杜邦 (DD) 2020 Q3 法說會逐字稿

Good day and welcome to the DuPont Third Quarter Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Leland Weaver. Please go ahead.

Good morning, everyone. Thank you for joining us for DuPont's third quarter 2020 earnings conference call. We're making this call available to investors and media via webcast.

We have prepared slides to supplement our comments during the conference call. These slides are posted to the Investor Relations section of DuPont's website and through the link to our webcast.

Joining me on the call today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer.

Please read the forward-looking statement disclaimer contained in this slide. During our call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risk and uncertainty, our actual performance and results may differ materially from our forward-looking statements. Our 2019 Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences.

Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and posted to the Investor page of our website.

I'll now turn the call over to Ed.

Thanks, Leland, and good morning, everyone, and thank you for joining us. I'd like to begin by recognizing the tremendous efforts of our employees across the world to deliver another solid quarter in the face of this global pandemic. Lori will cover the specifics of the quarter shortly, but I'd like to take a few minutes to highlight our performance in a few key areas.

The timely actions that we took earlier this year to protect our employees, ensure the safe operation of our sites, strengthen our financial position and do our part to combat the pandemic enabled us to deliver strong results this quarter. My senior leadership team and I closely monitor developments globally to ensure we are taking the right precautionary measures to continue protecting our employees. Their safety and well-being remains our top priority.

Our intense focus on safety has enabled all 170 of our global manufacturing sites to continue operating according to plan. This, in turn, has given us the ability to deliver for customers during a period of continued uncertainty. Additionally, our balance sheet remains strong. In fact, so far this year, we reduced our commercial paper balance by approximately $1.4 billion to end the quarter with less than $400 million in CP, which was enabled by strong free cash flow and proceeds from the TCS and Hemlock divestitures we announced in September.

Since the end of the quarter, we have further reduced our commercial paper balances, and we look to make additional progress through year-end.

We also remain committed to doing our part to help during these unprecedented times. We continued to enable production of approximately 30 million Tyvek protective garments per month in an effort to provide health care and frontline workers with the protection they need to battle this global pandemic.

I'll cover more details regarding operational excellence on the next slide, but let me just say that I am encouraged by the progress we are making here. We continue to remove structural G&A costs and execute on our working capital improvements, which helps drive our strong free cash flow and operating earnings improvements. We have moved faster and found additional pockets of G&A costs to streamline, enabling us to increase our expected cost savings from our 2020 initiatives from $180 million to $280 million.

I am also pleased with the progress that we have made in advancing the N&B and IFF transaction as well as the divestitures of Non-Core assets. In August, IFF shareholders voted overwhelmingly in favor of the transaction, and we remain on track for a first quarter 2021 close. And we are targeting February 1.

With regards to Non-Core, in September, we announced the divestiture of the TCS business, along with our equity interest in the Hemlock Semiconductor joint venture for $725 million. Earlier this month, we also signed a deal to sell the Biomaterials business for $240 million. These portfolio refinement efforts contribute to value creation by increasing cash flow, strengthening the balance sheet and focusing our portfolio in markets where we expect to see solid growth opportunity.

Moving to Slide 3. I'd like to provide more specifics on the progress we've made improving our cash generation and G&A productivity.

Free cash flow conversion on a year-to-date basis was 140%. Through September, we've delivered approximately $1.9 billion of free cash flow versus $1.6 billion for all of 2019. This growth is primarily attributable to actions we have taken to reduce our capital expenditures and improve working capital.

During the quarter, we significantly reduced inventory balances, and the team's focus on reducing past due accounts receivable also yielded positive results as we reduced our past due balances as a percentage of accounts receivable to 4%.

We've also lowered planned capital spending for 2020 to approximately $1 billion, nearly $500 million less than 2019 levels. As a reminder, we did not reduce any safety-related CapEx and have developed detailed plans for restarting our growth projects to ensure we are able to capture demand when markets fully recover.

We delivered more than a 185 basis point reduction in nonmanufacturing costs as a percentage of sales in the quarter, mostly in G&A. Of the approximately $150 million of cost savings that we realized, $100 million was structural in nature. As I mentioned, we now expect our 2020 in-period savings from current year actions to be $280 million versus our prior estimate of $180 million. Our cost actions are targeted towards G&A expenses and are aimed at enabling a highly productive, appropriately scaled cost structure.

Growth through innovation remains a key component of our strategy, and we continue to invest in critical areas like sales, application development and R&D so that we will be well positioned to capture growth when we fully emerge from the current market environment.

Before turning it over to Lori, I'd just like to make a few comments on some of the sequential trends we saw in the third quarter.

We saw a 15% increase in operating EBITDA as well as 200 basis point improvement in operating EBITDA margin versus the second quarter. This rebound was most significant within T&I as global auto builds were up more than 60% sequentially, stronger than our expectations going into the quarter. Additionally, our third quarter decremental margin was approximately 31%, an improvement of approximately 1,400 basis points versus second quarter led by strengthening top line and continued structural cost removal across the company.

