Q3 2019 Earnings Call
Good day and welcome to the Dupont third quarter 2018 earnings call. Today's conference is being recorded and at this time I would like to turn the conference over to ARIKACE. Please go ahead.
Good morning, everyone. Thank you for joining us for Dupont third quarter 2019 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 you fly their post since the Investor section of Dupont's website and through the linked to our webcast.
Joining me on the call today are marked a while chief Executive Officer Gene Desmond, Our Chief Financial Officer, and add Green Executive Chair.
Please read the forward looking statement disclaimer contained in the slide during our call. We will make forward looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risk and uncertainty our actual performance and results may differ materially from our forward looking statement.
Our second quarter Form 10-Q at maybe modified by or subsequent periodic and current report.
Who's the detailed discussion a principal risk and uncertainties, which may cause such differences.
We will also refer to non-GAAP measures a reconciliation to the most directly comparable GAAP financial measure and other associate disclosures are contained in our press release and posted on the Investor section of our website.
Now turn the call over to Mark.
Thanks, Laurie and good morning, everyone. Starting on slide two we delivered organic sales and adjusted EPS inline with our expectations by staying focused on our competitive strength and the earnings drivers within our control.
Although our operating EBITDA was slightly below our forecast primarily due to on anticipated currency headwinds, we were able to maintain gross margins and continue to expand our EBITDA margins, even as the U.S. dollar strengthened and several of our key end markets remain challenged we enabled this performance.
When you price improvement driving our synergy savings and advancing our restructuring program combined these actions delivered an additional $145 million of savings this quarter and we are on track to deliver greater than $500 million for the full year. Our team is laser focused on these priority initiatives.
As we continue to navigate the macro uncertainties.
Turning to slide three our volumes continued to be impacted by the slow down in both the automotive and semiconductor end markets that has also affecting many of our peers. However, there are still many exciting areas within our portfolio such as water and pharma that continue to post strong results all in global sales of five.
Point $4 billion were inline with expectations at down about 2% on an organic basis.
Organic sales in our core segments were down about 1.5 done.
As noted while we are seeing continued weakness in a few end markets. There are many bright spots in our portfolios that are performing very well highlights here, our aerospace and T. and I and SNC pharma and plant based foods in the NB water and the SNC and premium smartphones and he and I.
Which in total account for approximately 15% of our sales and were up 7% in aggregate versus the prior year.
In smartphones a market that continues to face challenges our ability to deliver a higher content in the newer models enabled our interconnect solutions business to deliver 8% higher revenue in the quarter versus prior year, a marked improvement from the first half when sales were down 10%. This outcome demonstrates that.
Value of our innovation engine and the power of our close customer relationships our reputation for working closely with our customers to deliver the technology. They require sets us apart and enables us to drive pricing and demand and a rapidly changing market like smartphones.
Our more sluggish markets of automotive in semiconductor are experiencing negative growth year over year. These areas, which account for a little more than 20% of our portfolio were down 11, and 3% respectively. We believe de stocking in semiconductors is now behind us and we're starting to see indications of state.
Realization in automotive channel inventories.
I'm confident our businesses will ultimately outperform driven by their strong position and broad technology portfolios to address key trends, such as hybrid and electric vehicles, and the transition to fiveg and enabling the internet of things.
Regionally organic sales were flat in the U.S. in Canada down, 3% and EMEA down 4% in Asia Pacific and down 4% in Latin America weakened automotive end markets continued to drive the declines in both Asia Pacific and the EMEA. However, total sales in China the market.
Which turned down sharply for US last December posted its strongest results this year and were down year over year in the quarter by 2% versus down 10% in Q1 and 3% in Q2 each versus the same period last year definitely an improving trend for us.
Turning to slide for adjusted EPS was up 2% on a pro forma basis versus the prior year as noted currency was a headwind in the quarter, reducing EPS by three cents. Our segment results, excluding the impact of currency, where net two cents headwind to adjusted EPS well depreciate.
Her decision and a lower share count both contributed to our EPS growth.
To provide a little more color on our segment results I'll cover some of the key operating EBITDA drivers operating EBITDA of $1.4 billion was down 4% versus the prior year period, we again delivered operating leverage further demonstrating our ability to drive price and operating efficiencies amid challenging.
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We delivered operating EBITDA margin improvement of 20 basis points versus the prior year, our strong price and cost discipline was partially offset by a weaker mix with volumes at our higher margin businesses, primarily semiconductor technologies posting softer results in the quarter. We also experienced tire manufacturer.
