DuPont de Nemours, Inc. (DD) Q2 2012 Earnings Report, Transcript and Summary

Karen A. Fletcher - Vice President of Investor Relations Ellen J. Kullman - Chairperson of the Board and Chief Executive Officer Nicholas C. Fanandakis - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division Sabina Chatterjee - Wells Fargo Securities, LLC, Research Division Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division Vincent Andrews - Morgan Stanley, Research Division David L. Begleiter - Deutsche Bank AG, Research Division Laurence Alexander - Jefferies & Company, Inc., Research Division Duffy Fischer - Barclays Capital, Research Division John P. McNulty - Crédit Suisse AG, Research Division Robert Koort - Goldman Sachs Group Inc., Research Division John E. Roberts - The Buckingham Research Group Incorporated Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont quarterly investor call. [Operator Instructions] To listen to the webcast, please go to www.dupont.com. Thank you. It is now my pleasure to turn the floor over to your host, Karen Fletcher, Vice President of Investor Relations. Karen, you may begin your conference.

Okay. Thank you, John. Good morning, and welcome, everyone. With me today are Ellen Kullman, Chair and CEO; and Nick Fanandakis, Executive Vice President and CFO. The slides for today's call can be found on our website at dupont.com, along with the news release that was issued earlier today. During the course of this conference call, we will make forward-looking statements, and I direct you to Slide 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 and request that you review the reconciliations to GAAP statements provided with our earnings news release and on our website. As a reminder, our comments on today's call regarding segment earnings are on an underlying basis. And finally, we've posted supplemental information on our website that we hope is helpful to your understanding of our company's performance. It's now my pleasure to turn the call over to Ellen.

Great. Thank you, Karen, and good morning, everyone. DuPont executed well in the quarter and delivered strong results despite macroeconomic headwinds. We continued our momentum with particularly robust volume growth in agriculture, food and enzyme markets. Company sales were up 7% despite a 3% currency headwind. Excluding currency, sales were up in all regions. Sales to developing markets grew 11% versus a very strong comp. While volumes were down in Europe and Asia, we continue to see sequential improvement on a seasonally adjusted basis. Volumes were up 5% and 3% in China and India, respectively, versus the second quarter of 2011, which is another measure of good momentum in the regions. Underlying earnings grew 8% to $1.48 per share. On a segment level, pretax operating income was up 13% excluding Pharmaceuticals. I'd like to highlight some of the important milestones from the quarter. First, we passed the one-year anniversary of the Danisco acquisition in May. The contributions and benefits from the acquisition have exceeded our expectation. We added 2 very attractive businesses to our portfolio and identified significant opportunities for cost and revenue synergies. This newly created reporting segments of Nutrition & Health and Industrial Biosciences delivered strong performance this quarter and are expected to combine for over $4.5 billion in sales this year with a pretax operating margin in the 10% to 14% range. We will deliver $130 million of cost synergies by year end and expect additional productivity and margin expansion in 2013 and beyond. Another important milestone in the quarter was the conclusion of the northern hemisphere planting season. For the first half, Ag segment results were up 15% and pretax operating income up 16% driven by new products, strong relationships with our growers and an ever-expanding global footprint. In addition to a strong foundation in North America, we have built solid businesses in Eastern Europe, Latin America and China, which offer additional attractive growth. Earlier this quarter, we announced government approval of the acquisition of Pannar Seed company, a leader in Africa, as yet another example of our global build-out. Finally, I would be remiss if I didn't highlight innovation milestones. We're tracking well versus our target of having 30% sales from new products introduced within the last 4 years. I'd like to give just one new product example from the quarter. Our performance polymers business responded quickly to address the global shortage of PA-12, a critical polymer for automotive applications. We accelerated the introduction of new grades of our Zytel product to allow the automotive industry to continue to produce parts with alternative materials. The contribution to business results is small in the quarter, but importantly, we demonstrated, again, DuPont to be a valued partner in helping the auto industry respond to a critical shortage. Now I'll turn the call over to Nick and Karen to review the quarter in more detail. Then I'll come back and close out the call with our views on the outlook; so, Nick.

