杜邦 (DD) 2018 Q3 法說會逐字稿

Good day, and welcome to DowDuPont's Third Quarter 2018 Earnings Call.

(Operator Instructions) Also, today's call is being recorded.

I would now like to turn the call over to Mr.Neal Sheorey.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us for DowDuPont's Third Quarter 2018 Earnings Conference Call.

We are making this call available to investors and media via webcast.

We have prepared slides to supplement our comments during this conference call.

These slides are posted on the Investor Relations section of DowDuPont's website and through the link to our webcast.

Speaking on the call today are Ed Breen, Chief Executive Officer; Howard Ungerleider, Chief Financial Officer; Jim Fitterling, Jim Collins and Marc Doyle, Chief Operating Officers for DowDuPont's Materials Science, Agriculture and Specialty Products divisions, respectively; and Jennifer Driscoll and Lori Koch, who will lead IR for Corteva and DuPont, respectively.

Please read the forward-looking statement disclaimer contained in the earnings news release and slides.

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 statements.

Our Form 10-K and each of Dow's and DuPont's Forms 10-K as well as Dow's and Corteva's Forms 10 include detailed discussion of principal risks and uncertainties which may cause such differences.

Also, we will comment on segment results on a divisional basis, so please take note of the divisional disclaimer in our earnings release and slides.

Unless otherwise specified, all historical financial measures presented today are on a pro forma basis, and all financials, where applicable, exclude significant items.

We will also refer to non-GAAP measures.

A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

I will now turn the call over to Ed.

Good morning.

Thank you, Neal, and thanks to all who are joining us for the DowDuPont Third Quarter Earnings Call.

We delivered another strong quarter, as you saw earlier today.

I was pleased with the way our teams performed in all 3 divisions as they successfully grew the top line and bottom line.

They did this while delivering cost synergies, executing good price/volume discipline, advancing their growth synergies and preparing for the spins.

The financial highlights on Slide 2 are as follows.

First, sales grew 10%.

We saw continued strong demand for our products and executed well against our new product launches.

While we had higher raw material costs and more currency pressure than we expected, we successfully increased pricing by 5 points while also delivering solid volume growth.

The consistency across all divisions and regions was very good.

Second, operating EBITDA increased 19%.

We expanded our operating EBITDA margin with volume and price gains, cost synergies and strong execution overall.

And last, adjusted EPS rose 35%.

As our divisions advance toward separation, they continue to build out the structure and features necessary to their future success.

Each of them continues to make progress toward their best-in-class cost structures.

Cost synergies this quarter exceeded $450 million.

We have executed against the majority of our cost synergy projects, and those savings are coming through.

Today, we increased our cost synergy target to $3.6 billion, another $300 million increase, to reflect further expected benefits.

These increased benefits are expected to begin to show in our results in the second half of 2019 and are primarily related to additional procurement savings.

For DowDuPont, we are reaffirming our full year adjusted EPS guidance of low 20s percent growth.

This is consistent with the increased guidance we provided during our second quarter earnings call.

It speaks to our team's focus and our ability to continue to deliver a strong full year result, which comes from the levers within our control: execution of cost synergies, new product introductions and growth investments, to name a few.

Another step toward separation was naming the boards of the 3 intended companies.

These boards each consist of highly experienced, independent professionals across a range of relevant fields.

They bring deep insights, expertise and support to their respective management teams as they work to drive growth and fully capitalize on the potential of our 3 independent companies.

I really appreciate the good work the board and advisory committees have already done.

They have worked closely with management to develop near-term strategic plans for the respective businesses.

They also have worked hard to enable all 3 companies to be well positioned in their markets, with appropriate capital structures, and plan to invest capital and R&D in a way that will drive meaningful shareholder value creation now and over the long term.

Our confidence in our future is one of the reasons we announced today a new share buyback plan, a $3 billion program.

We intend to complete it before the first spin.

This would bring our total expected share repurchases to $7 billion since merger close.

We are creating 3 financially strong, independent companies, each of which will be well positioned for continued growth and further shareholder remuneration, to be determined by each company's board at the time of spin.

In September and October, we filed the initial Forms 10 for Dow and Corteva.

Filing the forms gets the clock ticking for the SEC to approve these registration documents and enables us to stay on schedule for our expected separation.

This means separating Dow on April 1 and Corteva on June 1, thereby creating the new DuPont on June 1.

We show the time line on Slide 3.

Keep in mind these Forms 10 are iterative.

We will be sharing more information with you in updated filings.

I am pleased to report today that our board made solid progress in the quarter on defining the capital structures of the intended spins.

Howard will cover this in more detail in a moment.

The important point is that we are doing what we said we would: creating 3 strong companies that can hit their targeted capital structures.

We are very excited about the growth opportunities for each of the 3 businesses.

With greater focus, each of these intended companies, [already] industry leaders as divisions of DowDuPont, will be able to unlock their full growth potential.

We expect each will be able to allocate capital more effectively, apply their powerful innovation more productively and expand their products and solutions to more customers worldwide.

Our results today and throughout the year we've been merged illustrate that our strategy is working.

At our investor events next week, you will hear from each of these [independent] companies will be positioned to capture the attractive growth opportunities in their end markets, as well as further details on their capital structures and financial priorities.

You also will have access to all the leaders who will be driving our future growth.

I look forward to seeing you there to introduce you to these exciting new businesses.

With that, let me turn it over to Howard.

Thanks, Ed.

