our next question is from Duffy Fischer from Barclays.

[Duffy Fischer:]

Yes. Good morning. Another question on ag. Back in '13 you had signed the deal with Monsanto around the Roundup Ready 2 Xtend licensing, some other things in that. Am I right that I understand because that was a paid up license, as you start to grow into Roundup Ready 2 Xtend this year, the profit on that should be extremely high because there’s no incremental costs year-over-year in '17 versus '16 or '18 versus '17, but now the revenue starts to flow through? Can you just walk through the dynamics of how that license will play out from a profitability standpoint?

[James C. Collins:]

Thanks. Under those agreements, DuPont Pioneer made a series of upfront payments and there were some variable-based royalty payments associated with that. So beginning in 2018, the paid up portion of that will essentially be complete and beginning in 2018, DuPont Pioneer will continue to pay some royalties on a per unit basis. The way that works is the royalties that we paid begin to be recorded as we start to sell the units going forward. So we have this essentially our expense – essentially a way to kind of flatten out the impact. So, no, you should see really no change in the net profitability of the business going forward as a result of those payments.

[Operator:]

Our next question is from Laurence Alexander from Jefferies.

[Laurence Alexander:]

Good morning. Can you please flush out the comments about emerging markets headwinds and maybe give some, maybe a force ranking of the headwinds that you’re facing outside of the ag sector?

[Nicholas C. Fanandakis:]

Laurence, this is Nick. When you look across the world; Brazil obviously is still in the recessionary sort of environment, so issues there and instability there, political instability as well. In India, you’re looking at the demonetization move. Although we haven’t seen significant impact from that move yet on our businesses, there is still the question of where that’s going to lead to. In China, we continue to see – although signs of stabilization, you do still see the movement from the industrial into the service consumer side which has impact. The overall PD market and the impact that may have largely in the developing regions with the growth rate slowing there. Those are some of the concerns and reasons why we were somewhat cautious when we looked at developing markets.

[Operator:]

Our next question is from Don Carson from Susquehanna Financial.

[Don Carson:]

Jim, a question on Crop Protection. Your release indicated that your sales were up 9% in the quarter. Just wondering what they were up to the year as a whole? And you made some rather cautious comments on the market outlook for Crop Protection in '17. Do you expect your sales to be up? And then finally if you can tell us how Rynaxypyr has been doing?

[James C. Collins:]

Thanks, Don. You’re right, our fourth quarter performance was up and as I said before that was related to some strengthening that we saw in North America as well as our insecticide performance in Asia-Pacific. Overall for the year, we were down mid-single digits for the full year and that’s really reflecting the headwinds that we had early on in the year. As Nick mentioned, Brazil, the impact of Intacta on our Rynaxypyr sales and then just overall concerns about channel inventories down there. But as we talk about 2017 we really see kind of the industry decline easing and we have upsides on some new product launches. We’ve got Vessarya out there starting in 2017. We’ll pick up the good sales as we continue to launch Zorvec globally and Cyazypyr. We’re still in the early stages of launching Cyazypyr. We have always talked about globally if we exclude Brazil, Rynaxypyr volumes have continued to look pretty strong for us for eight years now, seven years into the global launch of that we’ve seen year-over-year. I think about '17 going forward, I’d say we’re probably going to be a return to overall global volume growth of Rynaxypyr, Brazil included. So we’ll be back on that trend line for continued performance of that whole product portfolio.

[Operator:]

Our next question is from Frank Mitsch from Wells Fargo Securities.

[Frank Mitsch:]

Good morning, gentlemen and congrats on the quarter, and to Nick a begrudging congrats.

[Nicholas C. Fanandakis:]

Thanks, Frank.

[Edward D. Breen:]

One more to go.