Thank you, Ellen. Good morning, everyone. Let's start with the details of the quarter on Slide 3. Total segment PTOI on an underlying basis increased $185 million or 9%, overcoming headwinds relating to currency, a decrease in pharmaceutical income and higher pension costs. This outstanding performance demonstrates the diversity and strength of our portfolio, and moreover, the outstanding execution by our teams. Underlying earnings of $1.48 per share increased $0.11 compared to the $1.37 in the prior year as the strong operating results were partially offset by $0.06 of headwinds relating to exchange losses and taxes. Consolidated net sales of $11 billion were up 7% versus the prior year. Local selling prices increased 6% with gains in all regions and most segments, reflecting the benefits from new product introductions coupled with our continued strong discipline to price per value. Portfolio changes, principally the Danisco acquisition, added 5% to sales. Volume was down 1% from the near-peak level in the second quarter 2011. On a sequential basis, when you exclude Ag and adjust for seasonality, volumes improved 3% led by Asia-Pacific. We expect this momentum to continue as we head into the second half of the year, particularly in the photovoltaic, consumer electronics and TiO2 markets. Now let's turn to a corporate view of the second quarter, looking at EPS variance analysis on Slide 4. Higher local selling prices resulted in a $0.49 per share benefit. Variable costs were a $0.03 headwind as raw material, energy and freight costs were up about 1% over the prior year. Input costs have moderated from the first quarter. And for the full year, we now expect an increase of about 1% versus our previous assumption of 3%. The 2 percentage point improvement is primarily due to lower crude oil and ethane costs as well as more advantageous mixes of ores in our titanium dioxide business. The improvement also includes lower silver costs, which are passed through to the customer so there's no associated earnings impact. Excluding the impact of portfolio changes, volume declines resulted in an earnings hurt of $0.06 per share. Let's move to fixed costs, which reduced earnings by $0.15 per share when you exclude currency, volume and portfolio changes. This change reflects growth investments including increased R&D and marketing initiatives in the Ag segment and costs associated with operating the new Kevlar and Tedlar plans. I would also like to note that the fixed costs increase includes a $0.04 of higher noncash pension costs over prior year. Concurrent with taking actions to support growth, we've delivered approximately $190 million of fixed costs productivity year-to-date. We're well on our way toward exceeding our commitment of $300 million for the full year. Year-over-year, currency was a negative $0.06 variance in the quarter. At current exchange rates, we expect a $0.30 to $0.35 headwind for the full year, compared to our previous guidance of $0.20 to $0.25. For third quarter alone, the stronger dollar would result in about a $0.12 to $0.14 headwind versus prior year. Next on the waterfall is portfolio changes, which is a net $0.06 benefit primarily reflecting the acquisition of Danisco. Moving on. Exchange gains and losses was a negative $0.04 variance in the quarter. As is typical, the detailed reconciliation on Schedule D in the earnings news release can be found. It shows the exact impact our hedging program had on earnings as well as the effective tax rate. Income tax was a $0.02 headwind. This represents a difference between the base tax rates of 24.1% this quarter versus 23% last year. The higher base tax rate primarily reflects an increased proportion of earnings in higher tax rate jurisdictions as well as the absence of the R&D and other tax credits, which expired at the end of 2011. We now expect full year 2012 base tax rate to be about 24%, 1 percentage point higher than our previous guidance, which equates to an additional $0.05 per share headwind for the full year. This revision reflects our latest view on the earnings mix. Lastly, reduced pharmaceutical royalties were a $0.05 hurt. We are now estimating full year 2012 pharma pretax income to be approximately $65 million, an increase of $15 million versus our original guidance. With that change, we expect pharma to be $225 million less than it was in 2011. There's a graph depicting sales by geographic region on Slide 5. You can see we delivered strong performance in developing markets with sales up 11% in the second quarter led by growth in Agriculture. Turning now to the balance sheet and cash on Slide 6. Second quarter free cash flow was $0.4 billion, essentially flat versus the prior year. At the end of the second quarter, on a 12-month trailing basis versus second quarter 2011, we were able to increase net working capital turnover by about 4% when you exclude the Danisco impact, thus reducing our working capital needs and in line with our commitment to deliver $300 million of working capital productivity this year. Our strong balance sheet continues to serve us well. We value our A/A2 credit rating and work to maintain the associated metrics to support that. Our long-held strategy has been to maintain a strong balance sheet and return excess cash to our shareholders unless the opportunity to invest for growth is compelling. In April, we announced a 5% increase to our quarterly dividend, and we paid our 431st consecutive quarterly dividend last month. Additionally, we completed the repurchase of $400 million of shares in the month of May. In summary, for the second quarter, our market environment was a dynamic one. Global volume for the company declined slightly on a year-over-year basis, but improved sequentially excluding Agriculture. As a result of our strong execution and portfolio diversity, we delivered a double-digit increase in the underlying total segment PTOI excluding pharma in sight -- in spite of these very challenging market conditions that we're facing. Turning now to the third quarter. We expect sequential volume growth to continue particularly in PV, consumer electronics and TiO2 markets. Additionally, we expect volume growth on a year-over-year basis, albeit off of a easier comp. Karen will provide more details when she covers the individual segments. For the full year, there are several items that we see as either headwinds or tailwinds. Weaker macros, a stronger dollar and higher tax rate are some of the headwinds. On the other hand, lower import costs will certainly be a tailwind. Taking these items into consideration, we expect full year earnings to be toward the lower end of our existing range of $4.20 to $4.40 per share excluding significant items. Additionally, we expect earnings in the second half of the year to be split about evenly between quarters 3 and quarters 4. Some of our businesses are impacted more from the changing macros than other businesses. However, each of our businesses has meaningful externally benchmarked performance targets. These businesses that are not executing against their targets are being required to provide even more productivity gains. These businesses are taking actions in a variety of ways including reducing expenditures and tightly managing their cash. They are also shifting resources as new opportunities are identified. All of our businesses are staying close to their customers to adapt to the changing demand signals and to continue to serve our customers' needs. DuPont's leadership team remains confident in our business plans and our ability to execute against those plans. Lastly, I would like to remind investors that although we are taking actions to react to today's dynamic market conditions; we also remain focused on our long-term strategy of growing the top line 7% and earnings 12%. We continue to drive a disciplined process around innovation, productivity and differential management. We're committed to build on successes in developing markets, and we continue to exercise good financial discipline and make decisions in support of continuing to have a strong balance sheet. Our focus on these areas and our strong execution are the key enablers to our success. With that, let me turn the call over to Karen who will review the segments. Karen?