Turning to Slide 4. As Ed mentioned, one of our key achievements in the quarter was defining the capital structures of each of the 3 intended companies.

Each of the companies will have strong investment-grade credit profiles, in line with what we committed when we first announced the merger.

We were able to accomplish all this and implement our new $3 billion stock buyback program announced today for DowDuPont.

Consistent with the rating agencies' criteria, adjusted debt includes several adjustments to each company's leverage to account for pension deficits, nonconsolidated subsidiary debt and operating leases.

We have also now finalized how we will allocate the heritage DuPont and Dow defined benefit pension plans and OPEB.

As you see on this slide, Corteva and new Dow will each assume the heritage U.S. pension plans of DuPont and Dow, respectively.

New DuPont will issue new debt based on its stand-alone financials and provide funds to Corteva and new Dow to enable the deleveraging of the heritage financial debt necessary for their respective target credit ratings.

Turning to Slide 5. We will implement the capital structures in several coordinated steps.

New DuPont will first issue new debt based on its pro forma financials.

As we disclosed when we made the shelf filing in the third quarter, this debt will be nonrecourse to Corteva or new Dow.

New DuPont will then contribute the majority of the proceeds from the debt issuance to Corteva and new Dow so that those entities can further delever to achieve their targeted capital structures.

Taken together, these structures best position each company and their shareholders for long-term success and financial strength.

At our investor events next week, each of the future companies' CFOs will unpack more details on the financial policies that underpin these capital structures.

Moving to Slide 6 and a summary of our third quarter results.

For every quarter since merger close, we grew earnings per share, net sales and EBITDA year-over-year.

Drivers of our 35% EPS increase included volume and local price gains, cost synergies and lower pension and OPEB costs.

These gains more than offset higher raw material costs in all divisions and currency headwinds, primarily in Agriculture, from the Brazilian real.

We grew net sales by 10%, evenly balanced between pricing actions and broad-based demand for products across the vast majority of DowDuPont's key market verticals.

Sales rose 13% in Materials Science with double-digit gains in every segment.

Specialty Products achieved 8% sales growth, led by a 14% gain in Nutrition & Biosciences.

And Agriculture grew sales by 2%, led by strong gains in Latin America and Asia Pacific.

Volume increased 5%, with gains in all divisions and all regions.

Agriculture grew volume 8%, led by gains in Latin America and Asia Pacific.

Materials Science grew volumes 6% with gains in most segments and all regions.

And Specialty Products delivered 3% volume growth with gains in all segments and all regions as well.

Local price increased 5%, also with gains in all divisions and all regions.

Price increases were led by Materials Science, which was up 7%.

Agriculture increased local price by 3%, and Specialty Products increased local price by 2%.

And as Ed mentioned, we continue to exceed our cost synergy commitments, delivering more than $450 million on the quarter.

We have now delivered cumulative savings of more than $1.3 billion since merger close.

And we ended the quarter at a run rate of greater than $2.5 billion on our cost synergies, exceeding our original 1-year target by more than $400 million.

These collective drivers translated to operating EBITDA of $3.8 billion in the quarter, up 19% year-over-year; and operating EBITDA margin expansion of approximately 140 basis points.

We delivered these results despite approximately $600 million of higher raw material costs versus the prior year period.

Cash flow from operations was a use of cash of approximately $320 million in the quarter, which included discretionary pension contributions of approximately $2.2 billion.

Excluding these, cash flow from operations would have been a positive $1.9 billion.

The pension contributions had 2 benefits.

First, they significantly improve the funded status of the Dow and DuPont plans.

And second, they provided economic value as we were able to optimize the benefit under prior tax law and free up tax credits to offset tax on future income.

Finally, we again returned nearly $2 billion of cash to our shareholders in the quarter, including another $1 billion of share repurchases.

Including dividends, we have now returned $7.5 billion of cash to our owners since merger close.

Turning to our modeling guidance on Slide 7. For the full year, we are reaffirming our prior guidance of adjusted earnings per share up low 20s percent, consistent with the increased guidance we provided during our second quarter earnings call.

We continue to expect healthy demand as well as pricing gains across most of our businesses.

At the company level, we expect our top and bottom line growth to continue year-over-year.

We see full year net sales to be in the range of $86.5 billion to $87 billion, and we continue to expect full year operating EBITDA be up in the mid-teens percent.

For the year, the Materials Science division expects low-teens top line growth on the continued ramp-up of our recent U.S. Gulf Coast investments and strong global demand.

Operating EBITDA is expected to increase in the low teens as well on solid underlying end market fundamentals, continued cost synergies, supply from our U.S. Gulf Coast growth projects and lower start-up and commissioning costs.

These tailwinds will be partly offset by some margin compression in plastics and lower isocyanate prices that have begun to come down from the record levels we saw in the second half of 2017.

As you may recall, these trends are in line with the expectations we laid out at the beginning of the year.

The Specialty Products Division expects full year net sales to increase in the high single-digits percent with strong organic growth across all of our segments.

We continue to expect operating EBITDA to be up in the high-teens percent, driven by cost synergies, lower pension and OPEB costs, sales growth and portfolio and currency benefits, partially offset by increased raw material costs and growth investments.

The Agriculture division expects full year sales to be flat with 2017 as price and mix gains and the benefits from new products are offset by lower planted area in North America and Brazil, continued currency pressures and the portfolio impact.

Operating EBITDA is expected to grow by mid-single-digits percent, which we've said is about $2.7 billion.

The gain is expected to be driven by cost synergies, higher local prices and lower pension and OPEB costs.

