杜邦 (DD) 2020 Q2 法說會逐字稿

Good day, and welcome to the DuPont Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. 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 Second 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 this conference call. Slides are posted on 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, our Chief Financial Officer.

Please read the forward-looking statement disclaimer contained in the slide.

During the 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 non-GAAP measures. Reconciliation to the most comparable GAAP financial measure is included in our press release.

I'll now turn the call over to Ed.

Thanks, Leland, and good morning, everyone, and thank you for joining us. I hope you and your loved ones are staying well.

Last quarter, I laid out our priorities for operating in this unprecedented environment. I am pleased to say that the quick actions that we took to protect our employees, ensure the safe operations of our sites, strengthen the financial position of the company and do our part to combat this pandemic are working.

Additionally, I'd like to acknowledge the tremendous efforts of all of our employees to deliver solid results this quarter in the face of this global pandemic.

Lori will cover the specifics of the quarter. But first, I'd like to discuss our performance versus our priorities in the current environment.

First and foremost, the safety and wellbeing of our employees remains paramount. We continue to restrict access to our sites, execute enhanced cleaning protocols, administer quarantines where needed and enable our employees to work from home where possible. In addition to the extra measures taken in response to the pandemic, our employees have remained laser-focused on safety as we achieved our all-time best safety performance in the second quarter. We remain focused on safely maintaining our operations. Through the incredible effort across our organization, 100% of our 170 manufacturing sites around the globe are currently operating according to plan.

We also made nice progress on our third priority: bolstering our already strong balance sheet. As we discussed the last quarter, we launched a successful $2 billion bond offering, which will be used to satisfy the long-term debt maturities that come due in November of this year and extended and upsized our liquidity facility.

Looking ahead, we plan on using $5 billion of special cash payment associated with the N&B and IFF deal to pay down debt, which will leave us in a very favorable position with no long-term debt maturities until the end of 2023.

Finally, we believe it is critically important for companies like ours to continue partnering with other industry leaders to deliver essential products needed to support the significant efforts to combat COVID-19. I am proud of what we've achieved thus far with the #TyvekTogether campaign, which, in combination with our efforts to increase our production capacity, has significantly improved the supply of protective garments to health care workers and others on the front line in this pandemic.

We also continued to advance other critical priorities across the company. In fact, just last week, we published our inaugural sustainability report at the new DuPont. With this report, we are not only able to convey our progress towards our 2030 sustainability goals, but we are also able to highlight our innovations across the company, which create a positive impact in people's lives every day. This is an exciting time for our company, and I look forward to the progress we will make in the coming years.

Moving to Slide 3. I am also pleased with the progress we've made executing the playbook that we implemented in mid-March as the pandemic intensified. We remain committed to a best-in-class cost structure and delivered approximately $130 million in cost savings during the quarter, 2/3 of which are structural. We have made great progress towards delivering the $180 million of structural cost savings we announced earlier this year, and the majority of the actions to deliver these savings are in place.

In addition to these cost savings, we are also realizing benefits from the tail of the DowDuPont synergies and the restructuring actions we put in place in 2019. As I've noted before, our cost actions are targeted toward G&A expenses and aimed at enabling a highly productive cost structure, which is appropriately scaled to the size of the organization. While we will continuously monitor our cost structure for optimization opportunities, we will also drive growth through innovation, which remains a key component of our strategy. We are continuing to invest in key areas like sales, application development and R&D, so that when we fully emerge from the softness, we will be well positioned to capture growth.

We are also studying the temporary savings that we are experiencing in the areas such as T&E to better understand what changes we can make to ensure some portion of these temporary savings become more structural. Additionally, longer term, we're evaluating the most effective approach to the way we work in order to generate further potential savings from consolidation of our asset footprint, driven by hoteling or other office-sharing initiatives. Plus productivity is an instilled mindset at DuPont, and we are consistently scouting for new areas to drive improvement.

We also made the decision to reduce 2020 CapEx to approximately $1 billion, which is about $500 million lower than 2019. We are not reducing any safety-related capital expenditures and have developed detailed plans for restarting our growth projects to ensure we are able to capture the demand when markets fully recover. Through the first half of the year, we remain on track to deliver our goal.

From a working capital perspective, we made good progress reducing our past due accounts in the quarter, which is notable in the current environment. However, the majority of the benefits that we generated were from lower sales and idling facilities versus systemic productivity improvements. Our teams have developed a number of detailed plans to generate working capital benefits beyond those that you would expect in a soft macro environment, and we anticipate these initiatives will favorably impact the second half and enable a greater than $500 million improvement that we are targeting for 2020.

Our focus on cash generation not only ensures we have a strong balance sheet, but positions us well to act on our commitment of returning excess capital to shareholders when we and the Board feel it is appropriate to do so.

I believe that our playbook is working. We have solid plans in place and are keenly focused on all the levers within our control. We are confident in the strength of our businesses and are well positioned for growth when markets fully recover.