Okay. Thanks, Nick. Turning to Slide 7. Our Agriculture segment continued the momentum established in the first quarter, underpinned by strong northern hemisphere execution in a robust ag market. Sales of $3.4 billion grew 13% with roughly equal contributions from volume and price. Earnings grew 12% to $926 million. First half sales of $7.5 billion grew 15% with earnings up 16% to $2.2 billion. Reviewing the individual businesses starting with seeds. Second quarter sales grew to $2.5 billion, up 12% with first half sales growing to $5.7 billion, up 16%. While first half growth reflects increased corn and soybean acres and strong price performance in North America, each region contributed positive price and volume growth. As a result, the business is expected to be at the top end of our goal to deliver 5% to 10% net price gains this year. North American growers have recognized the value of our Optimum AcreMax family of reduced and integrated refuge solutions. This is only the second commercial season for these technologies, and adoption rates continue to exceed our expectations. Over 70% of above- and below-ground sales and about 10% of above-ground-only sales were in AcreMax technology, which is at the high end of our expected range. Additionally, growers planted over 2 million acres of our Optimum AQUAmax hybrids developed to deliver a yield advantage in water-limited environments. In soybeans, we grew sales through pricing gains and volume growth in North America. Our focus has been on optimizing the financial contribution of the breeding investment we made in soybeans. Through outstanding execution, we continue to lead the market based on the confidence customers have in our disease packages and all-around product performance. Moving to Europe. Corn sales in the quarter were down year-over-year, as expected, following an early start to the season, which favored the first quarter. For the first half, pricing and volume contributed positively to sales growth. In crop protection, second quarter sales grew to $879 million, up 15% with first half sales of $1.8 billion up 11% led by volume growth in North America and Latin America. The results reflect growth across all product categories with notable strength in insect control product sales as Rynaxypyr continues to penetrate markets around the world. The broad success of Rynaxypyr supports our aggressive investment effort to rapidly expand the franchise, bringing Cyazypyr products and Dermacor seed treatment to the market. We received our first registration of Cyazypyr in Argentina on July 13 and we expect to launch in the second half. We expect this franchise of insect control products derived from the same novel chemistry will grow to over $1 billion in the next few years. Looking ahead to the second half for the Agriculture segment, our outlook remains unchanged as we expect high single-digit percentage sales growth and larger seasonal losses as compared to same period previous year. Second half sales anticipate strong business performance in both seeds and crop protection in Latin America, partially offset by significant currency headwinds primarily due to the rial and lower corn planting as growers in Argentina and Brazil are expected to move strongly to soybean. Sales growth is offset by continued investment in our Right Product, Right Acre strategy; new product launches; and long-term R&D build-out. Moving to Slide 8 for Electronics & Communications. Sales of $795 million were down 11%, primarily due to soft photovoltaic volume and lower silver price pass-throughs. On a sequential view, growth in photovoltaic materials was enhanced by our industry-leading products like our latest Solamet paste gaining traction with customers, coupled with recovery from the inventory correction that began late last year. In consumer electronics, demand was up for our market-leading materials, driven by ongoing growth in smartphones and tablets. PTOI was down 27% on lower volume and plant utilization. Additionally in the prior year, PTOI was reduced $20 million due to extreme metal volatility. For third quarter, we expect sales down slightly due to pass-through of lower metal prices and PTOI up slightly on higher volume. Sequentially, the story is even stronger with earnings up substantially due to continued momentum in PV and consumer electronics. Photovoltaics remain a very dynamic market. We see installations continuing strong in the U.S. and China with new positive feed-in tariffs in Japan even as industry macros are weighing on the module makers. For the full year, we reaffirm our view of 10% growth in global installs, and our advanced materials will play an essential part in that. On the consumer electronics side, launches of new mobile devices are expected to pull through our industry-leading materials like Kapton Black. Now on to slide 9, Industrial Biosciences. We delivered sales of $300 million with growth predominantly from acquisitions. In biomaterials, our Sorona polymer continues to gain market adoption in carpets, thanks to our highly differentiated value proposition. PTOI of $44 million grew primarily because of acquisition but also from cost synergies, which are performing in line with expectations. Turning to third quarter. We see sales up modestly and PTOI up substantially with realization of additional cost synergies. As in previous quarters, the generally good market fundamentals for enzymes are expected to remain favorable, albeit with some slowing of enzymes for ethanol given higher corn prices. Turning now to Slide 10 for Nutrition & Health. The teams delivered a very strong performance in the quarter, posting sales of $885 million with earnings of $112 million. The quarter reflects the 2-month acquisition benefit in addition to growth in Solae. Our global teams have maintained the business momentum from these -- from our businesses, delivering pro forma sales growth in health and protection and enablers with both price and volume gains that more than offset currency headwinds. For Solae, a key growth objective is to enhance product mix and earnings by growing the Solae specialty segment while optimizing the commodity segment. Towards that goal, Solae specialty posted mid teens sales growth as our new products continue to penetrate the nutrition solutions and improved health segment of the food ingredients market. Pretax operating margins of 13% reflect the progress we're making on cost synergies with meaningful impact from timing lag on raw material cost inflation. Moving to the outlook for third quarter. We expect moderate sales growth with substantial earnings growth. Year-over-year pretax operating margins will be up substantially, reflecting business mix and cost synergies, but will be tempered sequentially due to raw material inflation. Moving to Performance Chemicals on Slide 11. Sales were essentially flat as higher prices offset lower volume. Versus a sold-out environment last year, TiO2 demand was down particularly in Europe and to a lesser extent, Asia, while North America showed strength. Within the quarter, we saw growing momentum particularly in Asia. As an example, China's June sales were our strongest year-to-date for TiO2. Strong demand in industrial chemicals like cyanide also provided an uplift to the quarter's result. PTOI of $538 million was up 7% despite higher ore costs, reflecting our technologically advantaged process and consistent gains in productivity. In third quarter, we expect sales down modestly and PTOI down substantially versus a very strong comp of tight TiO2 and robust fluoroproducts demand a year ago. In spite of the uncertain global macro environment, segment outlook is for sequential improvement. Additionally, we reiterate our view of flat segment margins year-over-year for Performance Chemicals on slightly lower volume. Now let's turn to Slide 12 and Performance Coatings. Higher OEM volume, tied to a 10% increase in auto builds, helped the quarter. These increases were more than offset by weaker refinish and powder coatings volumes primarily in Europe, resulting from weak macro conditions. PTOI increased 26% with 180 basis point margin expansion, which resulted from pricing and mix enrichment actions plus productivity gains, partially offset by unfavorable currency. For the third quarter, we expect segment sales to be essentially flat in spite of unfavorable currency. PTOI is expected to be up substantially with continued margin expansion versus prior year. Now turning to Performance Materials on Slide 13. Automotive-related demand continued to improve, particularly in North America. This was offset by continued softness in industrial and electronics markets, especially in Europe and Asia-Pacific. However, we did see sequential growth in electronics in Asia. Additionally, packaging markets improved modestly. PTOI increased 25% primarily due to lower feedstock costs, higher volume, improved mix partially offset by unfavorable currency. For the third quarter, we expect sales to be down modestly as stronger volume will be offset by lower U.S. dollar selling prices, primarily due to currency headwind. PTOI is expected to be up substantially on a stronger mix. On Slide 14, we'll cover the Safety & Protection segment. Sales decreased 4%, primarily due to lower public sector demand and continued softness in industrial markets. PTOI was down 11% on weaker mix, unfavorable currency and higher costs associated with operating the new Kevlar plant, partially offset by value-based pricing actions. For the third quarter, sales are expected to be up slightly with higher demand, principally in North America and Asia-Pacific, partially offset by unfavorable currency. We see demand improvement for Kevlar as some of our newer products, utilizing the latest technology installed in our new Cooper River plant, are being very well received in the market. Additionally, we expect sequential demand improvement from Nomex from higher infrastructure spend and Tyvek in worker protection markets. PTOI is expected to be up modestly on stronger volume and improved fixed cost leverage, partially offset by unfavorable currency. That concludes our review of the segments. And now, I'll turn the call back over to Ellen.