Before turning it over to Jim, I want to address the trade and tariff topics that are still receiving attention.

After assessing the potential and based on actions implemented to date, we do not expect that tariffs will have a material impact on any of our divisions in the fourth quarter.

This is due to our global asset base, our local presence in markets around the world and proactive mitigation actions we have been taking.

I'll now turn it over to Jim to cover Materials Science business performance.

Thanks, Howard.

Moving to Slide 8. Materials Science delivered another strong quarter.

The core business again achieved strong top line gains with double-digit increases in each of our segments and gains across all regions.

We continue to capture demand growth well above GDP while also driving quick pricing actions where supply/demand fundamentals are favorable and the value in use of our products differentiates us in the market.

And our growth investments also continue to contribute to our performance.

Our assets on the U.S. Gulf Coast are running at or above design rates, and we're executing our marketing plans to continue to place product in the market.

And in our first quarter lapping full commercial operations at Sadara, the JV again delivered a year-over-year earnings improvement.

Let me hit the division highlights.

We have delivered double-digit top line growth every quarter since merger close.

We grew volumes 6% with gains in most segments and all regions, and we achieved local price increases of 7% with gains in all segments and all regions.

We delivered strong EBITDA growth, up 8%, with gains in most segments.

We again exceeded our cost synergy commitments.

And we delivered all of these results despite $400 million of higher raw material costs in the quarter.

I'll now take a closer look at our business performance.

Performance Materials & Coatings achieved operating EBITDA growth of 37%, led by local price gains as well as cost and growth synergies.

The segment achieved double-digit sales gains in both businesses and in most regions.

Sales gains in Consumer Solutions were driven by double-digit local price gains in all regions.

While total volume was down for the business, our price/volume management in upstream silicone intermediates enabled us to achieve volume gains for our downstream formulated silicones applications, where we achieved higher margins for our products.

Industrial Intermediates & Infrastructure operating EBITDA declined by 3%.

Double-digit volume gains and strong pricing actions in both businesses were more than offset by rising raw material costs, margin compression in isocyanates and equipment repairs to an isocyanate unit on the Gulf Coast.

Polyurethanes achieved double-digit sales gains in most regions based on broad-based demand growth in all regions, led by Asia Pacific and EMEA; as well as on local price increases.

Industrial Solutions delivered volume and price gains in every region, led by gains in downstream ethylene oxide derivatives, with double-digit growth in intermediates for crop defense, energy heat management and food and feed manufacturing.

Volume gains in both Polyurethanes and Industrial Solutions were further supported by increased supply from the Sadara joint venture.

The Packaging and Specialty Plastics segment grew operating EBITDA 4%.

Volume and local price gains were the key earnings drivers, including increased supply from growth projects.

Lower commissioning and start-up costs and cost synergies also contributed to the year-over-year improvement.

These benefits more than offset the increased feedstock costs.

Additionally, you'll remember that last year's hurricane activity hit this segment the hardest, and the absence of that cost impact also helped the segment's earnings year-over-year.

The Packaging and Specialty Plastics business grew volume 6% on broad-based demand strength and new capacity additions on the U.S. Gulf Coast.

Volume gains were led by demand for industrial and consumer packaging and health and hygiene applications.

The business also achieved double-digit growth in Elastomers applications.

Finally, on our growth projects, through the third quarter, Sadara has now delivered year-over-year equity earnings improvement of $170 million.

We have now lapped full commercial operations in the year-ago period, and the JV remains on track to execute the full lenders reliability test at year-end or early in 2019.

On the U.S. Gulf Coast, our new assets continue to run hard and contribute to earnings.

And our High Melt Index Elastomers train in Freeport and our bimodal high density debottleneck in St.

Charles both remain on track for start-up before year-end.

The strong results of our Packaging and Specialty Plastics segment is worth noting, particularly during a quarter where we experienced significant raw material cost headwinds.

Our results, which outperformed our peers, are another proof point of the value of the portfolio we have carefully constructed over the last several years, and it's one that well positions us for future growth going forward.

There are many pieces to that advantage that pay off, especially in times like we saw in the third quarter: first, our industry-leading asset flexibility, which enabled us to more effectively manage feedstock swings versus other industry players.

Second is our ability to reduce risk and drive greater margin stability across the cycle.

We do this in 3 ways: through our full chain integration and ownership of the entire monomer-to-polymer chain, through our broad geographic reach and through our product differentiation that is further downstream than peers.

Lastly, our growth investments leverage these collective factors and deliver EBITDA growth to offset the headwinds like those that we saw in the quarter.

To sum it up, Materials Science continues to capture strong demand growth, drive agile pricing actions and exceed our synergy commitments and control our costs.

I look forward to sharing more on the path forward for the new Dow, which will separate from DowDuPont in less than 5 months, at our Investor Day event on November 7.

I'll now turn it over to Marc to cover Specialty Products.

Thanks, Jim.

Turning to Slide 9. Specialty Products again reported strong growth on both the top and bottom line.

We continue to deliver steady mid-single-digit top line gains through higher volume and price.

Our organic growth is enabled by our new products, customer-driven application development and leadership positions in attractive end markets.

The division reported 5% organic sales gains, with Transportation & Advanced Polymers again leading the way with organic sales growth of 9%.

And Safety & Construction was not far behind at 8% growth.

Operating EBITDA for the division again grew double digits, with gains in all segments, driven by cost synergies, sales gains, lower pension and OPEB costs and a portfolio benefit more than offsetting higher raw material and freight costs and onetime prior year benefits.