I'll now turn it over to Lori to walk through some of the details for the quarter.

Thanks, Ed, and good morning, everyone. Turning to Slide 4 and the financial highlights for the quarter.

Net sales for the quarter were $5.1 billion, down 6% organically and as reported. Portfolio was neutral as acquisitions in Water Solutions offset divestitures in E&I and Non-Core. Likewise, currency was neutral in the quarter.

Pricing was mixed across the portfolio with gains in S&C and Non-Core offset by price declines primarily in T&I. Price declines in T&I of down mid-single digits were in line with expectations. We expect similar T&I pricing through the fourth quarter as nylon 66 prices had generally stabilized in the back half of the year.

On a regional basis, organic sales increased 3% in Asia Pacific versus the year ago period with declines in the other regions. China sales in our core segments improved 14% versus the third quarter 2019 and 10% sequentially from second quarter 2020. I'll provide additional color on our segment top line results on the next slide.

We delivered operating EBITDA of $1.3 billion and adjusted EPS of $0.88 per share, well above expectations driven by better-than-expected top line results in our E&I and T&I segments and more favorable product mix with continued strength in semiconductors, Tyvek protective garments and probiotics. Once again, our teams maintained strong cost control to deliver operating EBITDA decline in line with the sales decline on a percentage basis.

Our decremental margin was approximately 31%, also ahead of our expectations heading in the quarter. Excluding approximately $50 million of costs associated with temporarily idling facilities, primarily in T&I and S&C, as well as gains in both the current and prior year periods, our decremental margins were in the mid-single digits, a significant improvement from the second quarter driven by the improving top line and continued structural cost takeout.

As Ed mentioned, we are also delivering on our cash targets. Free cash flow of approximately $1.9 billion through the first 9 months of the year led to a conversion rate of approximately 140%. In addition to the strong free cash flow, Ed mentioned the progress we have made on the Non-Core divestitures, which enabled the reduction of commercial paper balances in the quarter. These actions have lowered our net debt position and improved our net debt-to-EBITDA ratio to below 3x.

Slide 5 provides more detail on the year-over-year change in net sales. Consistent strength across semiconductors, probiotics, home & personal care, Tyvek protected garments and Water Solutions, coupled with improvement in automotive and residential construction markets, led to an overall organic sales decline of 6%, which reflects steady growth off the second quarter lows.

Several of our businesses have market-leading products which enable them to succeed despite global challenges presented by the pandemic. Within Electronics & Imaging, Semiconductor Technologies delivered its third consecutive quarter of organic growth. Likewise, within the Nutrition & Biosciences, our probiotics and home & personal care offerings continue to capitalize on robust global demand, each with double-digit growth in the quarter. Finally, within Safety & Construction, the Tyvek protective garment business is providing critical PPE to our medical communities and frontline workers, and the water business continues to provide market-leading innovation demanded by our customers. In the third quarter, sales in the water business are up low single digits on an organic basis and up mid-teens percent as reported due to the acquisitions we have made in the space.

We also saw market improvement in other key markets in the third quarter, most notably automotive and residential construction, which contributed to the sequential improvement in the top line. We estimate that global auto builds were down about 4% in the third quarter versus the same period last year, a substantial improvement from the historical lows in the second quarter and stronger than we anticipated. At down 9% for the quarter, our T&I volume performance is consistent with the improvement in market demand and the lag we expect due to the majority of our automotive sales going into the Tier 1 and Tier 2 suppliers.

There were also green shoots in residential construction, a market that represents approximately 40% of the shelter business within S&C. Our solutions to the residential construction market include Tyvek building wrap, styrofoam installation and GREAT STUFF insulating foam, which has also experienced strong retail demand from an increase in do-it-yourself projects. Despite tailwinds in residential construction, our shelter business was down versus last year due to ongoing softness in commercial construction, which makes up the remaining 60% of the shelter business.

Also contributing to the improving top line was demand for our materials that enable smartphone technology. Increasing material content, which now accounts for up to $4 a phone in the top-end model, overcame an overall decline -- declining smartphone market and drove high single-digit growth in our Interconnect Solutions business as premium phone manufacturers prepared for model launches and holiday demand.

Overall, top line performance continues to be impacted by significant weakness in oil and gas, aerospace, commercial construction and select industrial markets. These market dynamics are most prevalent in the safety and shelter businesses within S&C to Health & Biosciences business within N&B and across the Non-Core segment.

Before moving to the next slide, let me comment on our year-to-date performance.

I am pleased with our team's focus on execution and operational excellence, 2 areas that Ed and I have been focused on since day 1. Through the first 9 months, our sales have declined 6% on an organic basis, and our focus on streamlining our overhead structure has enabled us to better maintain our earnings. Over the same time period, our EBITDA margin has declined just 7%, excluding costs associated with temporary idling facilities in the second and third quarters. Choosing to run these sites for cash was the right decision for the strength of the company, and it is showing in the strength of our balance sheet and cash flow.