Great. Thank you, Karen. As Nick already stated, we expect full year earnings, excluding significant items, to be toward the lower end of our existing range of $4.20 to $4.40 per share due to the uncertainties of the global macro conditions, currency and anticipated higher tax rate due to earnings mix. Year-to-date, you've seen the strength and resiliency of our portfolio plus disciplined execution combine for earnings that were better than expected, and we intend to finish the year with the same discipline and focus. We remain committed to differentially managing our portfolio and invest in markets where growth remains attractive. Our innovation centers are an important tool in this effort and they’re places where we can focus resource and leverage the power of DuPont innovation in order to pursue growth opportunities in developing markets. As the result of a series of very purposeful actions, investment innovation, selective capacity expansion, acquisitions such as Danisco and Pannar, just to name a few, our portfolio is less cyclical than it was just 5 years ago, and we continue to drive productivity and benefit from the restructuring actions we implemented in 2009. Our business teams remain close to the markets and customers, ensuring that they are ready -- reading underlying demand signals from downstream markets and able to meet whatever changing customer needs they see. They're also focusing on innovation that truly add value to our customers and create opportunity for growth in new areas. Now I'd like to walk through some of the markets that are the most important to DuPont. Our Agriculture and Nutrition & Health segments will contribute about 1/3 of the company's sales and earnings this year. Agriculture and specialty food ingredient markets are expanding based on population growth and the demand for healthier food choices. Our businesses drive solutions to improve productivity and deliver more nutritious food. Success is contingent on our ability to continue to deliver products with improved performance for our customers year in and year out. And we have tremendous momentum with how customers have responded to our latest offering. TiO2, it's received a lot of attention lately. The market became soft in the second half of '11 and we've seen slow sequential recovery since then. We believe that recent comments in the press regarding demand outlook overstated the softness of the market, so much so in fact that we publicly affirmed our confidence in the demand outlook. We expect sequential recovery to continue. We expect segment margin for 2012 to be comparable to 2011, which is among the highest in our portfolio right now. Keep in mind that overall fundamentals in this market are robust. Demands historically track GDP growth, and we anticipate only modest capacity additions to this market over the next 4 years. We expect favorable market conditions to remain during that timeframe. Moving to automotive. Our expectation of global builds is still about 5% growth this year, although that outlook varies from a 6% decline in Europe to 14% growth in North America with the rest of the world somewhere in between. And finally, electronic markets are improving. Consumer electronics is bolstered by continued strong demand for smartphones and tablets. Demand for photovoltaic materials has shown good sequential improvement since the downturn in the second half of 2011, and we continue to expect PV installations to be up 10% over last year. Overall, with DuPont's mix of products sold into electronic markets, we expect sequential recovery to continue in the second half. So to summarize, second quarter came in about as expected against the backdrop of very dynamic market conditions. The company demonstrated strong execution and resiliency. The comments we've made about our performance and our outlook are very consistent with what we've been saying for the past couple of years: Innovation is the backbone of the company and we differentiate ourselves through our offerings. We are prioritizing resources and aligning with secular growth opportunities in food, energy and protection and productivity. It remains a way of life for each and every of our businesses. These are our constants, the essential drivers of our performance that enable us to deliver increased value for our shareholders over time. So now, we can open up the lines for your questions.