Before turning it over to Lori, I'd like to make a few comments on diversity, equality and inclusion. The significant challenge that has been put before all of us as individuals and as a company to confront deep-rooted issues of inequality, racism and discrimination is one that we must take head on. My leadership team and I are committed to supporting racial equity with an intensified focus on the experiences of Black Americans through programs specifically aimed at improving our hiring, training and talent development practices within DuPont as well as extensive efforts to eliminate barriers to equality for people of color in our broader communities. This is the right thing to do and a necessity for any company that wants to achieve long-term sustainable leadership. I am confident that DuPont will once again be an agent of change to make meaningful and lasting progress in this vital area.

Now let me turn it over to Lori to walk through some of the details for the quarter.

Thanks, Ed, and good morning, everyone. Our results for the quarter give me confidence that our business teams are staying close to our customers, understanding the near-term market dynamics of their industries and responding appropriately. These actions enabled us to deliver results that exceeded the expectations we provided in the first week of May with overall market dynamics very similar at the end of the quarter as they were at the beginning.

The diversity of our portfolio, including significant strength in semiconductors, water filtration, Tyvek protective garments and health and wellness enabled us to deliver top running results that were down 10% organically in the most challenging macro environment that we have seen since the global financial crisis. Additionally, excluding the costs associated with idling facilities as well as a gain in a Non-Core segment, our earnings declines were very consistent with our top line performance on a percentage basis due to significant cost actions that we have taken to improve our cost structure.

In the quarter, our Electronics & Imaging and Nutrition & Biosciences businesses delivered organic growth of 7% and 1%, respectively. This was more than offset by organic declines in the other segments with the largest impact in our T&I segment, which is highly exposed to the auto industry.

Regionally, organic sales declined mid- to high teens in the U.S. and Canada, Europe and Latin America while Asia Pacific was up 1% versus last year. Sequentially, the year-over-year change in U.S. and Canada, Europe and Latin America declined, while Asia Pacific showed a slight improvement. These trends are all consistent with what we expected as the pandemic significantly slowed Western economies through the second quarter.

Also in the second quarter, we saw parts of Asia, particularly China, begin their recovery. China sales in our core segments improved 6% versus the second quarter of 2019 and 20% sequentially.

The top line growth in E&I and N&B, coupled with delivery of our cost savings, translated into robust operating EBITDA margin expansion in each of these segments in the quarter, up 190 and 240 basis points, respectively. Unprecedented demand weakness in automotive markets, which led to the decision to idle approximately 50% of our polymer capacity in T&I as well as soft industrial markets led to margin contraction in T&I and Safety & Construction.

In total, we generated operating EBITDA of $1.1 billion and adjusted EPS of $0.70 per share.

Our decremental margin was approximately 45% in the quarter, at the low end of our expected range, driven primarily by even greater cost savings than we had anticipated. Excluding the $64 million Non-Core gain and the $160 million of costs associated with idling facilities, our decremental margins in the quarter were approximately 30%.

Free cash flow of approximately $560 million in the quarter led to a conversion rate of approximately 140%. As Ed indicated, we have implemented a number of working capital initiatives that will enable us to continue to drive strong cash flow conversion through the balance of the year.

As you saw in our release this morning, we recorded a noncash impairment charge related to our T&I segment of $2.5 billion. As you know, the automotive markets account for about 15% of our sales. The majority of this exposure sits in our T&I segment with the advanced materials we supply to the OEMs, Tier 1 and Tier 2 component manufacturers. This is a market we watch closely and one that has been significantly impacted by the global pandemic. With auto builds down now more than 30% in the first half of 2020 and IHS projection for a further year-over-year decline in the second half, we determined that an impairment test was appropriate.

In connection with the DowDuPont merger in 2017, the carrying value of the heritage DuPont assets and liabilities were marked at fair value and a significant goodwill and intangible balance was recorded. Specific to T&I, approximately $10 billion of goodwill and intangibles were recorded in 2017, equating to more than 75% of the overall carrying value of the segment. The impairment charge was the result of the unprecedented market dynamics we see today, combined with the increased carrying value of the assets resulting from the DowDuPont merger. It is important to note that there was no impairment recorded associated with the tangible assets of the T&I segment.

Our confidence in the long-term characteristics of the automotive industry and our position as a market leader remains strong. In addition, we continue to expand our application development expertise and take actions to improve our cost structure so that we can expand our margin profile when markets fully recover.

Slide 5 provides more detail on the year-over-year change in net sales. Our organic sales decline of 10% reflects the net impact of significant market weakness in automotive, aerospace, oil and gas and other industrial end markets partially offset by robust demand in semiconductors, water filtration, Tyvek protective garment and health and ones.

Within E&I, Semiconductor Technologies delivered another strong quarter with 17% growth. The semi demand was broad-based. We saw market strength in both logic and foundry, driven by the ramp-up of advanced technology nodes, which placed nicely to our product portfolio as well as robust demand for memory in servers and data centers. The strength in semi also provided a more favorable product mix, leading to 190 basis points of margin improvement in this segment.