One of the items I'm particularly pleased with this quarter was our pricing strength.

We delivered an overall 2% improvement in price with contribution from almost all of the businesses.

The specialty nature of our portfolio enables us to price our products for the value they deliver to our customers and mitigate the earnings impact of higher raw material costs.

Turning now to the segments.

Electronics & Imaging net sales and operating EBITDA were steady with last year due to well-known weakness in the photovoltaics space caused by the midyear reduction of incentives in China.

We continue to see strength in the semiconductor business driven by new customer wins and robust end markets.

Sales in our displays business were up nearly 20% due to strong demand in China for one of our new OLEDs products.

Overall operating EBITDA improvement from cost synergies, higher semi and display volumes and lower pension and OPEB costs were offset by headwinds from softness in photovoltaics and higher raw material costs.

Nutrition & Biosciences grew sales -- grew net sales by double digits with price and volume gains, in addition to the benefit from the acquisition of the FMC Health & Nutrition business.

Organic sales increased 4%.

Nutrition and health continues to see strong growth in probiotics, with sales up more than 30% this quarter.

Within Industrial Biosciences, top line growth in CleanTech and volume growth in bioactives were offset by lower production volumes in biomaterials, partially driven by Hurricane Florence.

Segment operating EBITDA grew 33%, driven by portfolio benefits, cost synergies and volume growth.

Safety & Construction organic sales increased 8%, led by broad-based growth across industrial, personal and life protection and medical packaging, partially offset by softness in construction in U.S. residential markets.

Our pricing strength continues to improve.

In this quarter, we delivered 2% growth.

This was a result of targeted actions to drive value-in-use pricing across our portfolio.

We look for this pattern to continue.

Operating EBITDA for the quarter was up 10% as reported but up 20% when excluding prior year onetime gains of approximately $30 million.

Growth was driven by cost synergies, lower pension and OPEB costs and higher local price, partially offset by higher raw material costs and the absence of prior year onetime gains.

Transportation & Advanced Polymers again delivered strong top and bottom line growth.

The segment continues to perform well, driven by strength in automotive, which grew double digits and again significantly outpaced auto builds.

Our ability to sustainably deliver this type of above-market growth stems primarily from 2 factors.

First is our leading position with key OEMs.

Second is our robust product portfolio, which enables both higher content per vehicle and biases our offering towards the higher-growth areas of the industry, including hybrid and electric vehicles.

We also continue to experience growth within the electronics and aerospace end markets.

In addition to higher volume, we again benefited from pricing strength in our nylon products as tight industry supply dynamics supported our position with customers looking to meet strong market demand.

Operating EBITDA margins expanded by more than 550 basis points to about 31%, driven by sales gains, cost synergies and pension and OPEB benefits, partially offset by raw material headwinds.

In closing, I'm pleased with our businesses' ability to execute on items that are benefiting all lines of our P&L through pricing actions, productivity initiatives, high-return capacity expansions and customer-driven new product innovations.

This winning formula will enable us to continue to drive sustainable top and bottom line growth.

With that, I'll turn it over to Jim to cover Agriculture.

Thanks, Marc.

Turning to Slide 10.

For Agriculture, our third quarter is mostly [focused] on the southern hemisphere, and we finished strong.

The 2 standout highlights were the 11% organic sales growth and the $134 million year-over-year improvement in operating EBITDA.

I'm pleased with how well the team has executed, particularly with our new product launches in crop protection.

Let me break down that organic sales growth figure of 11%.

Volume for ag this quarter [rose] 8%, driven by Latin America and Asia Pacific, and local price increased 3%.

Our organic sales growth was largely driven by crop protection.

Total sales rose 2% with a negative currency impact of 6% and portfolio reductions of 3%.

Our currency pressure came mainly from the Brazilian real, which went as high as BRL 4.1 to the dollar at the time our seed selling season began.

The portfolio change was a result of the Brazil seeds remedy we executed last year to complete the merger.

Our organic sales growth this quarter reflected the strength of new product launches, more normalized crop protection inventory levels in Brazil, [pricing] benefits in crop protection and an early start to the Latin America season for seeds and crop protection.

Our crop protection business led the way with 17% organic sales growth.

As expected, much of the sales gain came from volume, up 13%, as we successfully launched several new crop protection products this quarter.

Among the products driving our volume gains were the Picoxy-based products such as Vessarya, the leading treatment for Asian soybean rust in Brazil; Arylex, a new cereal herbicide in Europe; and Pyraxalt, a novel insecticide for rice brown plant hopper control in Asia Pacific.

We also saw strong growth in seed-applied technologies with new launches of Lumisena.

Last year's third quarter crop protection inventories were unusually high and have now returned to more normal levels, helping our volumes.

Pricing in crop protection rose 4% as we responded quickly to fluctuations in the Brazilian real.

We still expect currency to be about $100 million EBITDA headwind in the second half for the Ag segment, impacting seed more than crop protection.

Organic sales for seed rose 1% on volume gains, despite an expected reduction in corn planted area and lower royalties.

We continue to have good results and strong demand for our POWERCORE and Leptra brand corn seeds.

And we enjoyed an earlier start to the planting season.

And I will also note that Pioneer hybrids were awarded the first and second prizes in Mexico's [largest] dairy congress for their extraordinary silage results.

Price in seed was essentially flat with last year's quarter.

The remedy loss subtracted 9 points from seed, with currency taking another 6 points, for a total sales decline of 14% in seed.