[Frank Mitsch:]

Yes, go Falcons. As I look at your capital expenditure spending, I think at the beginning of the year you were looking at 1.1 billion, which was materially down from the year prior. Obviously it came in at around 1 billion, so even lower. So I was wondering if you could talk about what sort of things that you forgo in terms of the spending? And how should we think about the breakdown between growth CapEx versus maintenance CapEx versus CapEx to – you spent a fair amount of time on the call talking about improving your manufacturing productivity. How should we think about DuPont in that vein in '17?

[Edward D. Breen:]

Thanks for your question, Frank, and I’m rooting for the Falcons also by the way just to get Nick a little heated up. But the CapEx in '17 will be very similar, up slightly probably about $1.1 billion is what we kind of targeted with all the businesses. We did this last year – we’ve gone project by project through all of them and we’ve really clicked there is where we’re very – at least I’m questionable on the returns we’re going to get from the program. So we’re spending money and very significantly where we know we’re going to have really good returns. Probiotics is one we mentioned on the earnings call. We approved $100 million spend there in the next few years. It’s going to significantly increase our capacity and throughput in that area and that business is going very significantly. We just announced the other week a major CapEx program at an experimental station here in Delaware. But when you look at the payback of it, it’s very significant because it’s a consolidation of a lot of desperate footprints and all that into a really high-tech environment for our employees. So we’ll spend where we really know we have that capability. And I’ll let Nick kind of give you a little bit on what I call the CapEx spend for maintenance versus growth and all that.

[Nicholas C. Fanandakis:]

Frank, when you look at the line with what everything Ed just said and if you look going forward here, having our CapEx aligned with our D&A kind of yearly number is what one could anticipate. One of the other biggest drops is along the pre-commercial side, saw a decline there and the beta now being obviously in place was part of that. When you look at the maintain dollars, about 40% of our CapEx is in the run and maintain side. The rest would be on the grow and improve side of the house.

[Operator:]

Our next question is from P.J. Juvekar from Citigroup.

[P.J. Juvekar:]

Yes, hi. Good morning.

[Edward D. Breen:]

Good morning.

[P.J. Juvekar:]

If the border adjustment tax goes through the new administration, how do you think that impacts DuPont overall?

[Edward D. Breen:]

Well that’s yet to be determined but there’s a couple of elements of it that if they tag along would obviously be beneficial to DuPont. If we get the repatriation piece of that coming along with it, that would have very favorable impact. I think you’re aware, P.J., that the biggest part of our cash on the balance sheet is outside of the U.S. And so that would have favorable impact on liberating additional dollars to be spent whether it be on CapEx, M&A or returning value to the shareholders through share buybacks or dividends. When you look strictly on the border of the exports, imports, I think it’s going to be slightly favorable for us from an exports side versus the imports side but obviously we have to wait and see the details around that as it becomes more solidified if it actually goes through.

[Operator:]

Our next question is from [indiscernible].

[Unidentified Analyst:]

Good morning. Thank you. Could you provide some idea of free cash flow bridge for 2017 and maybe the biggest items, restructuring costs, CapEx, taxes, working capital, et cetera?

[Nicholas C. Fanandakis:]

Yes. When you look at our free cash flow numbers and you see the large improvement we had of the $1.6 billion, a piece of that is the Chemours is no longer being a part of the numbers. That’s about 400 million of the 1.6. So now you’re at a $1.2 billion improvement in free cash flow. We saw the reduction in CapEx that we just mentioned. That’s about roughly $400 million reduction in CapEx. We saw an improvement in working capital. If you look at the business working capital numbers, we had an improvement of about $500 million largely seen in inventory as well as accounts payable. Accounts receivable was flat to slightly up from a working capital standpoint. Those were the major improvements as you look at the working free cash flow.

[Edward D. Breen:]

In 2017 I think you touched on that also. As I mentioned, CapEx will be about equal to depreciation, amortization but I got to plan in that 1.1 area, so kind of similar to this year and I would expect improvement next year in business working capital was a 500 improvement and we know we have at least $1 billion opportunity there as we’ve mentioned before. So with the programs in place and the focus we have, we should see continued improvement there through '17.