Our Nutrition & Biosciences business also delivered another strong quarter with very resilient growth across the food and beverage and health and wellness market. Our sales in these end markets, which make up approximately 85% of N&B's portfolio were up 5% organically in the quarter. New customer wins and initiatives to better position our products in the market through multiple channels, combined with a renewed focus on health and wellness, drove more than 30% growth in probiotics, its strongest quarter ever.

Pharma Solutions recorded a strong quarter on increased demand in over-the-counter and prescription pharma applications.

Growing demand in the meat-free segment and continued strength in animal nutrition and home and personal care applications also contributed to the strong results. These areas of strength were partially offset by significant demand weakness in the energy and industrial markets, which make up about 15% of N&B's top line.

The well-known weakness in automotive and industrial end markets continued to impact all 3 businesses within T&I. Our volumes in the second quarter were down 28% while global auto builds were down 45%. We saw a similar trend in the first quarter where our volumes declined with 8% when global auto builds were down 22%.

Our total T&I outperformance versus auto builds is a function of a few key drivers. First is mix with about 40% of the portfolio selling into markets outside of auto such as health care and electronics. Additionally, while we expect to deliver volume growth in our normal inventory environment of about 1.5x auto builds, the main drivers of our outperformance versus auto builds in the current environment is more a function of where we sell into the supply chain. Our polymer sales, which account for the majority of our auto exposure were sold into Tier 1 and Tier 2 component manufacturers, whereas our adhesives business sells directly to OEMs. Our polymer sales outperformed auto builds, which we believe has led to some inventory build in the channel, which we expect to result in a more muted recovery in the back half versus expectations for auto builds.

Our adhesives business sales are more directly aligned with auto build results and we, therefore, expect that segment of the business to recover along with the expected pace of recovery at the OEM.

Within S&C, demand in both Water Solutions and Tyvek protective garment remained robust. Water delivered another quarter with double-digit organic growth. The Tyvek protective garment business has expanded to nearly 30% of the Safety Solutions portfolio with garment sales up 65% in the second quarter. However, weakness in aerospace, automotive, oil and gas and industrial markets continued, leading to a decline in the Safety business overall.

Growth in Shelter Solutions remain pressured as we continued to redirect Tyvek supply to personal protection and stay-at-home orders across the globe limited demand.

Turning to the adjusted EPS bridge on Slide 6. Adjusted EPS of $0.70 was down 28% versus the same quarter last year, driven by lower volumes and costs associated with idling facilities, partially offset by the delivery of cost savings and a $64 million customer settlement gain in the Non-Core segment. As I've mentioned, our cost actions from the DowDuPont synergies and the 2019 restructuring program, coupled with incremental actions we are taking in 2020, contributed to approximately $130 million of savings in the quarter.

Below the line, we saw benefits from a lower share count due to share repurchases we executed in the second half of 2019 and early 2020 and a lower tax rate relating to foreign operations. Year-to-date, our base tax rate is approximately 22.5%, and we continue to anticipate our full year base tax rate in the range of 21% to 23%.

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

Thanks, Lori. Slide 7 highlights the progress we have made since announcing the N&B and IFF transaction in mid-December. During the quarter, we completed additional key milestones. In May, DuPont N&B and IFF filed their respective initial registration statements and are advancing the review process with the SEC. IFF and DuPont also named the Executive Committee of a future combined company, which will include key DuPont N&B senior leaders. In addition, the companies announced 2 independent DuPont appointees to the Board of Directors of the future combined company.

We have made meaningful progress regarding regulatory approval, we cleared the U.S. process in March and have since received approval in China, Serbia and Colombia. The clearance processes in the remaining required jurisdictions are well underway.

Earlier this week, IFF filed its definitive proxy related to the IFF shareholder approval of the transaction. The IFF shareholder meeting is set to take place on August 27.

I remain excited about this combination and see tremendous opportunity for growth and greater innovation as the businesses come together. The teams are energized and all the critical milestones remain on track for a first quarter 2021 closing.

Let me wrap up with a few comments on our expectations for the third quarter. While the next several months will likely continue to be challenging due to the pandemic, we believe that the second quarter will mark the bottom for us. However, our return to prepandemic levels will be measured and will certainly vary across our end markets. In markets like automotive and residential construction, we have seen an inflection in demand heading into the third quarter, but believe recovery will be gradual. Additionally, markets like oil and gas, aerospace, commercial construction and other key industrial segments continue to see significant weakness. As a result, the approach of operating many of our sites with a focus on cash generation to better match supply with demand will remain unchanged.

We expect third quarter to look very similar to the second quarter with sales slightly up sequentially, driven by modest recovery in automotive and residential construction, mostly offset by seasonal patterns in N&B, as well as the impact of supply constraints across our Tyvek enterprise as we perform routine maintenance on the assets. It is worth noting that within E&I, Semi is holding up stronger than we initially estimated but we remain cautious about the potential of some elevated inventory in the channel.

We expect operating EPS in the range of $0.71 to $0.73, a sequential increase from the second quarter, driven by the improving top line.

Sequentially, lower costs associated with idling facilities will be offset by a slightly weaker mix in S&C due to required downtime in Tyvek and the absence of gains associated with a customer settlement and a discrete tax item recorded in the second quarter.