The ag segment operating EBITDA loss this quarter was $104 million, an improvement of 56% versus last year's quarter.

The third quarter is our seasonal low point, ahead of the southern hemisphere season that starts in September.

The year-over-year improvement reflects cost synergies, sales gains, lower performance-based compensation and lower pension and OPEB costs.

These positives offset higher raw material costs and launch spending for our new products.

We reaffirm our full year guidance of $2.7 billion of operating EBITDA, consistent with what we said last quarter, including the earlier start in Brazil, which benefited the third quarter; and continuing currency pressure.

Turning to operational highlights.

We have 3 worth calling out this quarter.

First, we exceeded our commitment of reaching a 75% run rate against our goal of $1.1 billion in cost synergies by the first year since merge.

This run rate illustrates that we have taken quick action and are tracking these projects rigorously.

Consistent with the company's new synergy targets, we now project a total of $1.17 billion in cost synergies, an increase of $70 million.

We expect to reach 100% of that higher goal on a run-rate basis by the third quarter of 2019.

Second, we have advanced our new multichannel, multi-brand strategy in the quarter.

Realigning our global brand portfolio was necessary to better focus our product and service offerings to our customers.

This strategy will expand access to the company's genetics, technology and traits across various agriculture distribution channels, including agency direct, retail, distribution and licensing.

So far, the response from farmers has been good, and early indications are that we are making a smooth transition to the new brand structure.

We launched our Brevant brand in Eastern Europe, after having launched it in Brazil and Argentina earlier this year as part of our efforts to regain share lost from the seed remedy.

We will delve deeper into this topic at Investor Day next week.

Third, we filed the initial Form 10 for the Corteva spin.

As promised, we will continue to update that document as more details become available.

Overall, we are happy with the progress the team is making towards separation.

All the key projects remain on track as we advance towards June 1. In closing, we are delivering results by optimizing our organizational structure and go-to-market strategies, successfully launching innovative new products targeted to customers' needs and maximizing efficiency and productivity.

I'll now turn it to Jen to open up the Q&A.

Thank you, Jim.

And with that, let's move on to your questions.

First, I'd like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A.

Rochelle, please provide the Q&A instructions.

(Operator Instructions) And our first question today will come from Vincent Andrews with Morgan Stanley.

Maybe I could just ask you to put the buyback, the $3 billion, into context.

Clearly, given where the share price is, why not -- why wasn't it larger?

Why did you do discretionary pension payment now versus maybe doing a higher buyback now?

And why not accelerate the share repurchase, given where the stock is?

Yes.

This is Ed.

Let me comment, and maybe Howard wants to make a couple of comments also.

Remember, the share repurchase that we announced today, we're going to accomplish that in literally the next 5 months pre the spin of Dow.

So we'll be moving at a pretty good clip there.

I would also say to you, although we have the new boards of the 3 companies look at this, but we're obviously going to talk about financial policy next week at our Investor Day for the 3 companies.

So we'll get into more detail on that, talking about dividend and all.

But I can suggest to you that we will be very friendly remuneration companies to our shareholders, and share buyback will also be a part of that.

So I would look at this in the context of the next year and the opportunity we have to repurchase shares and have a nice dividend in each of the companies.

The pension, I'll let Howard comment on that here, but it was very advantageous for us to do it at this point in time.

And Howard, why don't you give a few of the details around that.

Yes, Vince.

And it was really a combination of tax benefits as well as the value from the spread between the EROA and the interest expense spreads.

And so -- and it was a credit-neutral event.

Because, if you look at the capital structure slides in the deck, you'll see that the rating agencies look at the underfunded pension, so it was credit-neutral from that perspective, and it allowed us to take a significant economic opportunity to create value.

And next, we'll move to David Begleiter with Deutsche Bank.

Ed, can you and Jim discuss the lowered guidance in Materials Science for full year?

And then how much of the additional cost synergies are in Materials Science going forward?

Yes.

I'll take it, Ed.

David, look, I think the 2 big things that are on the radar screen for everybody in materials is just margin compression in isocyanates, which we've seen; and also a little bit of concerns about what's going on with feedstock costs as we look at the plastics chain.

Just to give you a reference.

On the third quarter, we actually did better in plastics versus what the IHS forecast out there in terms of margin compression, considerably better.

And we're starting to get synergies to roll through.

I'll give you a quick plastics recon.

Synergies in the third quarter were positive $87 million.

We had a positive $80 million from hurricane.

We had lower start-up costs, so that was positive $66 million.

We had positive $103 million from our Gulfstream investments, positive $15 million from Sadara.

Turnarounds and maintenance was a negative.

So I had a couple of turnarounds and I had one unplanned event, $70 million.

And feedstocks were $231 million.

So that's how you get to the third quarter results.

Isocyanates saw some compression, still good margins.

I think at these growth rates, both pMDI and TDI will tighten up by mid-2019.

David, this is Howard.

The only other thing that I would like to just add is if you look on at it on a full year basis, the Materials Science division is up on an EBITDA basis low-teens percent.

And so we feel really good about that performance.

We'll next move to Jeff Zekauskas with JPMorgan.

If you add back your pension contribution, you said your cash flow from operations was $1.9 billion.

So what that means is that, for the year, even if you add it back, your cash flows from operations are down by about $3 billion.

Can you talk about that differential, why it's so much lower?

And last year, your cash flow from operations for the year were $8.7 billion.

Like where do you think you'll stand relative to that, adjusting for your pension expense?