And costs driven by planned maintenance activity, primarily in the safety and construction segment as well as lower production rates driven by weakened volumes, NRT and I and noncore segments.
Before I turn the call over to gene to discuss the quarter in further detail I'll cover our full year guidance on slide five for the full year, our expectation for organic sales remains unchanged at slightly down our forecast for total annual sales, including the impact of currency and portfolio is about 21.
$1.5 billion, we're narrowing our adjusted EPS range of 375 to 385 per share to 377 to 382 per share maintaining the midpoint of the prior guidance. This adjustment reflects second half currency headwinds of approximately 45 million.
In dollars versus our original expectations.
In the appendix, we provide segment level commentary as well as some additional modeling guidance.
Overall, I am confident in our ability to adapt as market conditions evolve, while continuing to make smart high return investments to enhance our portfolio a relentless attention to cost and pricing discipline, coupled with the benefits of our ongoing investments in innovation will deliver bottom line growth when market conditions.
Improve our focus on driving improvements in ROI C is the right mindset for the long term strength of the company and every part of the organization has committed.
We are working all the levers in our control to deliver on our earnings commitments and drive shareholder value I'll now turn the call over to gene to discuss the segment results.
Thanks, Mark starting with electronics imaging on slide six.
Net sales of 934 million, an operating EBITDA of 320 million or in line with our expectation and demonstrate that the second half improvement we have been forecasting got off to a solid start in the third quarter.
Sales in China for the segment were up nearly 30% versus a year ago period, reflecting a second straight quarter of sales growth.
This result was partially enabled by higher content in the next generation smartphone.
Our semiconductor technology business was down low single digit versus a year ago period. It was up mid single digits versus the second quarter. We believe this sequential improvement indicates that the softness we saw in semiconductor technology in the second quarter due to high channel inventory is resolving and our current exit.
Station is that the semiconductor market recovery will continue returning to growth during 2020.
Operating EBITDA margins for this segment were flat, 34% softer volumes in semiconductor technology, our highest margin business was a headwind the segment margins. This headwind was offset by a gain associated with planned asset sale.
Moving to nutrition and bio sciences on slide seven.
And our nutrition and Biosite segments continued with another quarter of organic sales growth.
Strength of our NB portfolio is its Brett, which enabled low single digit organic growth amid well documented near term market driven softness in bio refineries and probiotic.
Third quarter organic growth was led by food and beverage volume gain which were driven by strength, especially protein and cellulosics from growing demand in plant based.
Other highlights include at high single digit organic growth in pharma solution as well its strength in the food enzyme and animal nutrition business within health and life Sciences.
We continue to be a market leader in probiotic I remain confident in the long term growth of this business. We expect the probiotics growth will continue to be fuel from Asia Pacific or current market penetration as low as compared to other regions the growing steadily.
September year to date Probiotics in Asia Pacific has grown double digit.
Operating EBITDA margins in nutrition and life Sciences are essentially flat with the prior year.
Transportation and industrial recorded net sales of 1.2 billion down 10% on inorganic basis, with a 1% price improvement more than offset by an 11% volume decline.
Our results reflect continued demand softness and de stocking in the global automotive market and weak electronics volumes.
Global Auto Bill remained relatively steady with last quarter from a year over year perspective inventory de stocking continue to negatively impact our result.
We are pleased that we maintain pricing strength in the quarter versus the prior year, but anticipate that the rebalancing of the nylon sixtyk supply chain will influence pricing and volumes as we look to the remainder of the here.
Operating EBITDA declined 20% versus the prior year ago period, with pricing gains and cost reduction more than offset by the impact from lower volumes and currency headwinds.
Turning to the results of safety and construction on slide nine.
Net sales of 1.3 billion were up 2% on inorganic basis.
Operating EBITDA of 352 million was up 1%.
Can you pricing strength and productivity actions drove operating EBITDA margins up 80 basis points versus the prior year.
Year to date operating EBITDA margins are up 370 basis point.
Our topline results were consistent with the second quarter, we realized pricing gains across all businesses, which is now our seventh consecutive quarter pricing gains in essence see.
Likewise strength in water solutions, where we continue to see strong demand in industrial and waste water treatment market was offset by softness in North American construction end markets.