Great. Thank you. John, let's open up the lines.

[Operator Instructions] Our first question comes from Jeff Zekauskas from JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Have you come to a decision as to whether you'll sell Performance Coatings or not?

Jeff, I'm not sure where that question is coming from. Certainly, Performance Coatings, as you saw, had good performance this year. But as you know, we evaluate our portfolio each and every quarter and if we have anything to announce about any of our businesses or product lines, we'll make sure we include you on the call. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then as my follow-up, were titanium dioxide prices up sequentially in the second quarter and do you expect them to be up sequentially in the third quarter?

Nick, why don't you take that?

Yes, why don't I take that? When you look at the TiO2 pricing in the second quarter, it was flattish versus being up. And expectation is that it's going to be flattish as you continue for the rest of the year.

Our next question comes from Kevin McCarthy from Bank of America.

Your Asian volumes were off 1% in the quarter. Do you see volumes there stabilizing? When I look at it in the context of minus 2 last quarter and minus 10 in the fourth quarter, you called out improvement in China and India. I'm wondering if you think Asia may have bottomed here.

Kevin, thanks for the question. Asia is still a tale of 2 cities when you think about the developing areas versus the developed areas. Although our volume was down 1% in the quarter; in the developing Asia, it was up about 3% with -- developing Asia was up 3% with developed Asia down 4%. And you felt, China and Hong Kong, I mentioned in my remarks, were up 5% and then India was up 3%. And if you look at it sequentially, I mean it's been a hard one to call this year because it just was moving all over the place coming off of the Chinese New Year. But we have seen -- continue to see sequential improvement and as we take a look at the underlying markets, we expect that to continue.

Just as a follow-up, Ellen, you mentioned that June was the strongest month for TiO2 in China. I think in the past, you've talked about pigment as being a leading indicator. And so my question is to what extent does that activity in June in China reflect restocking given some price declines in the region? Or rather would you attribute it to an increase in underlying demand there?