Yes.

I think on a -- Jeff, this is Howard.

On a cash from ops basis, I mean, one of the big drivers is working capital.

So we've been growing sales double digit now every quarter since merger close, and it's just not possible to do that and not add some working capital dollars.

But the team is very focused on efficiency.

And if you look at the efficiency metrics for working capital, Q3 versus a year ago, our efficiency improved by a day, a little bit higher DSI but offset by positive improvements in both DSO and DPO.

When you think about it on a full year basis, I mean, if you just take street estimate of around $18 billion of EBITDA for 2018, you subtract out the interest expense, the working capital investments, the voluntary pension contributions, the integrate -- the onetime integration and restructuring costs, you're getting a cash from ops of around $10 billion.

And then if you subtract out CapEx, you're talking about free cash flow of around $5 billion.

And next, we'll move on to P.J. Juvekar with Citi.

A question on ag for Jim Collins.

Jim, can you describe the impact you expect to see from a 4 to 5 million acre shift from soybeans to corn next spring?

And then in your recent $4.6 billion charge that you took in ag, you mentioned delayed product registration.

Can you shed some light on products that are getting delayed?

Yes.

Thanks, P.J. So it's a little too early to kind of nail down what we expect to see going into 2019 in terms of acres.

And we would be out selling right now normally.

We'd have a good look at our order book, but you're probably also keeping track.

North America harvest has been quite delayed, so our signal that we would normally have by now is a little bit weak.

That said, commodity prices on soybeans, that pressure is likely to drive some higher corn acres.

And historically, our portfolio, from a margin perspective and just our ability to compete, favors a strong corn market.

So we'd expect to see that.

Other crops that we participate in a little bit too, will benefit.

We think some of that shift out of soy could be going into wheat and cotton.

So it's a little hard to say.

The flip side is, as we're seeing more soy acres going into Brazil, we have a very strong chemistry portfolio that I've talked about before.

Our Picoxy-based products are industry-leading, so we'd expect to benefit on this soy shift in Latin America.

In terms of the impairment and the registrations, the main one we were pointing to there was Qrome, another year delay, not huge.

But with the discussions going on with China, we'd expect to not hear anything now until

(technical difficulty)

Early 2019 and our ability to ramp up parent seed.

We are out with a limited commercial launch.

So we're still demonstrating that technology to customers, and we're still seeing good yield advantage.

So the other thing is some delays in being able to integrate some of the Dow traits into Pioneer germplasm, especially with Enlist, another delay in that.

And final one we pointed to was we lost a registration in Europe for Picoxy for fungicide in wheat.

And we're working with the European Commission to get that registration back, but we're going to lose at least the sales season here.

And next, we'll hear from Christopher Parkinson with Crédit Suisse.

Within the specialty businesses, there's been a lot of end-market noise and even some investor fear, just ranging from construction to semis to auto.

Can you just parse out the key macro variables over the 12 -- next 12 months as you see and how you're positioned for further growth?

And then also, if you could just address the simple, new sources of the $100 million synergy increase and give a quick update on your intentions for the broader portfolio realignment, that will all be greatly appreciated.

Yes.

This is Ed.

Let me just make a few comments on trends.

And it's always hard to say what the next 12 months will do obviously.

But if you look at the quarter that we just recorded, and I'd even go to the guidance that we gave for the quarter we're now

in, fourth quarter, auto sales for us were up 10%, even though auto builds were flat to down 1%.

And probably that continues a trend we've had for almost 3 years now, where we've had double-digit growth on auto, and it's because of the parts of the market that we participate in, the lightweighting, electrification, et cetera.

So we're seeing strong demand there.

Our China sales across the DowDuPont portfolio were up 18% and very strong.

In fact, it was double-digit growth in all 3 divisions, by the way, so continuing strength there.

Our semi businesses, as Marc had mentioned, was up nicely, 3%.

And our industrial sales across the platform were up 8%.

So some of the areas I know others have been talking about, we continue to see nice secular strength in our part of the product portfolio that we're delivering to those markets.

And so this is Marc.

Let me just add a little bit more on the market side going into 2019.

We are -- as I've said, it's hard to predict the future, but we are expecting that electronics markets to be strong next year.

We think semi will have another strong year next year.

As Ed indicated, we think our auto growth will continue to be strong because we're better connected to key trends like auto electrification.

And we're also expecting photovoltaics to rebound next year, so that will be a positive tailwind next year for us versus this year.

I want to say something about synergies, too.

There's a question about the synergy breakdown.

I'd say just from a Spec co perspective, we said that the breakdown of synergies would be about $100 million for Spec co.

That's mostly going to be driven by procurement savings, and we'll see most of that in the back half of next year.

And so that maybe answers the question on the synergy.

Yes.

And just to follow it, MatCo will have about $130 million extra in synergies.

Ag will have about $70 million in extra synergies.

The bulk of the increased synergies, and we've kind of highlighted this before that we've been working on hard, is in the procurement area.

So that will start kicking in kind of depending on the division.

But kind of by midyear '19, those extra synergies will be kicking in as it flows through our production facilities.

And next, we'll move on to John McNulty with BMO Capital Markets.

I think in the remarks, you had indicated, I think it was, a $650 million raw material headwind that you were dealing with.

I guess, can you give us some color as to where you're catching up on that and where you feel like there's still more to go?

I guess especially in the specialty business, but even on the materials segment would be helpful.

Yes.

Let me give you an overall comment, though, and Marc and Jim can comment on those -- the 2 divisions you mentioned.