Demand for our safety solutions segment remains robust, but was negatively impacted by plant maintenance activity as well outages at some of our key raw material suppliers, causing us to have to curtail aramid production.
I see continues to improve their cost structure and its raised their operating EBITDA margins above the company average.
A commitment to value in used pricing and a relentless focus on productivity is driving EBITDA margin improvement.
Turning to the balance sheet on slide 10, you'll see that our net debt has remained relatively consistent at 15.5 billion with slightly higher commercial paper balances, which we expect to reduced by year end offset by higher cash balances as of September thirtyth.
As I've said before our capital structure has been in place for several quarters now and we feel good about our position it provides us with the flexibility we need while maintaining our investment grade rating.
You can also see the improvement we have driven in working capital in the quarter.
Accounts receivable and inventories are down as compared to June thirtyth, providing a working capital benefit. This is slightly offset by lower accounts payable balances.
Capitalizing on our working capital opportunity remains a focus area for our working capital levels did rise coming out of separation, but I'm pleased with the progress we've made this quarter and expect additional improvements in this area.
The games from working capital improvement and well controlled capital spending enabled us to exceed our free cash flow conversion target of greater than 90% for the quarter.
We also made additional progress on our share buyback program repurchases now totaled $600 million since June 1st and you can anticipate a similar pace through the end of year to date, we've returned a greater than $800 million to shareholders.
Let me close with a few comments on ROI C., we remain on track to deliver meaningful ROI see improvement as the portfolio came together.
More importantly, however is the mindset shift of the organization, which has now returned spoken.
A major capital and R&D spending is appropriately de risk our teams understand the importance of ensuring these dollar strengthened the bottom line and improve ROI see.
I'll now turn the call over that.
Thanks Gene I continue to be impressed by our team's ability to advance its strategic priorities and tough market conditions.
We have stayed relentlessly focused on execution and it is visible in our results.
At the same time I want to emphasize that we are well aware of the value accretion potential inherent in this portfolio. We're actively pursuing strategic portfolio transactions that will drive increased shareholder returns and sustainable long term growth.
We also continue to refine the portfolio, even as we assess more significant portfolio reconfiguration.
This past quarter, we completed the sale of a sustainable solutions business from the non core segment and in Q2, we completed the sale of the natural colors business from SMB.
Both divestments had lower margin profiles than their segments and the total company average.
Additionally, we announced the planet divestment of the Silicon carbide business in the United for for 50 million in cash once we close we will use the net proceeds in a way, which further enhances shareholder value.
We continue to look for opportunities to monetize our noncore businesses and we plan to make significant progress over the coming quarters.
We're also looking for bolt on acquisitions targets to further strengthen our high growth industry, leading businesses recently, we announced the intention to make two strategic acquisitions in our water solutions business and area of significant growth opportunity by enhancing our capabilities and ultra filtration. We're building on an already.
Strong position with additional capabilities and value added solutions that will drive topline growth.
Water is a vital end market driven by significant demand trends in our portfolio is advantaged in the space as evidenced by our 6% organic growth during Q3.
Overall, we are focused on both organic and inorganic growth opportunities.
Before we turn to culinary I want to address a couple areas that I know we're on your mind, the PFS litigation and the course suits.
P. fast as a broad terms the covers a variety of successes, including CFO away and Pos.
For your information firefighting foams suits really largely to Pf Oh, Wes chemical to come wars, and we including historical Dupont never made.
The same is true for fire fighting fall.
As to the PFS matters themselves. We feel these liabilities are well managed and we have every confidence in our position as a testament to that we have passed the second year of the five year sharing agreement with course, and we still have paid $0 to them.
As to the come more soon the spin off of heritage Dupont's performance chemicals business into course comply with all of applicable legal requirements and followed standard practices relating to such transactions and we're confident in our position.
Earlier this month Kumouri's filed a response, which implies that the historical Dupont work did not intend for from words indemnification liability to be on cap. This is simply wrong. The materials reviewed with historic Dupont Board and the June 15th meeting, which the spin was unanimously approved.
Clearly and unequivocally state that the indemnification liabilities are on cap. In addition to the board materials. There are numerous other documents, which clearly show that the liabilities bar on cap.
Furthermore, Moore's itself reaffirmed the separation agreement as part of that 2017 Amendment.
Which undoubtedly stage the liabilities work to be on cap.
As you know curtailment Dupont jointly filed a motion to dismiss the complaints because this matter belongs in arbitration that's provided in the course separation agreement.