Turning to the adjusted EPS bridge on Slide 6. Adjusted EPS of $0.88 is down 8% versus the same quarter last year driven by lower volumes, costs associated with idling facilities and the impact of Non-Core divestitures. These headwinds were partially offset by the delivery of cost savings.

As Ed mentioned, our cost actions from the 2019 restructuring program, coupled with the incremental actions we are driving in 2020, contribute to approximately $150 million of savings in the quarter. The impact of portfolio actions is a net headwind primarily due to the absence of the gain on sale of the DuPont Sustainable Solutions business in the third quarter of 2019.

We realized $0.03 of benefit from below-the-line item, primarily a lower share count due to share repurchases we executed in the second half of 2019 and early 2020 and lower interest rate enabled by reductions in commercial paper balances. These benefits were offset by a slightly higher base tax rate of 21%.

In summary, I would emphasize again what Ed said at the start of the call. Our team is laser focused on execution, and we are now consistently delivering on our earnings, cash flow and cost savings commitments. Through a period of significant uncertainty, we continue to progress our strategic priorities, which positions us well as we look ahead to 2021 to continue creating value for our shareholders.

As we show on Slide 7, we will continue to strengthen our balance sheet with the anticipated closing of the N&B and IFF deal in the first quarter of next year as well as the closing of the Biomaterials deal in the first half of 2021. These actions alone will generate over $7.5 billion of cash proceeds, nearly $2.5 billion of which we will have available after planned debt repayments to use for creating shareholder value. Additionally, we expect our strong free cash flow generation to continue into 2021.

As we said earlier, we have significantly improved our net debt position with the reduction of commercial paper balances, and we do not have any debt repayments until the fourth quarter of 2023 beyond those that we intend to satisfy with the proceeds from the N&B and IFF deal.

I am excited for what's ahead, and I commend our team for staying focused on execution to put us in a position to have the flexibility to capitalize on the opportunities for growth and shareholder value creation going forward.

With that, let me turn it back to Ed for an update on the N&B and IFF transaction and some final comments on what we expect in the fourth quarter.

Thanks, Lori. And now turning to Slide 8. We highlight the progress we've made since announcing the N&B and IFF transaction.

During the quarter, we completed 2 additional milestones. In August, IFF shareholders voted overwhelmingly in favor of the transaction, with more than 99% of the votes cast in favor of the deal. Then in September, N&B issued $6.25 billion of senior unsecured notes in a private placement. The net proceeds from the offering are intended to fund part of N&B's special cash payment of $7.3 billion to DuPont. The net proceeds are held in escrow until the deal closes. The offering was more than 5x oversubscribed and resulted in a very favorable cost of borrowing for these notes. We continue to make progress regarding regulatory approval. And additionally, our integration planning remains on track as the teams work to a first quarter 2021 closing.

I remain excited about this combination and confident that the new company will be well positioned for growth and to deliver sustainable value for shareholders.

Let me close with our financial outlook on Slide 9, which we have prepared assuming no substantial change in the slope of the recovery due to the pandemic. Obviously, this is a fluid situation with increasing cases and we are monitoring this closely.

We expect to deliver net sales for the year in the range of $20.1 billion to $20.2 billion and adjusted EPS in the range of $3.17 to $3.21. Sequentially from the third quarter, normal seasonal declines in E&I from smartphone production cycles and S&C from the timing of North America construction activity will be partially offset by improvement in T&I as auto demand continues to recover, although at a much more gradual pace as compared to the prior quarter. Our forecasted earnings also reflects the absence of a $30 million technology sale in E&I and the loss of earnings from Hemlock and TCS, which were divested in September. We will stay focused on driving improvements in working capital and delivering our cost savings commitments.

With that, let me turn it back to Leland to open the Q&A.

Thanks, Ed. Before we move to the Q&A portion of our call, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. (Operator Instructions) Operator, please provide the Q&A instructions.

(Operator Instructions) And we will hear our first question from Steve Tusa with JPMorgan.

Can you just maybe comment on the -- there was a bit of a change of language in the last filing with regards to the IFF transaction around your decision on whether you're going to spin or split. Can you maybe just talk about what your thoughts are there? It looks like maybe a split is more likely, but you want to obviously maintain the flexibility and optionality with the kind of whole cleanup spin dynamic. Maybe just talk about what your latest thoughts are on that front.

Yes. Steve, we will be making that decision by mid-December. And we truly have not made a decision yet. I wouldn't put a leaning one way or the other on it. We took some language change because we wouldn't do a hybrid-type approach. We'll pick one or the other and that was the change in language. But no decision at this point in time. I wouldn't read anything into it.

Okay. And then just the follow-up would be on the 4Q. I think the implied downside in the 4Q guide is a bit more than what you're losing from Non-Core and that gain in T&I. Is there anything else sequentially that's, on an absolute basis, kind of getting worse? I guess you mentioned seasonality in electronics, but is T&I basically -- did you overfill the channel before? Or is that -- are you kind of like -- is it a timing dynamic where at some point in the next couple of quarters, that will snap back to the kind of line and recouple?