We estimate our year-over-year decremental margins for the third quarter to be in line with the second quarter at around 45% on an as-reported basis, again impacted by costs associated with idled facilities as well as the absence of prior year gains in our E&I and Non-Core segments. However, on an underlying basis, we estimate our decremental margins will be approximately 25%, an improvement of more than 500 basis points versus our second quarter underlying decremental margins driven by sustained execution of our structural cost savings.

We will continue to stay focused on execution and remain confident that we will emerge from this crisis an even stronger company.

I'll now turn it to Leland to open up for Q&A.

(Operator Instructions) We will now take our first question from John Inch from Gordon Haskett.

I would like to ask you about the Tyvek line maintenance. Is this routine, say, for the summer or because you have older equipment? I'm just hypothesizing and it's been running full out. Obviously, you would not want to have the line going down in a period of strong demand. So maybe just a little more color there would be helpful.

Yes. John, there's multiple lines basically in 2 locations over in Luxembourg in Europe and in our Spruance facility in the U.S. So it's more than one line and we're going to add line 8 actually, which we have a CapEx program against for future demand.

But a couple of our lines are extremely old lines. We got those up and running at way higher rates than we had been running on that before because of the pandemic and want to make so many more garments, as Lori mentioned. You could see our garment sales were up 60% or so. So we've really been cranking it out a couple of the older lines and we just need to be doing some maintenance on. And the maintenance is not long, but it takes the lines down for 2, 3 weeks and we're going to rotate through quite a few of those during this quarter, and then we'll be hopefully in really good shape as we move over the next year after we do that.

And then line 8 we delayed some of that CapEx. We had to delay it because Luxembourg, the government actually shut us down during the pandemic, and towards the end of the year we'll recrank up the CapEx on that program to get that line up and running and we'll have that up in like 1.5 years from kind of when we started up. So we'll have all that capability as we move forward.

Yes. Okay. So that sounds like it really is just maintenance versus a major overhaul, which completely makes sense.

No, no. It's just some maintenance.

Yes. No, that's fine. As a follow-up, Ed, how do did trends look? And by extension, not to put you on the spot, but how conservative do you think you're being with your third quarter sales commentary of sales up slightly sequentially?

Yes. So John, look, our July sales were similar to the average we kind of were running in the first quarter, but the big difference was that we saw resi orders starting to pick up as we got into the middle of July. We're starting to see auto orders pick up for us as we kind of got into the middle of the month. And so we -- but we sit in the supply chain a little bit later, as Lori mentioned in her remarks. So we're expecting to see the sales impact from that hit more towards the back half of the third quarter and then certainly as we go into the fourth quarter.

So are we being a little conservative? Possibly because they are 2 key end markets for us, but it's just hard to tell exactly how much actually makes it into the quarter. But there's no doubt we're seeing demand lift on the order front in those 2 segments.

And then as Lori had mentioned also, the semi market is holding up. We thought we might see some softness in the third quarter because of some build in the channel. We still think there is some. We're a little cautious on that. I know some of our competitors are saying things are running hot also, and we continue to run pretty hot on the semi side.

So could we be a little bit conservative? Possibly. But again, it's hard to tell when things actually hit in the sales number during the quarter. But I think it's building momentum back half of third quarter, certainly in the fourth quarter.

Yes. If I could just add some things by a comment. So our July sales were for the average of 2Q, not 1Q. And then if we are being conservative in the market recovering a little bit more quickly than expected, then we will participate in that upside. So we have 0 concern that we've got market share issues. Really just our call on when the recovery really starts and when we start to see that manifest in order placement.

We will now take our next question from Jeff Sprague from Vertical Research.

Just 2 for me. On Electronics and in Semi, in particular, could you address, a, just kind of what you're seeing from a macro standpoint kind of in the channel. But the most important is how you're positioned relative to the various manufacturers. And I'm thinking, in particular, kind of this seemingly ongoing share gain that's going on by Taiwan Semi, how you're positioned there. And is there opportunity for share gain in some of these OEM players?

Yes. I don't necessarily like talking about specific customers, but I think -- let me just -- I think we're in a very strong position. That is a large customer of ours. So let me just say it that way. And there's clearly, maybe everyone misread the momentum a little bit in this industry, but the work at home, the data center usage, I know a key competitor of ours saw pretty much the same results. So I think it's across-the-board. The industry is growing -- was growing at that rate last quarter, 18%. But we're positioned very well with a couple of the very big players in the industry. So they're seeing nice momentum also as I see they reported their numbers. So if they continue like that, we're going to continue like that.

But 18% growth, I just don't see that, Jeff, holding at those kind of rates. I mean we grow 5%, 6%, 7%. I think that's pretty nice. So I do think there's going to be some, over the second half of the year, here, a little bit of a downdraft from those growth rates, I would think, but still growing nicely.

And you mentioned improving handsets in the back half. Obviously, Q2 was a tough quarter for handset industry. Do you feel like you have decent visibility on what happens in the back half at this point? And maybe you could address what's going on with content?