We will file our final response in early November after which the court will respond to our request for dismissal.
If there are additional questions on this we can discuss these further during the Q and a section of the cool.
In closing our results illustrate our commitment to our key principles the fundamental value of deep customer relationships ongoing investments in innovation.
And optimizing the efficiency of the organization. The team continues to stay laser focus on executing against these priorities to deliver increased value to our shareholders.
I'll now turn it over to Lori to open up the Q1 day.
Thank you Ed with that let's move on to your question first I would like to remind you that are forward looking statements apply to both our prepared remarks and the following Q in May we will allow for one question per person operator, please provide the Q in a instruction.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to layer signal to reach our equipment again. Please limit yourself to one question. We will take our first question from Jeff Sprague with vertical research partners.
Thanks, I had warning.
Thank you good morning, everyone.
Hey, Thanks for the comments on the broader portfolio and the like also I would just curious.
In addition to what you.
Identified as noncore right, you've got kind of a number of things that are still sitting in the segments and kind of coming out and.
Without identifying businesses, perhaps but can you give us a sense of Oh.
How much revenue might actually be sitting and the four segments as kind of quote unquote ongoing business that really hasnt met that threshold in your view.
Hi, Jeff it's very small we did sell business you saw recently that had not been in non core we've got a nice price for wasn't a strategic to us. There's a couple more things like that but generally speaking marching in a team we're really focused on moving out the non core every one of them is in motion you've seen we've made a.
A few announcements are ready, but every one of them is actively being worked at this time. So that's the heavier lift is to get that doesn't get the cash in so we can redeploy it.
Smartly for our shareholders and then just to reiterate your opening comment there. Obviously the team is extremely busy on looking at some transformational moves and I would just say were in seven day, a week work mode right now if I could say it that way and you know really looking at that heavily.
A couple things.
And we will take our next question from Vincent Andrews with Morgan Stanley .
Please go ahead.
Thank you and good morning, everyone.
Maybe if we could just get a little more detail and the electronics piece.
Finally, as it relates to smartphones in the good sell and you're seeing.
How much of that is really related to just there's more content of your products and the phones versus.
There has to be sort of the inventory load of the cells or maybe greater production to build into the into the channel. So I guess, what I'm asking is how long it how sustainable is this is this strong sales trend and ultimately do you have a difficult comparison against it.
Yes, Thanks, Vince and this is mark I'll take that one.
You're right. It's it's a combination of builds for the new phones and higher content in the new funds, that's driving the kind of half over half sales increase most of which hits, our IC Es segment interconnect solutions and Eni.
And and we view that so what's really happening here is as the phones start to become more fiveg enabled there are more high frequency materials inside including antennas that pickup the signals and we have a.
A number of products that go into their including some next generation kept on based laminate materials and Thats expected to continue to grow through 2020, 2021, as more and more of the new phone models have these antennas and these higher frequency capabilities and so while it's it's a nice.
Growth driver in the second half of this year, we do expect it to continue for several years and just to bring it back to the new capped online we announced a couple of quarters ago that new cap dumb production line. The demand there is largely driven by these trends in Fiveg for next Gen handsets.
And next we'll hear from Christopher Parkinson with credit Suisse.
Please go ahead. Thanks. Thank you.
I'll now looks random being the 20 and 21 that there's been some recent volatility in quarters due to market based sectors as well some facility downtime in pharma can you just refresh our memory on your general growth expectations for the components of that it'd be portfolio, specifically probiotics specialty proteins and pharma solutions as well as any key macro very.
Doubles, driving each substrate just trying to get a sense of the normal his outlook from both a growth as well as a mix on margin perspective. Thank you.
Yes, Chris This is mark I'll take that one too. So you know as you said there are some good.
Mid term growth drivers here, and then B and you highlighted a few of the Q1 s.
We continue to to have a lot of confidence in the probiotics market as a long term double digit growth market.
Driven by new health indications new products.
As well as just the continued penetration of probiotic usage into the nutritional supplements market Asia is a huge growth driver for probiotics consumption.
Growing double digits. So we like those long term dynamics you also mentioned specialty proteins the whole space around plant based foods, which is our plant based meets which is relatively small today from a especially food ingredient sales standpoint for us.
Less than $100 million, we think Thats got a good long term double digit growth trajectory too.
And then you mentioned farm Excipients and certainly the pharma space is a nice kind of mid single digit growth space. So.