Yes. So let me go first to the sequential. So there's no real change in market dynamics as we see it right now. So there's actually continued sequential lift in T&I kind of in the mid-single digit pace.

The drop sequentially in revenue and EBIT is more driven by seasonality and it's normal seasonality that we see in our businesses. So primarily, it sits within smartphones. So as we get ready in the third quarter for the holiday demand coming up, we had a lot of sales in 3Q that would not be there in 4Q just due to normal seasonality. Additionally, within our construction space, third quarter tends to be high just with the summer months driving a lot of the construction. So you'll see a little bit of deceleration there from a seasonal perspective.

So the decline that you're kind of getting at is roughly in the $100 million space sequentially, 3Q to 4Q. About 1/3 of that is related to the seasonal decline that we just discussed. Another 1/3 of it is we did have a gain on a technology sale and E&I in 3Q that won't be there in 4Q. And the rest, the largest primary piece, is the sale of Hemlock/TCS assets that were sold in September.

So within T&I, we don't really see any level of channel -- high inventory levels in the channel. So if you see where we look year-to-date, our volumes are down about 15% in T&I versus the auto builds are down about 23%. So I think we're outperforming there. There's really -- if you look at where we sell into, as we mentioned on the call, we sell into the Tier 1 and Tier 2 players primarily, so it doesn't always exactly line up with the auto builds number. You kind of got to look at it year-to-date to understand the lag.

So we're comfortable where we sit going in. No material changes from a market perspective as we see it right now.

And we will hear our next question from Scott Davis with Melius Research.

I'm just kind of curious. You've been chipping at corporate and G&A really since we got involved in your story. And is this a kind of a -- and is there an endgame, I guess? Is this kind of every quarter you look at just trying to take levels down where you opportunistically can? Or is there a certain goalpost there where you want to get to and then you feel like that's the sustainable right level?

Yes. Scott, I mean, I'd put it more in the category of chipping away at it. As we streamline some of our functions and capabilities, we can get -- do a little more streamlining on our overhead. We're putting in some digital tools, and we're going to do a central finance tool, and things like that really help us out. So I think we're getting the best-in-class on our G&A. When you look at peer companies and all, I think we're doing a heck of a job there.

I would highlight one area we're not touching or taking down at all, as we said in our prepared remarks, is clearly our salespeople around the world, our application engineering teams around the world, and we're going to continue to spend at the level we've been spending out on the R&D front. So we want to come out of the softness in this pandemic period real strong with lots of new product introductions coming. So it's really going to continue to stay focused on the G&A piece of it.

And then I would really say that the next big focus, and we're focused on it now, but we're really doubling down, is going to be on the gross margin line and our factory efficiency, our uptimes. And again, we're doing a fair amount of digital tools. They're not overly expensive to really look at the predictive analytics in our facilities with a lot of AI capability, and we really think we can do some fair amount of improvements there and hopefully help the gross margin line. So that's where you'll see some of the kind of the effort as we're going into 2021.

Okay. Good. And then on the inventory side, another big drawdown this quarter, where do inventories sit at kind of through the channel? And are you -- do you feel like we've gotten to the level where you want both your inventories and then obviously as you look through the channel?

Our inventories have a ways to go still. Now barring a sales pickup, that'll mute us a little bit here in progress, but we're expecting nice progress again in the fourth quarter. We still have over a $500 million opportunity on inventory to get to where we think we can get to. So that's kind of our bogey out there. And again, we'll make good progress in the fourth quarter.

As far as inventory in the channel, Scott, I actually feel very good about it right now. As you know, the auto industry is -- doesn't have a lot of finished goods. There's not any stuffing in the channel going on. And I really don't see it anywhere except maybe just a little bit in the electronics space. I think there may potentially -- and I've heard some of our competitors talk about maybe a little pre-buying from some of the Chinese players, nervous about what's going on geopolitically right now. But I don't even think that was a big number and, in the scheme of all of our sales in electronics, not significant. But that'd be maybe the one area where there's a little bit of that.

And our next question will come from Bob Koort with Goldman Sachs.

I was curious, in the T&I business, you guys have been idling capacity, and obviously, that's hurting your margins but helping your working capital. If we look to next year in a more normalized world and, I guess, global auto builds are going to be up mid-teens and GDP up mid-single digits, can you talk about how powerful the incremental recovery might be and where those margins might get to relative to the 23% operating margin you just reported?

Yes. So we see the T&I portfolio around the mid-20s from an EBITDA margin perspective in a normal market. So we've got some sequential upside as we head into next year, really driven by the items that you had mentioned. So a top line recovery as well as having a lot of the idled facilities behind us.

And is there any update on the discussions with Chemours and Corteva in terms of your separation and indemnification agreements?

Yes. Well, first of all, the arbitration has started up with Chemours on that. And there probably won't be any decision on that until kind of mid-next year, if you look at the time line on it. But we continue to talk to each other about the settlement. In fact, Mark Vergnano, the CEO of Chemours and I actually just talked this Monday. A couple of open points. We continue to get closer and then we'll see if we can get it to the finish line. So that's paralleling along while the arbitration starts.