Yes. So there's 2 things going on. We've got the product -- some key product launches coming up with our customers for the holiday season and their 5G-enabled phones. And we have a lot more content in the 5G phones because we do all the antenna technology. So yes, we definitely have visibility for that. Obviously, smartphone sales year-over-year have been down, but we'll start to get the lift from these new launches and then the lift from the content from -- going into 5G.

Lori, you might want to mention kind of the difference between a 5G and a non-5G phone, just to put it in perspective.

Yes. As Ed had mentioned, as we look to the third quarter, we'll see sequential lift within the Interconnect Solutions, which primarily sells into smartphones, just driven by the seasonality as the new phones come to market in the back half of the year. So we do expect that the overall handset to be down versus prior year but we'll pretty much offset that decline with the higher content that we have in the newer smartphones. So as Ed had noted, we sell into normal premium smartphone, about $2.50 a phone. In the newer models coming out, we have an extra dollar on phone, up to $3.50. And then as you get all the way to an enabled-5G phone, we see upwards of potentially another $1 on top of the $3.50 that we expected. It's a nice play for us to be able to offset some of the decline that we expect within the overall handset.

We will take our next question from Steve Tusa from JPMorgan.

You mentioned in the slides that the delivery of cost reduction offsets absent a prior year gain in Electronics & Imaging. Does that mean that you will have a flat margin year-over-year? Or is that we should expect flat profits year-over-year?

Yes. So I think from a margin perspective, underlying, so it takes the costs that we'll see with idling facilities in 3Q and then the prior year total gains of around $60 million between E&I and Non-Core, expect margins to be about flat, maybe up a bit underlying.

Okay. So I guess, just in E&I, is that -- you're saying kind of the same thing?

Yes. E&I, the same thing. So the gains were in E&I and Non-Core, their value grows.

Sure. Okay. So that's the message there.

I still don't quite understand why T&I wouldn't be kind of better, why 2Q wouldn't be kind of the trough quarter. I mean I understand that things aren't maybe coming back as fast as you would have expected, but kind of tough to kind of understand why 2Q wouldn't be the trough. I mean are you saying that 2Q is the trough there? Or are we kind of stuck at the bottom for another quarter? I'm just trying to kind of parse out how negative you're kind of being here on this market.

Yes. So we definitely see 2Q as trough year. We will see sequential improvement in T&I as we head into Q3. Just right now, as we see the order book, it's going to be more towards the back end of the quarter and that really a nice (inaudible) assuming the reopening continues. It's really more of a function of where we sell into this than anything else. So we -- usually, once you start seeing the OEMs start back again, you're about a quarter behind because of where we sell in with the customers versus direct to OEM.

So as we had mentioned earlier, if we're being conservative on that ramp, we'll participate in that upside because we have no share concerns. But I think it's indicative too if you kind of look (inaudible) in the first half, we pretty well outperformed the auto build number and that's a function of where we sell into the chain. (inaudible) polymer player sit and pull back as much as the OEMs (inaudible) enabling us to have volume declines that were less than the overall auto build decline.

We will now take our next question from Steve Byrne from Bank of America.

Was curious to hear what fraction of your staffing at headquarters and in R&D during the quarter were working remotely. And do you see any impact on the R&D productivity from that challenge?

And with respect to headquarter staffing, just curious about what you've learned from this. You've obviously accomplished everything that headquarters needs to do with that staffing working remotely. Where do you think that goes down the road? Is that a lot of that staffing remaining remote? Or is that kind of what you're talking about changing the locations or figuring out another way of housing all of that staffing?

Yes. It's a great question. So from an R&D standpoint -- and by the way, want to just to use one example. Our biggest location is the experimental station in Delaware where a couple thousand people work there, a lot of our scientists that do just great work, and they are going back into their labs. Very few of them though are using the office space that they have, but they are doing all their lab work. We have set it up where we are actually doing different shifts.

So not every employee is in the labs at the same time. So we have an early shift that goes to about noon and then we have a second shift that goes in for the whole afternoon into the evening. And we even have quite a few of our scientists going in during the nighttime into the wee hours of the morning. So we can keep -- limit the number of people in any given lab at one time. And by the way, we have many, many, many labs. So that -- they are functioning. They need to be in those facilities to do a lot of their work, and that's occurring.

One of the things that I think every CEO is seeing in this environment, though, back to your point about the corporate office and many of our other offices, we've been able to really work very well remotely. And by way, remember, DuPont is going through a massive deal with IFF and N&B and all the integration work and separation and hard financials and tax work and we're right on schedule with it despite most of the people working remotely.

So we really -- we've put a team together, and we're really looking at how do we handle our office footprint around the globe going forward. And by the way, I'm a big believer you should be in the office interacting with people. I do think if you do this long term, you'll lose something but I don't think it has to be where you're there every single day and our people are working extremely hard remotely. So we're kind of doing a whole study on can we do kind of sharing of offices and all that and reduce the footprint as we move forward. So we're taking a hard, hard look at that and probably make some decisions before we exit the year.