So those dynamics are still very solid there. They are great long term growth secular growth drivers for and then be I'd also mention these are higher margin parts of the and then be portfolios. So as they grow will continue to see.
An uplift on our margins.
Thank you.
And next we'll hear from Scott Davis Smelliest Research. Please go ahead.
Good morning.
Sure.
I'm.
Glad to be calling in on my first call here I.
Hi, good questions I can get away with the profile since as an okay.
I.
I am kind of intrigued by your comments on.
On trying to drive this can more thing in arbitration, but can you can you really can you talk to us about.
What you think the timing is if there is two potential outcomes here.
Youre going to get a an outcome that drove an it into.
Arbitration is that something that can happen in the next 12 months or is this all.
Good kind of.
Brian to the halt just with the legal system minutes delays.
Notably here Scott I think.
Having been through some of these before.
Certainly talking with our counsel on this if it goes the arbitration, which is clearly what the documents say.
I think it resolves itself much quicker.
Because that process is just the faster process.
So I would think during 2020 that would resolve itself.
The timing by way as I mentioned in our prepared remarks, we're filing our final brief moment. The next set of days here and there could potentially be oral arguments that would occur. So I wouldn't expect necessarily the judge to rule on this for us as during the month of November it's probably out just a little ways.
They happen to go through our arguments, which is not uncommon thing in this case, so pending that happening it could be a little bit of time before we hear that but again I think an arbitration process.
Would be a lot quicker.
Through the legal system would be a little bit longer.
So and that's kind of how I would handicap it at this point in time, but by way I'd, just reiterate and I said this in my comments, but just to kind of put an exclamation point on this I mentioned a few documents with the uncapped language Theres also filings by course public filings.
That they signed by their chairman and CEO , the talked about uncapped documents and I would not even venture to tell you. How many emails there are in the system the talk about uncapped liabilities.
So you know, it's very cut and dry in all the documentation.
Throughout the company.
And next trailhead here from Steve Byrne with Bank of America.
Please go ahead, yes, yes. Thank you appreciate the disclosure on the PFS.
You make a comment in here that you've never sold PEO fairway.
Curious whether.
In the years that.
The Dupont manufactured products that.
For a was used in the process was was it simply.
Surfactant used as an aid in the manufacture of a product or was the product derived from it and contained in the product that you sold so it was used in the process and remember look the clarification I think a lot of this gets blown out of proportion inclusive articles that are written we seem to get our name and a lot of them, but it was we use.
In the manufacturing process in for manufacturing facilities in the us that's it.
We didn't have it in our end products by we might the comment I made where more of the legal issues are and more of the locations. Our is firefighting foams Dupont income wars never had anything at all to do with fire fighting phone so I.
I think people blow it up a little bit more here, but it's literally work locations for Moore's is liable for it and we've been doing ground water remediation in those locations for quite a few years and by way. It will continue for many years and by a very key point here.
With all the talk around this the last were two years now as of July one into the five year agreement with come Wars work Moore's pays the first 25 million in a year and the Dupont will ship in the next $25 million and then after that it's more as liability in two years now we have not paid and equals come worse.
Is not going over the the 25 million dollar limit I would also say.
We have some things we would like to clean up we're clearly in close communication with come wars. On this we have about 64 personal injury claims remember we settled 30 550 of them.
All from one location by the way and we have about I think 64 more there would be nice for us to get those resolved and then we will continue the ground water remediation at the four locations that I mentioned, so I think we have this thing well contained well boxed in.
The overtime.
We will get a couple of these other things cleaned up like the personally injury cases.
Next we'll hear from David Begleiter with Deutsche Bank. Please.
Please go ahead. Thank you. Thank you good morning.
Morning.
The second worthless sort of any impact on the timing of the portfolio actions and I know, it's hard to say, but any sense, we might see the first of these transactions from a timing perspective.
Thank you well well know the curve or soon will have no bearing on any strategic.
Actions, we take on on the portfolio.
And I look I can't talk time, and but let me just go back to comment I made a few minutes ago were remark gene be were all we're in seven day, a week mode right now.
Feels like back when we were doing stuff both talk into down one getting things going so we're busy.
We're we know what we want to do.
We are pursuing.
Next we'll hear from Jonas Oxgaard with Bernstein. Please.
Please go ahead.
Hi, good morning, guys.
Good morning dress.