And our next question will come from John Inch with Gordon Haskett.

And Lori, what are the cost savings that spill over from actions taken in 2020 into 2021? And are you planning for prospectively more restructuring? Or would that potentially be too disruptive given all of the restructuring that's already gone on against the backdrop of what I will describe as a fledgling recovery?

Yes. So I think the savings that will trickle into 2021 is around $120 million. So we're targeting now $280 million of in-period savings. So on a run rate basis, that's about $400 million as we exit. So another $120 million next year.

There are just some headwinds that we'll face next year as well. Obviously, there'll be some snapback in the temporary savings, but we've really biased our actions towards the structural. So we don't have a material headwind, but there will be some opening up of the economy that would lend itself to some T&E and some other stuff that we've really seen clamp down this year.

Right now, as Ed had mentioned, I don't see additional structural cost takeout. Really, the opportunity for us is within gross margin and driving more productivity and gross margin. And second to that, continuing to drive our productivity and working capital.

So we've made a lot of nice progress this year. We're up about, from a working capital trade perspective, only about $250 million year-to-date that we've nicely dug ourselves out of the hole that we got in earlier in the year. And we're still targeting more than $500 million of working capital savings this year, but we still have a ways to go to get to best-in-class there.

I'm assuming these gross -- the gross margin initiatives are probably longer term. And I wanted to ask you also kind of for your strategic thoughts to do possibly even further S&C expansion into water. I'm thinking maybe technologies where you don't play currently, such as UV or even, say, I don't know, getting into production of equipment as well as the filtration products that you currently provide.

Yes. So John, we're very interested, if we can, in expanding the water business. So that would be one area. I don't want to comment on details because you get pretty specific and there's not that many targets out there. So I won't get into that. But the water business would be one. There are some areas in the electronics business. I will mention that one 5G-type stuff we would be interested in.

And -- but let me just say overall we're really looking at things I would put in the category of bolt-on acquisitions. Nothing on a bigger scale in 2021 but could be several bolt-ons during the year if they make financial sense.

And our next question will come from Jeff Sprague with Vertical Research.

Maybe just a couple of follow-ups on kind of segment-level kind of dynamics. First on T&I, just thinking about the price pressure there. I think it is largely a function of kind of year-over-year dynamics. But I wonder if you could just give us a view on how you see pricing playing sequentially with the builds firming up. Do we move to a little more constructive price environment, perhaps not as soon as Q4 but into the early part of next year?

Yes. We do. We do see a more constructive price environment. So I think the majority of the nylon 66 headwinds that we've seen are behind us. So we did see year-over-year headwinds in the third quarter, and we'll expect year-over-year headwinds again in the fourth quarter, but those are really just a function of the price decline from the prior year when they were still quite strong. So sequentially, looking at about flat pricing.

As we look into 2021, obviously we've done a nice job of taking advantage where we can of constrained environments, and we'll be able to keep our eye on that to be able to see any gains that we could possibly pick up there.

I think also within T&I, just overall, once the market normalizes and stabilizes, we do expect to get back to that 1.5x auto build outperformance within that portfolio. You can see it year-to-date. So as I had mentioned earlier, our T&I volume has been down about 15% year-to-date versus auto builds being down 23% year-to-date. So you can see that outperformance, and we'll look to continue that going forward once the market fully recovers.

And on the semi side specifically, I mean, you kind of spoke to the seasonal letup on handset within -- with E&I. But semi has kind of continued to surprise to the upside kind of all year here. Do you -- and there's a lot of consolidation starting to happen in that industry, right? Do you see anything that kind of disrupts your growth trajectory there? And what's your view looking forward kind of 1 quarter or 2 there in terms of the end demand environment?

Yes. Jeff, I'll just comment on kind of October because I know that. Demand feels pretty good still on the semi side. So we're not really seeing any change from what we've been seeing in the last few quarters. So at least so far, going into the fourth quarter, that feels nice.

And again, I just think the dynamics of work-at-home and what everyone's doing with data centers and nodes and all that, it looks like potentially good momentum going into next year. But we'll see when we get closer to the end of the year.

I know one of our key competitors, a very, very good company, and CEO is a good friend of mine, he talked very bullishly about demand going into 2021 also. So that feels good.

And again, the only thing in electronics, and you just mentioned it, was a little bit of the seasonality on the smartphones because we had such strong shipments in the third quarter for the shipments and launches of the new phones in the fourth quarter. But we feel good about the portfolio we have on the 5G side that as more phones are enabled 5G going into 2021, it's nice upside opportunity for us.

And our next question will come from John McNulty with BMO Capital Markets.

So I guess the first one would just be -- look, we've had about a month of kind of the COVID research and especially kind of out of Europe and a little bit less of that in the U.S. Any changes in demand pull that you've seen either positive for maybe some of your health care-related products or negative as just some of the economy shut down? Anything that we should be thinking about and trying to think about extrapolating going forward?