And then, Ed, can you provide any update on the Ohio MDL litigation settlement? I don't know, you had a couple of law firms that you're working with. Just wondering if anything is an obstacle at this point? Or whether you're still thinking about resolution there relatively soon?

Yes. I think -- look, I think there'll be a resolution settlement. There's basically 2 plaintiffs that are handling the 100-or-so outstanding cases. We've been in conversations, and let me just say, I'm highly confident there'll be a resolution in the not-too-distant future on that.

We will now take our next question from Scott Davis from Melius Research.

I know it's kind of hard to predict these things but, Ed, do you have a gut instinct to when you think your T&I plans will be back up deployed and running or when you'll need them again kind of a cadence, I guess, is what I'm looking for?

Yes, yes, yes. Go ahead, Lori.

Yes. So from an idle mill perspective, we took about $130 million in Q2. We do see sequentially less underlying from the costs actually associated with taking the assets down into Q3 and then even more so into Q4. So fortunately, we have the flexibility that whenever we do see the demand recover, that we can be pretty agile and take those assets back up in 2 to 3 weeks. And so if we need to accelerate our existing plans, we can do that. So Q3 will look a little bit more of uptime than Q2 and then we'll see even more uptime as you head into Q4.

Okay. And then CapEx, I mean, you took it down to $1 billion for 2020. And just one of the knocks on -- I know your business structure is just the capital intensity of it. But is there a sense -- I mean, Ed, how do you think about how you become more capital-efficient kind of longer term? I mean, obviously, productivity has to play a role. But is there a possibility that a longer-term DuPont could become less capital-intensive and perhaps closer to the $1 billion run rate than the $1.5 billion-ish kind of levels?

Yes. No, Scott, I think there definitely is, and by the way, Lori and I have been very focused on that issue. As we look out over multiple years, I think we can reduce the CapEx. It just so happened that we hit a period between probiotics, Kapton, Tyvek where we were very constrained on capacity and it just so happens they happen to be 3 of our most capital-intense businesses. So I would just put in we kind of are hitting a hump on the high end for a couple of years. And we -- as we model out over 3, 4, kind of 5 years, we can drift that CapEx back down.

We're also -- I don't want to get into all the details, but we're also looking at some outsourcing of some of the earlier [change] stuff in our portfolio that I don't feel we have to do and we can outsource that to somebody else, and we're studying that hard, too. There's a couple of areas we know we can do that in and that will reduce the CapEx on our end also. So it's a big focus of ours to get that number back down around D&A on a consistent basis. But it's a great question. We understand the importance of that.

We will now take our next question from the Mike Sison from Wells Fargo.

In the Nutrition & Biosciences, you drove 240 basis points of margin improvement. What drove that improvement?

And beyond 2020, Ed, given you'll be on the IFF Board, what do you think the normalized growth rate for this business could be? And remind us how you think IFF combination can support that growth?

Yes. So maybe I can hit the margin piece first. So we did drive really nice margin lift in N&B and a lot of it was driven just by favorable mix. And so we had mentioned that our probiotics were up about 30%. That's definitely the highest margin piece of the portfolio. So we really had nice improvement there. And also cost actions helped with the margin lift. So N&B would have shared in a portion of $130 million of cost reductions that we saw in the quarter.

Yes. And just, by the way, on the combo, look, a couple of key principles. We're going to have pretty massive R&D capability in the combined company. So we're not doing any cutting there. Most of our synergy work as it is at DuPont is really going to be on the G&A side. So we're going to have really nice scale to be launching consistently new products into the markets. We've had great feedback from customers on our ability to do a lot of application development work with them with the extensive portfolio we're going to have. So I feel very bullish on that.

And as you can see, generally, as an industry, it just holds up very, very well. I think Lori mentioned this in her prepared remarks, 85% of the portfolio, which is really Food & Beverage-centric, grew organically 5% in the quarter. And the piece that dragged it down to 1% in aggregate was really industrial end markets that we play in. So we'll have to look at that as we move forward. But it's just a consistent industry.

I would also point out, I think I said this on the last earnings call, the multiple that IFF trades at -- and by the way, the IFF value or the N&B value is basically still about where we announced the deal at, which is $26 billion of value for a DuPont shareholder and IFF's multiple still sits 400 to 500 basis points below the top, what I'd call, the top few players in the industry. So I think we, as a combo, we proved success rolling out the new company. There's great margin expansion capability just with the IFF share price and clearly the #1 position that we're going to have. Again, we've got to come out elegantly and integrate the company well, but that opportunity is there.

And in this case, I truly believe we have the revenue synergies we've talked about with what we can offer to a customer. One of the areas -- it's probably -- it's still a small business, but one of the areas really growing for us right now is the meatless meat market business, and I think we had a chart out when we announced the deal. IFF has 4 or 5 products that sell into that industry. DuPont has 4 or 5 products that sell into that industry. So our ability to innovate, just use that as one example, innovate in that industry as it moves forward is just way more significant than anybody else.

So I think it's going to be a really awesome company when we get going on it and hope February 1 is our date to consummate the merger next year. Again, and as I think Lori said, the vote -- the shareholder vote is on August 27. So another month from now and that will be done.