I was wondering which Halloween candy remote most exposed to.
[laughter].
We're on some of that candy by the way [laughter] I figured had to be more realistically.
Coming back to the two to the divestiture of the with the wafer business can you talk a little bit more about the process leading up to this is that something that you shopped around where you approach what's the strategic review beforehand.
Yes, Jonas it's Mark I'll take that one end.
Yes, so like the other noncore divestitures, we've tried to run good disciplined processes. So.
This was a case, where we knew there would be some strategic buyer interest because of the growth in silicon carbide.
And so we tried to move as quickly as we could you know to take advantage of kind of the industry dynamics in that area and then we ran a good process multiple buyers the final better that one.
Obviously was the best offer that we got.
And next we'll hear from John Mcnulty with BMO capital markets.
Yes, Thanks for taking my question. Thanks for taking my question guys.
On the on the innovation pipeline, that's going to help to keep driving your business better than GDP I guess can you give us some thoughts on how that pipeline will contribute 2020 or put another way. If we have a flat macro environment. How can we be thinking about the organic growth tied to some of the innovation that you're bringing out.
Yes, John it's Mark I'll take that one I mean, we're really confident in the strength of our innovation pipeline right now and I think honestly, it's never been stronger than it is we've really focused around a small number of very powerful themes.
With our innovation spend we're still spending about round about 4% of sales on R&D.
Expectations from me for sure that we're going to get more out of that investment than we then we may be ever have historically.
Couple of the big themes that we're spending around auto electrification is one we've got multiple new product innovations in that space, enabling lightweighting, enabling.
He'd removal from battery packs.
Enabling miniaturization of electric Motors, and Inverters lot of high performance materials.
And and that's both new launches and customer qualifications were also spending very aggressively on fiveg.
We mentioned earlier some of the uptake in antenna materials. Those are based on new product launches that are happening. This year, we have some additional new innovations coming in high frequency that a rollout over the next couple of years out of the pipeline.
And then maybe a third area I just mentioned as microbiome the broader space than probiotics is about not just.
More bacterial strains with new clinical indications, but also how can we attach additional offerings to our probiotics business, which is.
Currently the leading franchise and probiotics, but we're trying to double down and bring out new offerings like additional services data.
Three biotics and more advanced sort of complex formulations.
That can further sort of double down on the growth in that space.
So I'm really bullish on the pipeline.
I'd stay away from giving a specific revenue number for next year until we're ready to rollout are.
Our 2020 guidance.
But I think the innovation pipeline is very strong.
Next we'll hear from Bob Court with Goldman Sachs. Please go ahead.
Thank you good morning.
What I could ask about margins in your transportation industrial business. It looks like the decremental margins there were pretty painful on the volume loss. So I guess a combination question when would you expect.
Given the current environment to see those volume comparisons get a little bit more level and then secondly, what would you think about your incremental margin expansion as volumes come back in that business.
Yes, Bob let me kick it off this is mark and then I'll hand, it off if it's gene wants to add anything I'd say mid year, certainly right volumes have been really soft this year.
TNF business and in particular, the nylons and plastics are relatively lower gross margin businesses. So there is a significant loss a leverage when the volume soften price has been softening too as a result of the weak demand in the industry and so thats also hurting the margins.
Yes, we've talked about this now for a couple of quarters as being.
Not just the weakness in the industry, but also destocking and our channels, which is exacerbating and Thats why while the auto market is down mid single digits were down even higher than that.
Yeah, we are expecting that this will stabilize at some point some hard to call based on the the uncertainty this year, but going into the fourth quarter. We're currently seeing inventory levels relatively stable in the channel.
We're not seeing a pickup in demand, but we are seeing some signs of some sequential improvement. So September as an example was a pretty good month versus.
2019 for us so.
So again hard to call in terms of the actions that we're taking gene do you want to I mean, I think teen is an example, differentially managing our businesses, where as you look across the portfolio, you'll see the lowest kind of selling R&D expense in this business and I give randy and his team a lot of credit as we've come in.
This year, we saw the steep drop off in December they very quickly December of last year. They very quickly took action to further rightsize the business and take cost out. So that gives me a lot of confidence that we get through de stocking we see a rebound in auto builds that this business is going to be very well positioned to benefit as well.
We've run historically over auto builds in this business as you know until the Destocking kicked in pretty severely in mid December last year. So we get through destock in at least will stabilize kind of around to where auto builds our plus some increment to that with the content that we drive into the end market. So.