I think, look, one of the highlights in the quarter was, across the whole platform, we had a 5% price increase.

So we saw raw materials going up, and our teams reacted very, very quickly.

And with the products we have, we were able to get price out of it.

So to capture that kind of price across the platform, I think, really demonstrates the strength of the portfolio.

So we were able to take that $600 million and really cover it and have great leverage to the bottom line.

I mean, look, our leverage to the bottom line with 35% EPS growth was very significant despite that fact.

And a lot of that was due to the price actions that we took.

Jim, do you want to comment specifically on MatCo though?

John, out of the $600-and-some-odd million, $400 million of that approximately was in materials company.

It's both hydrocarbons and energy, but there's some non-hydrocarbons cost, too, just other raw materials that we purchase.

As I mentioned, $230 million of that was in plastics, so you can see the rest of it, and largely in Performance Materials, Industrial Intermediates & Infrastructure.

Some of what happened in the quarter was you had a big spike at the end of the quarter in ethane.

And as we know, that was very short lived, and that's come back down to kind of the $0.35, $0.40 range.

And I think, as we go forward, you'll probably see ethane in that $0.40 range for that quarter.

Natural gas has come back off quite a bit.

So natural gas, there's plenty of gas in the United States at below $3.50 and plenty of gas at $3 a million BTU.

So that to me means we're going to have good gas, good ethane, good propane positions, and that's our key feedstock exposure.

So I think, in the quarter, as we saw the stock prices decline, there were some overreaction to what people were anticipating with some of those feedstock costs.

And look, that's why we invest, to be able to navigate through that with feedstock flex.

Marc, comment on...

Yes.

Let me just add on the spec side.

We had a little over $100 million in headwinds on raw materials, and it was distributed through the segments.

The largest piece was in our Transportation & Advanced Polymers segment.

And there, you can think commodity chemicals for monomers, for our polymer production.

And we more than offset it at the division level with pricing, so we felt pretty good about how we performed during the quarter.

And next, we'll move to Steve Byrne with Bank of America.

I got a question for Jim Collins.

Just wanted to know how you're doing on trying to recapture some of that divested insecticide business.

And then I'm sure you saw EPA bless the dicamba tolerance technology last night.

If you can ever get Chinese import approval on your Enlist technology, do you think that market is going to be too penetrated to enter into with a new technology?

Thanks, Steve.

So globally, we've been working with our really strong insecticide portfolio, as you know, headlined by our Spinosad and spinetoram products, and we've been working on debottlenecking manufacturing processes.

So we have the volumes to be aggressive.

And overall, that's working quite well.

And we talked about our insecticide volumes through the first half were up dramatically, and we continue to see that same trend for the second half of the year.

So I feel really good about that.

The other area we're focused on, remedy recovery, is certainly in our seed business in Latin America.

And I feel really good about the way that team is executing.

We saw a nice early start to the season.

And the additional launches of our new seed brands like Brevant are giving us greater opportunity there.

So overall, in really great shape.

In terms of the dicamba piece, yes, the main news there was obviously the shortening of the window days after planning application window.

And we're still excited about the Roundup Ready 2 Xtend technology, and we still feel like it's very useful.

That said, with Enlist in soybeans, we think we will benefit from maybe a better advantage in terms of application flexibility.

And we already know that in cotton.

Today, we have a strong advantage with Enlist and the flexibility the growers have around application windows.

And we'll move on to Jonas Oxgaard with Bernstein.

A 2-part question, if you don't mind.

Ed, you previously said that you were going to stay actively involved with all 3 companies.

We saw the announcement on the boards today, and you're not on the Dow board.

So first part is, how are you planning to be involved with Dow after this spin?

And the follow-up question is also on the Dow board.

There were a couple of board members who are very close to the mandatory retirement age.

How should I think about that going forward?

Is that mandatory retirement age going to change?

Or are they just going to be basically interim members?

So I think, by the way, all 3 of the boards will have additional turnover here in the next year or 2 because of the -- part of it, because of the age limit you just mentioned.

So we're well aware that each of the 3 divisions is actually continuing to talk to other people about joining the board.

I wouldn't doubt, by the way, that you'll see another announcement from -- or 2 or 3 from us still to add.

If you kind of add up the list of what we announced today, you can see we're maybe 1 or 2 short on each of the boards potentially from where we want to be, including turnover because of the age, as you mentioned, that we'll be having over the next year or so.

So we're clearly talking to a group of people still.

I'm pretty excited about some of the people we're talking to and the skill sets that they have.

So we're not 100% complete there, and yes, there'll be additional turnover that we're working on.

As far as my involvement, I am -- as you can see from today's announcement, I'm going to be on the Corteva board, Executive Chair of DuPont.

And I think my comment back when I made it was I'm going to stay actively involved to help these companies out.

So I think that's the best area for me to be involved.

And the Executive Chair role will be a full-time role, so it's -- I'm going to be very, very busy doing that.

By the way, I feel very good about the Dow board and the additions that we made.

I think they're awesome additions to the business.

And I also feel very, very good about where the Dow board is and the management team is headed with the business.

I think the focus around capital spending, on their D&A levels -- and by the way, they're going to crush it this year on that.

They're going to be $500 million, $550 million below, if no big greenfields come.

I think the way Jim Fitterling and the team are managing the business is just very, very different as we move forward here over the next few years.

And I think you're going to see great returns out of that business, and I think you're going to see great returns out of the other 2 businesses the way we're managing them.