Yes, I think it's a hard one to call because you got to kind of look at it over time, but we see both happening. I mean we see that there's movement in some restocking. And I think that the Chinese government has really tried to create and have done some stimulus like just in the last month or so, they've had 2 cuts in their benchmark blending rate. They put in consumption incentives for some consumer goods and they've been working to accelerate project approvals on infrastructure. And we see all that is starting to move that market and I think TiO2 is a beneficiary of that.

And our next question comes from Frank Mitsch from Wells Fargo Securities.

This is Sabina Chatterjee in for Frank Mitsch. Just -- I'll continue on the topic of TiO2. Obviously, DuPont's been a lot more confident than its peers in your outlook. Can you just give us maybe some metrics to support that view? You just spoke about Asia, but maybe utilization rates and inventory levels here in the U.S. and even globally, if you could?.

Nick, why don't you...

Yes, why don't I take that one? And so when you -- let me -- let's talk about the larger picture of where we are with the TiO2 business. The fundamentals really haven't changed here. We're still very bullish on the mid-, long-term prospects for TiO2. When you look at the growth that it has, relation to GDP, over the next 5 years the only significant new capacity being announced is DuPont. And there just isn't enough capacity announced to keep up with the demand at that sort of GDP growth rate. So we're seeing the basic fundamentals still intact moving forward even if there is a short-term period of demand contraction. We're also seeing our strong position based on the decades of innovation that we have, our #1 position around production capacity as well as our advantage position from a manufacturing technology standpoint. You couple all those macros with some of the specifics that are going on right now. When you look at -- even with this volume being somewhat depressed, you look at the earnings of this business in the year and you look at the margins of this business and you're still in line with what was performance was in last year's results. So you're seeing margins very much in line and earnings, overall, very much in line. So I think the overall macro picture is still very positive and strong in the TiO2 business.

Okay. Maybe then as a follow up, switching gears to photovoltaic. It sounds today that you might be a little more constructive than you've been maybe in recent weeks. So have module inventories been worked down? And is it reasonable to say that maybe the H2 recovery has unfolded a little better than you expected earlier?

Yes, I think that the module inventories continue to be worked off with the installs. The first half installs were at a 10% rate, so they're -- this isn't a back-end loaded from an install standpoint. So that's really helped. As we look at our value chain, we predicted an improving position quarter-by-quarter and we think that still holds. So we think that the dynamics that we laid out for you in the last earnings call are playing out just as we have predicted.

Our next question comes from Mike Ritzenthaler from Piper Jaffray.

On the seed production side, can you give us a sense for availability of seed next year given the kind of adverse growing conditions here in North America? And I guess, more particularly, about how much of Pioneer's seed production is irrigated?

Yes, thanks. We know everybody's concerned based on the weather and the drought that's going on. We're looking at good availability for the 2013 series -- season. We have very strong risk management practices not only in -- for that carryover seed, but even our production locations are very geographically diverse, which helps, with 2/3 being irrigated. So that actually is very helpful especially with the weather. And then we always have winter production capability that we can come into play to fill in. So we are working that through as you speak, and we think we're going to have great availability for 2013 the season.

Okay, outstanding. And then with the recent ethanol plant rationalization, so -- or expected rationalization, does that make any sort of meaningful impact on the Industrial Biosciences division?

No, I think that commodity prices are going to come and go. And with the Renewable Fuel Standard, there's kind of a base that is there in that marketplace. We're still looking at cellulosic ethanol ultimately as being the answer and making great headways on that one. But as we said and Karen said in her comments, we think the enzymes sales in that market will come off a little bit based on commodity prices. We still believe that, that market will continue to progress.

Our next question comes from Mark Connelly from CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: As we look at your consolidated sales, how much of the local market price is being driven by raw materials and tight markets versus new product introductions?

Yes, Nick?

Yes. I think a rough rule of thumb you can use when you look at our pricing in the marketplace, about 2/3 or 75% is driven through the innovation. And a small percentage is driven -- in that 25% range is driven by pass-throughs of raws up or down. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Okay, okay. That's helpful. And just one follow-through. What kind of macro or micro conditions does DuPont need to see to get Safety & Protection to actually hit its PTOI targets?

Yes, I think we see that there are some things that are working in their favor, so sequentially we think that continues -- that will continue to improve. First of all, the acceptance of the new materials out of the Cooper River line, we're seeing great progress there. And even you’ve seen progress in the quarter -- second quarter, with the margin expansion you've seen in the second quarter, which is commensurate with improved products and improved utilization of those. Asia, we see is improving sequentially. North America continues to be solid. Europe is a challenge there. But even construction is given a little bit of a boost with residential being up 21%, now commercial is on its back but we're more heavily in residential than not. So there are some of those fundamentals that are coming into play that show an improving picture. But we're going to make sure that regardless of the external environment, we're going to be driving through either innovation and productivity to get to those targets.