Right. And a quick follow-up, TSMC announced a new fab to put in Arizona in 2Q. And not sure if that's a one-off or an ongoing trend to bring capacity back to the U.S., but if that's the latter, would that be a positive for your Semi business?

It should be, yes. And my gut is, talking to our customers, but you'll see more announcements like that.

We will now take our next question from Jonas Oxgaard from Bernstein.

Okay. I was hoping to take a step back. I mean we are living through the probably most influential event in our lifetimes. The world is changing a lot, and given that you're a diversified company, are you seeing any place where you're changing your strategy in the next couple of years?

Not -- Jonas, not significantly, but remember, one of the things we've been working on and I'm really clear about our sustainability report out, if you want to take a look at that now, that's online, is that a lot of our products in areas we're working on from an R&D standpoint really goes towards the UN Sustainability Goals. So I think we're -- secularly where we're -- our scientists are working where we're developing products for, I think, is in the sweet spot of a lot of things that are changing in the world. So from that standpoint, yes, we've put a lot of effort into that over the last few years so we kind of redirect our thinking towards that area. And so I think, secularly, I feel good about where we're investing our money.

So I wouldn't say the pandemic changed anything. It's kind of something we've been working on the last few years. And I think that's going to play out well for us. And it's why we think in normal times, we can outgrow GDP because of the areas we're going to be focused on.

Okay. As a follow-up with that, if you don't mind, we're seeing a lot of discussion about hydrogen in the -- particularly from the European Union. And some of the hydrogen investment has to be water purification. Is that something your Water business is doubling down on? Or is that an opportunity for you guys?

Yes. Yes. It is. And by the way, that's a business, and by the way that goes to our sustainability goals. That's one of the key ones is global clean water. That business, as you saw, is growing very nicely and we would love to add to that portfolio, both R&D capability, which we're adding people; application development people we're adding in that business. And if we could do any more bolt-on acquisitions, we would be thrilled to do it in that space. And by the way, it was a bit was strong across home applications, desalination and industrial wastewater. Every one of those segments is doing very well.

Yes. And if I can just add the acquisitions that we made at the end of the year really have put us as a leader across all 3 types of filtration technology: so reverse Osmosis, Ultrafiltration and Ion Exchange Resins. So we're well positioned to take advantage of any inflections in the market.

We will now take our next question from David Begleiter from Deutsche Bank.

Ed or Lori, just on Tyvek, how are you thinking about the growth of this franchise going forward given recent events? And are you doing any debottlenecking with the current plant maintenance?

Yes. So I think the growth -- we see a lot of upside in the growth. And even when the pandemic is behind us, we see further upside with the garments, just given that a lot of the local and national governments will look to either establish or replenish their stockpiles. So the benefits that we're seeing isn't temporary.

And longer term, obviously, we need to add capacity to continue to participate in the growth, and we're doing that. So once we are able to restart the Tyvek Line 8 project at the end of the year, that ultimately will add incremental capacity for us.

As far as the debottlenecking is concerned, we did a lot of that in the first half to enable the improvements that we saw in Tyvek garment. So combined with a couple of initiatives of bringing some new assets online as well as debottlenecking, that's where we're able to double the production of Tyvek garment. So always looking to get incremental capacity off the line just given the asset is sold out.

That's very helpful. And just on T&I, you mentioned an inventory build that could impact Q3 in the auto area. Would that be done by the end of Q3? Or could that leak into Q4 as well?

No. I would think that would be done. It's not -- I don't think it's overly significant. But as Lori mentioned in her remarks, our sales in T&I were kind of less than half of the downturn of autos. So we're concerned just there's a little bit. But we also, as we said, we lag in the supply chain a little bit. So I would think by the time we're going into the end of the third quarter, into the fourth quarter, we're totally fine.

We will now take our next question from John McNulty from BMO Capital Markets.

It sounds like you've got a lot of things in the works in terms of improving cash conversion and you highlighted a greater than $500 million working capital improvement. Can you speak to kind of the types of targets that you're looking for in terms of working capital enhancement as you're looking forward? Like I said, it sounds like you've got a lot in the works, but can you help us to quantify how to think about that going forward?

Sure. Yes. So we've got -- for this year, we've got a target of greater than $500 million. And then even beyond that, we still got entitlement as far as improving our underlying productivity, probably deliver another $500 million. So we said, it's not going to come out in 1 year, but we saw $1 billion total working capital opportunity. So once we get past that, those 2 large improvement opportunities, they're going to be a couple of years until we're complete with those.

With the free cash flow conversion target that we've set of at least greater than 90%, and we've been greater than that in the past and so our history is right around 100%, that sort of dictates that you maintain flat working capital to be able to deliver that metric. And so any upside that you see as far as top line growth that may negatively impact working capital, we're going to have to offset that with ongoing productivity.

And so our largest opportunity sits within inventory, which is where a lot of our efforts are targeted around improving inventory productivity through SKU rationalization, through reorder point examination, through demand -- better demand planning. So that's one of the larger opportunities for us as we go forward.