So I'm pretty excited about the future for all 3.

And next, we'll move to Arun Viswanathan with RBC Capital Markets.

Just wanted to go back to some of the commentary on materials co.

Jim, you mentioned that you'll stay in that $0.40 range or so on ethane.

You also mentioned that isocyanates and MDI could improve by mid next year.

Maybe you can just give us a little bit more detail on both of those and also your outlook on polyethylene given some of the recent nominations and also the pullback in ethane.

Yes.

Sure, Arun.

On isocyanates, mMDI is tight.

pMDI is a little more well supplied right now.

But at these growth rates, it's going to tighten up by mid-'19.

And what you had in the first half of the year with the big spike in pMDI pricing and mMDI pricing was because you had some unplanned outages that were in the marketplace as well.

And so those are not easy technologies to run, so sometimes things happen to tighten those markets up.

TDI is in a similar situation to pMDI.

The other thing I would say is the growth in the business is really heavily shifting towards systems.

So if you look at systems, and this is where the isocyanates get consumed, you're talking about double-digit growth rates.

Whether it's systems going into automotive applications, insulation applications, energy efficiency, food value chain, food storage, comfort and to new materials, they're all good demand growth.

So I think you're in a very short, shallow adjustment period here to new capacity, which some of it includes the Sadara capacity that we brought on.

Polyethylene, the -- as I said relative to the IHS estimates, we ended up in a much better place in third quarter.

There are some predictions out there that everything's going to collapse.

I'm not sure that I believe that.

We've seen that inventories are relatively under control.

They're actually down at the end of third quarter slightly.

So inventories are 42 day.

And that's basically what you need to run the supply chain.

So there's no massive issues there.

Operating rates on polyethylene are tight.

The new polyethylene capacity is coming on.

That will tighten up ethylene a bit.

We needed ethylene to tighten up a bit, and I think you'll see that start to happen.

And most of that ethylene link has been in the U.S. So I think there's some concerns that people have about China and China demand.

But as Ed said, DowDuPont was up 18% in China this quarter.

Materials was actually up 20%.

So we're still moving a lot of material into China, and the demand is good.

So I think some of the pessimism is a little bit overblown.

And John Roberts with UBS will have our next question.

The industrial intermediates volume growth of 14% include a significant benefit from distribution for Sadara.

But you didn't mention any Sadara equity income there, like you did over in the plastics segment.

So is all of the Sadara equity income being booked in plastics even though the Sadara distribution sales are spread across the segments?

Yes, John.

This is Jim.

Sadara was positive in plastics this quarter.

It was slightly negative in the Polyurethanes space.

It was good in industrial Intermediates.

It was slightly negative in the Polyurethanes space mainly because we had a isocyanates unit that was down in the quarter, and we did that because we are making some mechanical adjustments to get ready for the lenders reliability test which is underway right now.

So that was planned, and that was just something that we needed to get done so we had a good shot to pass this test.

Otherwise, I think you'll see good rates through the fourth quarter, and you'll see some improvement there.

And moving on, we'll hear from Frank Mitsch with Fermium Research.

Jim, just to follow up on integrated polyethylene margins and your comment before that you exceeded the IHS margin forecast in Q3.

And in your supplemental slide, you talked about the U.S. and European integrated polyethylene margins down greater than 50%.

Obviously, it sounds like you don't believe that.

Can you kind of ballpark where you think that might settle out?

And actually, more importantly, what is your expectation as we head into 2019 for the integrated polyethylene margins?

Welcome back, Frank.

I think a couple of things factor in here.

One of them is mix.

One of the reasons we did better than the IHS forecast was product mix.

I think the IHS forecast kind of attributes quite a bit of our mix to commodity materials.

And so they don't account for things like double-digit growth in Elastomers and how much Elastomers mix we've got and the investments that we made in both Sadara and in the Gulf Coast to grow the Elastomers business.

So we're continuing to shift mix as we make those investments and that helps.

Feedstock advantage helped in the quarter because we are able to use flex in the quarter in Europe, and that's an advantage to us.

So you can see that clearly in the pure comparisons.

And then geographic mix, we're obviously growing share in Asia.

We're growing share in Africa.

We're growing share in India, Middle East.

So those are all helpful to us.

We've got synergies, so synergies are going to continue to accrue into next year.

Our volume growth and the margin on that volume is offsetting, obviously, some of the compression that you've got across the rest of the base.

And we're continuing to keep the focus on making sure that we're getting the right nominations out there on the pricing.

So I think we ended up probably half the delta of the IHS.

What they anticipate that the margin compression was going to be in the third quarter, that might be a good barometer on how you look going forward.

I think we'll tighten up.

Obviously, what's happened with ethylene is you've got ethylene and PE kind of out of balance with each other.

They're both running at high rates.

They're in the 90% to 95% operating rates.

So I think what you'll see is a couple of polyethylene units come up.

That's how we'll tighten things up across the board.

And through the early part of next year, it would be kind of a short and shallow compression here and then we'll come out of it.

Thanks, Jim, and thanks, everyone, for joining us for the DowDuPont call.

We appreciate your interest in the company.

For your reference, a copy of our transcript will be posted on DowDuPont's Investor Relations website later today.

I'd also like to remind you that our Investor Days will be held next week, on the afternoon of November 7 and all day on the 8th.

These events will be video webcast, and all materials will be made available on the new DowDuPont Investor Relations website.

And with that, we conclude our call.

And that will conclude today's call.

We thank you for your participation.