That will play out in the near future.
Next we will take a question from John Roberts.
Please go ahead. Thank you did your animal nutrition business benefited all from swine fever in China. It I was surprised that the food enzyme business was up I thought the weakness in food and ratings was a little bit more broad based than just probiotics.
John I'll take that no not not a huge benefit animal nutrition has been a good market for us because we've had a very strong franchise around the fight Chase area.
And so we're benefiting kind of from global growth characteristics more meat usage.
And then around food enzymes that mean, where as you're probably aware, we're not the largest supplier of food enzymes.
We are seeing very attractive growth off a relatively small base and so food enzymes continues to be for us kind of a high single digit growth animal nutrition by the way in the quarter was about a mid single digit 5% growth. So those are bright spots in the in the enzymes portfolio I would say the.
Segment.
Health and Biosciences segment within nutrition and by Sciences was down about a percent this quarter and so it was a little bit soft overall, but those are some of the bright spots.
And next we'll hear from PJ Juvekar with Citi.
Go ahead.
Yes, hi, good morning.
Morning, future ahead on your potential strategic transactions can you make some general observation. So what am I didn't want to people is that youre seeing given the funding rates.
And then secondly, there is PFS liability, becoming a sticking point in negotiating these deals. Thank you.
Yes, Hey, PJC. Thanks for the questions no the the P. AFFO way is.
Not been issue in things that we're looking at them working one so I'll just leave it at that.
Doesn't concern me.
And just from a multiple standpoint right. It's it's hard to answer that but I'll, just say broadly multiples are very good.
You know when you're looking to transactions right now and buy we just to give you one I think multiples in the B type sector are kind of at all time highs right now and I think a lot of that is it's just a steady business a steady industry.
Which kind of recession proof.
People are going to eat.
And.
They command multiples up around kind of 20% the real premium companies, which I think we are the premium company in the space.
So you know multiples are not an issue.
And what we're working on.
Next we'll hear from our own Viswanathan with RBC capital markets.
Please go ahead.
Great. Thanks, Im just trying to understand.
The earnings algorithm from here.
Could you kind of touch on your outlook for cost reductions and synergy capture if theres any left into 2020.
And then similarly, I'm, assuming prices going to offset FX.
What would be that the main drivers that would help you get some volume growth next year. Thanks.
Sure. Thank you.
Let me first address synergies so as we look at 2019, we had about $450 million the synergies from the Dow Dupont and we're going to wrap that up in 2020, we have about another 100 6000 65 synergy and then we'll be finished that program.
The good news is and you know and we talked about this last quarter that productivity is in our DNA. It's really important I talked about the work that Randy and his team has done in other parts of our businesses as we come in to 2019 to deal with the softness in some of our end markets and so we've taken productivity actions.
This year, and that's going to give us a bit of a tailwind as we go into 2020 as well. So you can think about maybe another 50 million plus of of benefits from.
The timing of those actions going.
Going into 2020 in terms of our broader.
2020 guidance, we're going to talk about that more when we announced fourth quarter.
Earnings.
Late January early February , but no I think we're looking at.
You know similar macro dynamics from from 19 into 20, we're going to be fairly cautious as we think about 2020.
But there are certainly bright spots in our portfolio that we that we continue to be excited about whether its probiotics pharmaceuticals water. The aerospace business is doing quite well and then we've got the continued challenging dynamics with the terrorist and trade that are impacting of course nice.
Clearly auto but also electronics to some extent just to reiterate with Jean said, we as a management team market Gina all of US. We're we're saying lets plan for the kind of the macro we have now.
Clearly hopefully during the next month some resolution on China tariffs occur so that would be a green shoot and I think the biggest green shoot for all of us in the industrial sector is obviously, everyone is easing all over the world I think I was looking to 32 countries. The other day that are all have easing going on and clearly that most experts tell me that.
Kicks in eight nine months later with some positive momentum.
So there's some green shoots out there obviously that could be helpful to was but it's worth like don't count on any of that lets just plan conservatively and we'll see ourselves up properly from a cost structure at all as we go into 2020.
Next we'll hear from Frank Mitsch with Fermium research.
Please go ahead.
Hey, good morning, and pretty impressive results out of out of China mentioned that it was largely premium smartphone driven I'm just curious what percent roughly are you manufacturing in country and can you talk about the trade flow issues and just in general what the terror conflict has.