[Operator:]

Our next question is from James Sheehan from SunTrust Robinson.

[James Sheehan:]

Good morning. Can you talk about any areas of your Crop Protection portfolio that you will consider nonstrategic post-merger? And regarding any of those, would you expect to possible divest something prior to the close of the merger? Thank you.

[Edward D. Breen:]

Well, let me answer the second part. The first part I think we’ve got to stay away from just because of confidentiality of our conversations. But what we would do is with a remedy package we would have obviously very quickly be talking to other companies that could purchase that package and try to have that all keyed up very quickly. And the issue – we know who the companies are. A handful or two of companies that would be very interested and we would move very quickly on accomplishing that.

[Operator:]

Our next question is from Mark Connelly from CLSA.

[Nils Wallin:]

Good morning. This is Nils Wallin sitting in for Mark. A question on auto builds. You have mentioned the IHS outlook but I was curious what DuPont’s view was on auto builds for 2017? And overall what’s your sensitivity to a 1% increase or decrease in auto production?

[Edward D. Breen:]

So our numbers are in line with the IHS numbers. We’re also estimating the 1% sort of number. And when you look at the sensitivity piece of that, about a third of our sales within the DPM business are related to the automotive industry. In '16, if you look at the results versus IHS we were pretty much in line or slightly above what their numbers were saying. So as we look at '17, we use those same projections.

[Operator:]

Our next question is from Sandy Klugman from Vertical Research.

[Sandy Klugman:]

Thank you. Good morning. You touched on this a bit but given that your soy portfolio has become increasingly competitive, would the earnings headwind from a shift to soy acreage from corn be less pronounced than in prior years? And then how much volume growth do you see for Leptra in 2017 and what kind of tailwind should we expect to see from lower seed production costs given decreased use of winter nurseries?

[James C. Collins:]

So you’re right. We will see some of those shifts going into 2017. If I think about Leptra for a moment, we saw 70% growth in that market and a majority of that growth was attributed to Leptra. You’re exactly right as well as we look forward, the use of winter nurseries, we’ve now gotten a good beat on our ability to produce what we need for that market. So you’ll remember in that spring season prior to that, we sold out completely. We essentially sold everything we had for summer but we’ve now got nice supplies coming in for 2017. So we’ll benefit. It’s still a little early to call. It’s still a long way to go for that summer season at the end of 2017 just how big that penetration is going to be. And then I mentioned earlier in soybeans, we’ve seen some nice improvements in our portfolio as we looked at product performance trials at the end of 2016 and some performance that we had out in the field as our T-series continues to penetrate, and we’ll pick up I believe some share in soybeans as we go into next year’s market as well as acres come back. And that A-series launch for us will be really critical there.

[Edward D. Breen:]

Last question.

[Operator:]

Our final question is from Robert Koort from Goldman Sachs.

[Ryan Berney:]

Good morning. This is Ryan Berney on for Bob. I apologize. He had to hop to another call. Just another quick question around the cash flow. You’ve been pretty upfront around the D&A levels keeping the CapEx near there and it also seems that Dow is coming towards the later innings of its spending cycle. Have you had any conversations with them around how you view cash flow priorities kind of ahead and then after the merger and maybe rank ordering those?

[Edward D. Breen:]

No, that’s still something that would be separate between the two companies. But I think you can look at the track record of both companies in that regard. You can see what Dow’s track record has been around dividend issuances and DuPont’s track record of 435 consecutive dividends or in that range. You can see what we’ve done around share buybacks independently this year and those are pretty much aligned as well. So I think the message would be that the actions we’ve taken would indicate the path forward, but we haven’t had any discussions around aligned agreements in that regard.

[Gregory R. Friedman:]

This now concludes our call. We thank you for joining us today and we thank you for your interest in DuPont.

[Operator:]

Thank you. Ladies and gentlemen, that concludes today’s call. Thank you for your participation and you may now disconnect.