Well, no change in any of the end market demand that we've talked about due to the rising cases, I say, so far. It's all the same ones, I mean, obviously, auto coming back really strong. Residential construction, we're now seeing those green shoots coming back, not surprising with what's going on in the resi market. And all the areas that are down kind of significantly, oil and gas, aerospace, commercial construction, they've all come up a little bit but not significantly. So they're not dropping anymore. They're picking up slightly, but they're still all very negative numbers. So no, we haven't seen any change in October in patterns that we weren't expecting.

Got it. Okay. And then look, on the other side, you've gotten a lot of the Non-Core assets kind of out the pipeline. I guess does that -- in terms of how you're thinking about going forward, does that free up time to look at kind of bigger, more strategic options? Or is it really, right now, a little bit more about running the business in admittedly a pretty volatile time with a lot of kind of puts and takes going on? How should we be thinking about where management is putting their time right now?

Yes. No. No, John, it's very much running the business. I keep telling the team all hands on deck here. We want to string together a lot of consistent results. We've been doing that. We've got a ways to go here. Something still to get to best-in-class performance on like working capital. So no, it's more of that and it's more looking at bolt-ons next year.

And I would think as we get into next year, we'll be having a serious conversation with the Board about the share repurchase, where we're trading at -- or where new DuPont will be trading at as N&B goes out of the portfolio. So that's the mode we're in.

And our next question will come from Steve Byrne with Bank of America.

Yes. Was there anything in particular that provoked the House Environment Subcommittee to ask for some NIPTs data from your part from the legacy Parkersburg and the Circleville facilities? And do you have a sense of where their diligence is going these days with respect to PFAS contamination broadly?

Yes. Steve, I didn't read anything into it. We're going to supply all the information and answer all the questions. All that data is obviously available and it's been supplied to many federal agencies already. So I don't -- it's just information we've given before. So we'll answer it in a timely manner.

But maybe I would go to -- a little bit broader to your question there. The EPA put some regulation in place. We're always asked that and that might be part of the push here. And we are actually for that. We've said that in front of Congress when we testified. But not everyone in the industry is for that. But we think it would be great to have a national standard set on where those levels should be at instead of it being a patchwork by state and maybe by municipality. Who knows? And we actually think that would be very helpful, that we're all targeting the same thing as we do remediation and all that. So that's where we see a lot of the push at the federal level and we're all for that happening.

And just to follow up on that, Ed, is a national standard something that you think would focus their attention on -- less on manufacturing sources and more on product use as a source of PFAS contamination? And is that where you see the potential benefit?

No. No, I just think having a standard set out there that we're all marching to would be very helpful instead of having literally 50 different standards being set.

And by the way, just to make a point that I make every one of these calls, there's many more locations that had PFAS, but remember, a high, high percentage of this is firefighting foam. And I think you'll -- DuPont will -- we'll let that play out here in the South Carolina consolidation here. And potentially, we'll settle it or we'll let it go through the court system, but we never made the firefighting foam. So our work is really remediation in some of our sites where we did some manufacturing, which is a handful.

And next, we'll hear from David Begleiter with Deutsche Bank.

Ed, first, on the cost savings, what drove the increase from the $180 million to $280 million for the full year?

Yes. So that was really a function of really clamping down on third-party spend, so consultants and the like. And then we were able to accelerate a bit some of the off-rolls that we had planned that benefit -- is benefiting the in-period savings for this year.

Got it. And Ed, with the IFF transaction 3 months away from closing, what are your updated thoughts on what's next for the DuPont portfolio, specifically perhaps unlocking some value in E&I to maybe another RMT?

Yes. David, look, as I said a few minutes ago, we're operationally going to run new DuPont the way we are. I got to -- we want to clean up the Non-Core some more. So we're very focused on that also from a portfolio standpoint.

We'll be in an interesting position going into next year with the cash we're receiving from the IFF transaction. As Lori mentioned, we'll have at least $2.5 billion to $3 billion of excess cash available. So as I said, we'll be talking to the Board about how we're going to deploy that to create shareholder value in 2021.

And I would expect a few maybe bolt-on acquisitions would fit in there next year if they make financial sense for us to do.

And our next question will come from Mike Sison with Wells Fargo.

In terms of Nutrition & Biosciences, your EBITDA growth is up high single digits. So this year, tough sales comps. So if you think about getting that -- getting better growth in that business next year, where do you think EBITDA growth should sort of be as volumes return?

Yes. So we've always thought that the N&B portfolio to get closer to the company average from a margin perspective. So looking at 26% or 27%. So they've got continued upside. A lot of that's really going to come from just a higher favorable mix. So as they grow probiotics, as they grow their enzyme portfolio, as they grow their meatless meat market, those are all very high-margin product lines that'll lift the overall margin of the segment.

Great. Quick follow-up then. If you do get to close the business on February 1, how do you feel about the integration synergy potential you've had a year here to plan for it? Is there upside? And if there is, where could that be?

Well, I will talk about it if there's upside. I should probably leave that to the IFF team when they do their earnings. That would not be fair of me. But I feel good about it. We've got multiple teams, as we did -- when we did DowDuPont and all that, working on all the integration efforts. We're right on track.