Impacted Dupont and what's your outlook is there.
Yes, Frank Thanks. This is mark I'll take that one the.
Yeah, So rough number on our China sales, we have about 15% of our sales into China. A decent portion is is manufactured locally, but I'd call maybe about half fish of the sales.
We do have some products that are manufactured in the us that are that are sent over to China. That's a smaller portion of the total because we're also manufacturing around Asia to and shifting into China.
As a result, the tariff impact is not real huge for us when you look at that portion that's direct sales.
In terms of dollars it comes to about $50 million on a full year basis of tariff impact.
So.
Pretty well mitigated for our company our size I think it's still going to be a positive when we see a resolution to the U.S., China trade disputes, but the positive is not so much the direction direct impact of the tariffs. It's more just the stimulus to the economy the industrial growth in China.
And obviously the industrial growth in Europe in the us and we think Thats a much bigger lever for us than the direct tariff impact.
Next we'll hear from Laurence Alexander with Jefferies. Please.
Please go ahead, Mike could you just.
Good morning could you just clarifying two things the.
Any signs of a sequential improvements in China ex electronics and the comments about nylon six six rebalancing how much of the impact that has been and what that means for 2020.
Yes, Laurence I'll take that so you know in terms of China ex electronics, Yeah, we've been.
Pretty strong in essence see pretty strong and then be through the year. Those have continued to hold up well in China.
Kenai, which has been down significantly we're not seeing a significant rebound as yet.
So thats the exception and then electronics, obviously was a big trajectory change in China and then the second question around nine months six six with yes, I mean, I think if you look at Ti and I, we did see sequentially a pricing decline from second quarter to third quarter of about 2% and we would expect to see some continued the same continued.
Dynamic as we go into fourth quarter with.
And next we'll hear from Mark Connelly with Stephens, Inc.
Please go ahead.
Thank you.
Just how you've given us a lot of information on a lot of different businesses and the economic impact, but if we were to strip out the macro impact how would you read your performance relative to where you thought you would be on controllable issues and how how do you see the opportunity over the next.
Sure and Controllables is it more on the revenue side or is it more on the on the volume and product side.
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Yeah.
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Please standby as we are experiencing some technical difficulties.
And Mark if you could repeat your question.
Sure.
Ed you've talked a lot about what you what your strategies are in the portfolio, but what I'm trying to understand is if we think about the economy is what it is and you look at what Youve controlled and what you want to control how much opportunity do you see ahead in Controllables in this sort of flat macro environment.
On the cost side versus on the revenue side.
Yes, Mark sorry about the break there this is mark Doyle.
Yeah, I think we've we've done a reasonably good job certainly with being aggressive on cost actions and we think that there's more room to continue to drive productivity around cost.
A couple of additional degrees of freedom, we have our manufacturing production costs levels of automation. We've also got some opportunities to continue to de bottleneck manufacturing sites, because we do have areas, where demand is still outstripping supply and so those I'd call more sort of self help related cost actions.
I think we've also done a nice job focusing the innovation spend and the capital spend around areas, where we have.
Continued upside even in some of the softer market conditions and I think that those actions will continue to benefit us going forward and mark just to add on to that.
Im is still working on obviously the synergies we're capturing the rest of this year, but we have a 165 million more of synergies next year and if you remember I think it was last quarter, we announced restructuring where we were taking what we took 30 million out in the second quarter and we're working on we are working on 80 million.
For the second half for this year. In addition to the synergies withdrawal, obviously play through 2020 also and.
It would the worst there's a management team we have a many other items were looking out on the cost side, if we feel like we need to pull those levers.
Please go ahead.
The things we're doing book, but first let me just say the movie is not true facts. It's quote I think the trailer. So it was inspired by and I've had a pretty good debriefing on it and it's just not true material in it.
But obviously, we have a lot of legal folks have been looking at this and and I'm just going to leave that there for now yes, let me just build on Ed's comments I mean, unfortunately in a situation like this it just doesnt do you much good to fight it out in the in the public Guy in and that would just drive more and more attention to it. So we're really focused.
Internally on our employees our communities our families.
Them.
And with no further questions I'd like to turn the call back to Lora cost for any additional or closing remarks.
Thank you everyone for joining our call for your reference a copy of our transcript will be posted on Dupont's website. This concludes our call.
And this concludes today's conference. Thank you for your participation and you may now disconnect.