Our next question comes from Vincent Andrews from Morgan Stanley.

Just a question on seeds. Could you talk a little bit about how you're thinking about pricing going into next year? And I guess I'm just trying to be sensitive to the potential that you mentioned in the release that there were some higher seed production costs this year. Presumably, you passed those through and you would do the same if there was anything incremental next year, but it just might impact the mathematical margin you generate. So if you could just comment on that, that'd be helpful.

Yes, obviously with the commodity -- with volatile commodity prices, that continues to be looked at. Net farm income remains high, is high and is expected to remain high, so that's a positive, and probably will remain high for a little while because the stocks are not where -- it looks like with the volumes that are expected to come through from this season, stocks are supposed to remain high -- or stocks are supposed to remain low, therefore commodity price is high. We -- it's really early to talk about the details, but we are consistent with our pricing philosophy to the value of the new products, and I think you've seen that this year. I think you've seen that this year with our pricing being up at the high end of the range that we've talked about, 5% to 10%. I think you've seen it with the penetration of our new products. And it really is Optimum AcreMax now, for next year Optimum AcreMax XTreme and they're going to continue to make progress. AQUAmax, the new water resist -- water-tolerant, -- or drought-tolerant product -- I'll get the words right, yet. We're seeing great performance there in the 2 million acres there. So we tend to focus on product and performance to really drive our strategy with our pricing in North America. So I mean we're positive on price, but we'll bring up these new details as the year progresses.

Okay. And maybe just as a follow-up, given that you're going to have greater penetration and mix from new products again next year plus the higher seed costs, should we be -- is it, just back of the envelope, reasonable to assume that pricing was in the high end of the 5% to 10% this year, might be higher than that next year or is it too early to tell?

We're not going to go there yet. There's a lot that has to play out this year before we'll put that out there.

Our next question comes from David Begleiter from Deutsche Bank.

Ellen, can you comment on final U.S. corn and soybean market share numbers?

Yes, David. I mean so we've had great performance in North America. The denominator's changed on us. The USDA added about, I don't know, 1 million acres to the number last month. And so with that, I think with our -- the numbers that we're looking at, I'd say we feel we've held share of those crops, say, after multiple years of share gains. I mean if you think about it between 2008 and 2012, we gained about 6 points in corn and more than 10 points in soy. So with the change in denominator, I'm going to back off a little bit and say we held share. But ultimately, we'll see where it ends up.

And Nick, just on TiO2 pricing per buyers and per some consultants who are seeing prices move lower in Asia, lower in Europe and there are reports that prices have been lower in the U.S. as we speak, are you expecting U.S. prices not to be down from current levels, or do you see some erosion over the next few months here?

Well, in aggregate, David, I see pricing being flattish as we close out the year. And as I say, I think that's reflected not only in the margins that we've shown year-to-date, but also in our projections for the rest of the year. When we look at the total year, we're saying that our margin for the segment is going to be about equal to last year, which was about 25% PTOI margin.

Our next question comes from Laurence Alexander from Jefferies. Laurence Alexander - Jefferies & Company, Inc., Research Division: First question on the Ag business. Every year, there's bit of a kerfuffle when the yield data comes out. This is an unusual year with the amount of drought concerns. Do you expect -- can you give us some sense of what you think -- how you think people should be thinking about either the performance of your treated products in drought conditions or the newer hybrids versus the older hybrids. Were you breeding hybrids for drought tolerance, or is there some disconnects that will show up in the data that shouldn't be read through to a more normalized year?

So if you think about it, we launched AQUAmax and we have it on 2 million acres. The anecdotes I'm getting back from talking to farmers and talking to Paul Schickler, I was up here with them 2 weeks ago, are that it’s performing well and it's still green in some very stressed environments and AQUAmax is a native trait. And I think this year with the -- as we share the performance of that, we're going to get a lot more interest in that product in this coming season. But I think that's where we have to go as an industry. We have to go to be to be able to breed and to have traits that are very resilient under a wide range of environmental conditions, and I think that's the focus for the future.

Our next question comes from Duffy Fischer from Barclays.

First question on Ag. We came into this planting season expecting a tremendous year. When you look at the inventory channels, a lot of people were building inventory, expecting a lot of input. Now with the drought, my guess is farmers would back off on the amount of inputs being pesticides they'd use in the back half of the year. Is there a chance that we end up with too much inventory in the system on the ag chem side in North America, in particular, and that could be a little bit of a headwind in the back half of the year?

Yes, so crop protection chemicals is really a regional story. And so while there may be some backing off on what's required based on the conditions in North America, it's raining in Latin America. And we see the season shaping up there to be probably a pretty strong one for crop protection chemicals. And I think the 2 when you add it all up, it'll be a fine year for the business.