I must say I'm surprised we're doing as well as we are considering everyone's working at home, but every one of the work streams is right on track. Lori and I review it literally weekly with the IFF team. So we're ready to go on the synergy work that we've outlined publicly, and we'll get off to a very quick start.

And next, we will hear from John Roberts with UBS.

Staying on N&B for a second here. Food & Beverage sales were down probably close to the 4% decline for the overall segment. Can you give us some regional and maybe application granularity on the decline in Food & Beverages?

Yes. So a big piece of the decline was driven by sales into the foodservice space, which makes up about 5% of total N&B. It would be bigger, obviously, within the Food & Beverage segment. That was down kind of in the mid-teens. And so that's really selling into sports arenas, cafeterias, so really the industries that have been hit hard by COVID. So nothing underlying there beyond that. And a lot of that was in Europe. So I think Europe was one of the markets that were hit hardest within the N&B portfolio, and it's really back to the foodservices play.

Also, another impact that we saw a headwind was just as travel has clamped down, we had a large market into like the chewing gum and mint space within our sweeteners portfolio. So as there's less travel, less people going through airports, that impacted the business.

And then do you think you'll report your year-end before February 1 close or after? And do we get N&B as a discontinued op in 4Q if you report after February 1? I'm just trying to figure out the information flow we're going to get here over the next few months.

Yes. So I would look at most likely to be after the Feb. 1 spin date. So we can report kind of on a Remainco basis when we report disc ops with the assumption of when we make the decision on spin versus split. So if we end up doing a split, you have to do disc ops earlier. If you end up doing a spin, you do 1disc ops as of the separation date.

(Operator Instructions) Our next question will come from P.J. Juvekar with Citi.

There is a big green movement happening in Europe, parts of Asia, California with both EVs and hydrogen. How is DuPont positioned for that trend in terms of your portfolio? And particularly, can you address the EV market?

Yes. So this will obviously mostly be within T&I. There's also a play within S&C and E&I as well into electric vehicle space. So we're very well positioned. Obviously, as the conversion continues towards hybrid and electric, you need a lighter car. So that advantages our T&I portfolio as we take out metal and replace it with polymer.

Within S&C, we have a nice opportunity within the battery play. We have a use of our Nomex paper as a separator, and then, obviously, within E&I as the enhanced electronics go into electric vehicles. Really nicely positioned there. And so it's a -- obviously, full electric vehicles are a small section of the total auto build production today but growing very quickly, and we're -- I'm happy with the portfolio that we have.

Great. And I just have a follow-up on E&I. Intel has had some well-publicized issues at 7-nanometer nodes, and companies like TSMC are gaining share. Can you talk about your position relative to your customers? And what kind of wins or losses have you had at 7 nanometers?

Yes. So I don't want to really speak to a customer level, but you can see by our results within the semi space that we're seeing really nice performance. So in this last quarter alone, we were up 8%, 9%. So we've got a nice dispersion.

We play with all of the big players. So as the consolidation continues, we'll still continue to be well positioned in the space.

Also, as the layers, as you had mentioned, get more and more complex, that advantages our portfolio. So the more layers, the more steps, the more polishing that has to be done, the more cleaning that has to be done, the more complex the layers get with advanced nodes, that advantages our portfolio within -- as well. So I think we're nicely positioned to take advantage of growth there.

And our next question will come from Chris Parkinson with Crédit Suisse.

Great. You've done an impressive job on the cash conversion front. I think we're all aware of the rough conversion targets over time, which you had mentioned in the past. But do you have any brief updates on this front just given some of the portfolio changes as well as the ongoing incremental efforts on working capital?

Yes. So I think you're asking about our free cash flow conversion. You cut out a little bit, so I couldn't quite hear it.

Yes, so we've made really nice progress there. So we're up to about 140% year-to-date. We were actually butting up against 200% in the quarter, really enabled by that strong, greater-than-$300 million working capital productivity.

So we'll look to keep that free cash flow conversion number greater than 90%. We've been right around the 100% for the past several years, so I don't see any material headwinds there. And there's no real change in that metric as the portfolio changes. So each business was generating nice free cash flow conversion.

From an ROIC perspective, the goal that we've had is to deliver 100 basis points of improvement annually. So we'll look to get that out as well. That's -- one important piece of that is once the separation happened mid last year, we started to put ROIC into our comp metrics. So in a lot of the executive pay metrics, there's a piece of ROIC. So obviously, that will drive continued focus, along with system management, deep down -- deep dive within that space.

That's helpful. And just as a quick follow-up, you've also been doing a pretty solid job on the cost front, including the recent increase and also the percent that will be structural, which you hit on a little while ago. How should we be thinking about the further cadence as we enter 2021? And are there any considerations for base cost inflation if we're just trying to kind of figure out the net benefits on a per annum basis?