I'd also mention -- or Lori, you might want to give a number around this, but one of the things going into the pandemic I was personally very worried about was just past due balances, and we have had massive improvement on past due, which I kind of find interesting in this environment because I wouldn't have thought that. But Lori, the teams around the world, we put a big, big focus on that as I thought it could become a little bit more of an issue, and we've actually made great progress.

Yes. We did. We've reduced past dues versus prior year by about 40% in the quarter. So really nice there, just as Ed had mentioned, with a lot of the customers looking to delay payments or missed payments because of the pandemic, we've actually went to the other side and reduced it. So great performance there.

Got it. No. That's hugely helpful. And maybe just as a follow-up, it looks like in terms of asset values, they've come up a lot in the market, it sounds like a lot of the bid asks that are out there in terms of M&A or maybe narrowing. Can you give us any on the noncore businesses that you have kind of sitting there and your optimism on getting some transactions done either in the kind of in the back half of the year?

Yes. John, it's been one of my more frustrating ones. We have interested parties in every one of the assets. We're in negotiations on everyone, and it's just slower in this environment, doing due diligence, people visiting sites, doing the environmental studies. So hopefully, we'll make some progress here in the back half of the year on that. But we're totally focused on getting that done. I just don't want to put a date on them. I thought we have a couple done by this phone call, and hopefully, we get them across the finish line. But we definitely have interested parties that we've been talking to, mostly strategic players, which is a good sign, I think.

We will now take our next question from John Roberts from UBS.

Any updated thoughts on how you'll distribute the new IFF shares? You're giving yourself a lot of flexibility between a spin-off and split-off here. Are you tilting towards one versus the other?

Well, I can't say yet. We'll make that decision as we get later into the fall. I mean I've always just done a spin-off, but I don't want to put a leaning on it right now. It just depends what the numbers look like when we get there.

But look, I think the good news overall, John, I mean, the shareholder vote is happening in a month. The deal is definitely happening. I know earlier in the year, people were curious, is this thing going to stick and all that with everything going on. So the deal is in great shape from that standpoint. And again, we'll see where we're trading at, what's going on at the time and we'll make a decision then. You just can't make it right now because you don't know the facts.

And then could you give us an update on the ethanol enzyme in the Biosciences businesses, which are the weaker areas within N&B recently?

Yes. So that was within the 15% of the portfolio that we had noted that was weak in N&B. So that portion of the portfolio, along with microbial control, was down significantly in the quarter. As we look to the back half, we would think you would see kind of a flattish in the second half, but we'll see how the market continues to play out.

We'll now take our next question, PJ Juvekar from Citi.

Ed, many companies have deferred their buybacks and I know, right now, there is cash savings aspect of it. There's also the perception of buybacks in the middle of the pandemic. So with your strong free cash flow from the working capital release, when do you think it can come back in a meaningful way in share repurchases?

Yes, PJ. It's a great question. I think we'll probably assess it again in the kind of early fall, take a look at -- remember, we're going to get over $2 billion of excess cash from the IFF deal at the beginning or kind of going into 2021. So we know we have that coming.

Back to the prior question, hopefully, we have some decent cash coming in from the Non-Core asset sales. So that will be excess cash. And of course, in our own just operations, generating cash.

So I really love our position going into 2021 because we're going to have cash available from multiple angles and no debt payments until November of 2023. So we're going to have a lot of flexibility. And so I think we'll be reassessing that, as I said, in the early fall and make a call on that.

If I look at the new DuPont ex N&B, and I look at where the multiple of the company is at, which is, give or take, 8x, I can't imagine, at some point here, we're not going to be doing some share repurchase. Hopefully, we're not trading around 8x moving forward. But ex not worried about the pandemic, I'd be buying shares back right now. So again, we'll assess it again in the fall knowing where we're going to be sitting from a balance sheet, a very strong cash position.

Great. And one quick follow-up on M&A. I know it's tough to do M&A right now. But in the past, you had talked about potential deals in either T&I or E&I. With the recent charge that you took in T&I, does that set that division back a little bit? And maybe whenever the M&A market opens up, will E&I be the frontrunner?

Yes. Let me just answer, no, I don't feel any different about T&I. By the way, it's a great -- auto is a great industry to be in. It's just the pandemic took it down. But remember, I think Lori covered this well, the charge we had to take was because we had to step up the assets so significantly in the DowDuPont merger that there just was no wiggle room there. So it's a noncash charge. If -- any weakness we would see, we were kind of on the teetering edge because of what we had to do when we did the merger and the step-up.

So no, I don't feel any different about it. And look, we're starting to see the rebound in auto come back here and I think 2021 will be a decent year for auto, not back to 90 million auto builds, but it's going to lift up rather nicely here. So I feel good about that.

And look, as I said, we're all hands on deck operationally right now. We're not looking at something big structural right now. There's too many moving pieces with -- in all the industries and it's just not on our plate at this point in time. We want to get the N&B deal done, keep it on schedule, which we are. But we always have that flexibility in the future if there's a great opportunity for our shareholders.

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

Thank you. Ladies and gentlemen, you may now disconnect.