Great. And then on Nick's comment when you were talking about some of the costs for your inputs going from 3%, your old expectations, to 1%, I think you mentioned TiO2 ore. Is that just the fact that your operating rates are running a little bit below where you would have expected, so you don't have to buy that very expensive kind of marginal ton of ore and so your mix is better on that side?

Yes, essentially that's it, Duffy. As you know, we have the unique capability of consuming both the low and the high grade and still producing the high-grade TiO2. And it's a matter of how we regulate that mix of high grade and low grade, which is ability to impact that pricing just as you recapped.

Our next question comes from John McNulty from Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: On the TiO2 front, given what seems to be at least a little bit of slackening in demand, is there any thought as to the timing of your ramp-up on the big Mexico expansion on the brownfield and maybe delaying that out at all?

I mean when I look at the overall market conditions and the GDP growth that it has shown over extended periods of time, it tells me that even with our planned expansions over this 5-year period, it's going to be tight market conditions, and there won't be the ability when you look 3, 4 years out.

Yes, and you couple that when it would come online, it is 3 to 4 years out. And so far then, GDP will do what it does. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough; and then just one other question on the pension side of things. There was a recent change in Congress in terms of pension funding. Given the size of your pension, can you walk us through kind of what the implications could be for DuPont? I think it probably -- it should, if it starts to impact things, hit in 2013 for you in terms of cash flows.

Yes. So you're all, you’re well aware of the pension change, the ability to aggregate it over a 25-year period for a discount. And then of course, that deals with the cash contribution piece. It doesn't deal with the GAAP accounting or the balance sheet item on it. And so what we're talking about here is this change in law will appreciably reduce the cash funding requirements that DuPont would have to make, specifically in that next 2-year period, that '13, '14 sort of time period. When you look at the impact, it's about a percentage point in discount rate change -- increase in discount rate, which will have that sort of rather large impact around future funding requirements.

Our next question comes from Bob Koort from Goldman Sachs.

Could you talk a little bit -- in your TiO2 business, we see it with the chem solutions and fluoropolymers and chemicals, so it's a little bit tough to look at your particular margins. But I'm sure you benchmark against your competition. I'm just curious has your competitive margin or advantage expanded as we've seen ore prices go up, and can you give us some order of magnitude?

Well, I think when you look at our margins, and we don't talk about individual businesses. We keep it at the segment level. We do see, as I mentioned, the margins staying about equal to last year. For competitive reasons, I'm not going to get into specifics around my margin as it relates to others in the industry. I think you'd understand that.

And can you just give a little more detail on what's happening in fluoroproducts that causes the profit pressure in the second half?

They had very strong comps in 2011. They were really -- they were sold out last year and fluoroproducts solutions into wide variety of market like wire and cable and places like that. So those volumes have come off a little bit, and that's really basically the change.

Our next question comes from John Roberts from Buckingham Research.

Could you update us on where you are in your review of the Performance Coatings segment?

Well, Performance Coatings, you saw, had a good quarter. They had good margin expansion with the productivity programs coming through. They benefited from stronger volumes and OEMs, but coming off a little bit in the other segment. So they had some mix and opportunities there as well. So they continue to make progress on their goals of retaining their margin that we've laid out for you guys.

And our next question comes from Don Carson from Susquehanna Financial.

Yes, just a question on the overall guidance. Ellen, what would have to happen to hit the upper end of your guidance? And it seems like you don't think there's much of a probability of that, so I'm just wondering why you wouldn't adjust your guidance downwards?.

Well, I’ll let Nick give you details. Let me give you the high-level. Don, we're seeing sequential improvement in many markets that have been very sketchy in the first half of the year. And that gives us -- and our ability to forecast out is not as great as we used to think it was back in the last decade. So we see some positive momentum from the sequential numbers in several of our businesses. We have the positive momentum of raws and then offset by tax and currency. But Nick, I don't know if you want to comment any more than that. I guess I've covered it for him now.

Well, yes, you covered the main variables here. I mean, as Ellen mentioned, when the headwinds, you talk about the weaker macro conditions, the stronger dollar, the higher tax rate, those are the types of things that are impacting us in a negative way. But on the flip side, on the tailwind side, we do have the lower import costs. And as Ellen mentioned, the sequential improvement, some of our key markets and regions, for example, we talked about China, specifically, and the increases that are occurring in there on a sequential basis. I think you got to look at the overall breadth and strength of our portfolio. And we see opportunities where we can implement growth contingency plans and/or additional productivity gains in our businesses or regions that can compensate for where there are weaker outlooks elsewhere and we still have 5 to 6 months ahead of us to deliver on against the commitments. And taking all this into consideration, we now believe and expect our earnings to be towards the lower end of the existing range.

So I know we're coming up on 10:00. We've got a couple of our peers who have calls at 10. I'm sorry to cut off your questioning, but this will bring our call to an end. Thanks for your continued interest in DuPont, and we'll be talking with you later.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.