Yes. So we'll have another $120 million roughly on a run rate basis of savings into 2021. There will be offsets, though, as we had mentioned. So we are right now planning for a merit increase. We didn't have one in 2020, so we'll look to get back on track with that in 2021. We also will plan for a full bonus payout in 2021, so that'll be a headwind to 2020, where we won't pay a full bonus. And T&E is another piece, but we will control the snapback. So we've seen T&E plummet down to about $1 million a month. We used to be upwards of $10-or-so million a month. So we'll see some snapback there, but we're looking to try to mitigate that pretty significantly, really cutting more so down on the internal travel versus the customer-facing travel.

So I think net-net, with $120 million of benefits that we'll see and the offsets that we had just covered, we'll probably have a slight headwind from a cost perspective heading into 2021, probably nothing like some of maybe the others in the space just driven by our dedication to getting structural costs out versus the temporary that maybe some others have been doing.

And our next question will come from Arun Viswanathan with RBC Capital Markets.

I guess my first question is on S&C. You've directed some more of your capacity towards garments. Could you just talk about the trade-off there? My understanding is that those are higher margin but maybe precludes you from participating as much in residential.

And then as well, maybe you can just address the commercial markets and what you're seeing there in construction.

Yes. So I think within Tyvek, so overall, the entire Tyvek enterprise in the quarter was up in the low 20s. And so obviously, we continue to see nice strength within PPE. That was up 50%-plus. Within the Tyvek building envelope space, just given the seasonality within -- when the construction really takes place, we did see nice growth there. So we saw about 20% growth in residential Tyvek.

Where the volume was taken from was more in the medical packaging space, and that's really just a function of the reduction in elective procedures, dampening the demand there. But overall, up 20%-plus.

We have been able to enable additional production to come out. We -- sequentially, we were down a bit as we had to take the asset down for about 2 weeks or so. But year-over-year, we are having more product coming off the line.

And we're actually bringing up what we call Line 1, an older line that we had that it's not costing us too much to get that up and running. So we're bringing that up for incremental volume. So that's helping us.

And then as a follow-up, could you also just talk about your plans for the proceeds? I know that -- from the N&B separation, I know that you've talked about buybacks for $2.3 billion of it and deleveraging for the rest. Is that still your current thinking? Or how are you thinking about deploying that capital?

Yes. Yes, $5 billion of that money from IFF/N&B will be used to delever and pay down debt. So we'll be in a great shape balance sheet-wise when that occurs.

And then I would think, as I mentioned, that -- I don't want to get into exact numbers, but I would think we're doing share repurchase with where our multiple is at as we get into next year. And we still want to gauge the effect of COVID and cases picking up and all that, but that would probably be our leaning along with some bolt-on M&A.

Yes. If I could just add on to the debt conversation. So we really did a nice job, I want to highlight, in the quarter of reducing commercial paper. And so we were able to use the proceeds from the Hemlock and TCS transaction as well as organic cash flow generation to take that down to just under $400 million for the quarter. We've taken it down even since the quarter closed, and we'll continue to do that. So that'll be a nice tailwind heading into 2021 not only from an interest expense perspective, but just giving us flexibility to use those $2.3 billion in proceeds for either M&A or shareholder remuneration.

Yes. Our goal is to get the CP down to 0 very quickly.

And we will take our final question from Frank Mitsch with Fermium Research.

I just want to follow up on IFF since part of the DuPont value proposition is tied up in IFF share price, and obviously, we've seen a 20% decline over the past month. Ed, in your discussions with management there, what's your confidence level that, that can turn around? Any thoughts that you can share there?

Yes. Yes, Frank, I don't want to get into too much detail, but I think there are some technicals going on right now with that. I've seen some reports. I think, well, one of the analysts on this call wrote a nice report the other day. So I think there are some things going on short term maybe over spin/split that create some pressure.

But look, these sets of businesses, the IFF sets of businesses, the N&B, they do very well when there's distress in the system because of the end markets they were in. So these are consistent performers.

Yes, there'll be pockets of weakness like we saw because nobody is in airports buying chewing gum and all that. But generally speaking, they're going to do very well through this. And we got a lot of synergies coming up here to create additional value for shareholders. So look, my gut is all that settles down here rather quickly as we get closer and closer to getting the deal done.

Terrific. Very helpful. And just a question on the guidance for the fourth quarter. Obviously, yesterday, we saw France and Germany implement lockdowns. How should we think about "the wave 2 lockdowns" being embedded into that guidance? How much of that was factored in? Any thoughts there?

Well, we knew Germany was talking about lockdowns when we just gave the guidance. It looks like France might be going now. But I think, look, if all of Europe locked down and there were lockdowns in the U.S., that's going to affect everybody out there. So no, we're not counting on that in the guidance that we gave.

We see pretty far into the quarter now. But if there was massive lockdowns, that would probably affect December-type numbers, and we just have to see. But as we sit today and as long as there's no massive lockdowns, that's the way we gave the guidance.

Thank you, everyone, for joining our call. For your reference, a copy of our transcript will be posted on DuPont's website. This concludes our call.

And this concludes today's conference. Thank you for your participation, and you may now disconnect.