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DowDuPont Inc.  (NYSE:DWDP)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day and welcome to DowDuPont's Fourth Quarter 2018 earnings call. (Operator Instructions)

I would now like to turn the call over to Jen Driscoll, VP of Investor Relations. Please go ahead, ma'am.

Jennifer K. Driscoll -- Director, Investor Relations

Thank you, Rochelle. Good morning, everyone. Thank you for joining us for DowDuPont's Fourth Quarter 2018 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 on the Investor Relations section of DowDuPont's website and through the link to our webcast.

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

Please read the forward-looking statement disclaimer contained in the news release and slides. During our call, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10 and each of Dow's and DuPont's Form 10-K, as well as Dow's and Corteva's Form 10s and DowDuPont's prospective supplement filed on November 16 of 2018, include detailed discussion of principal risks and uncertainties which may cause such differences. Also we will comment on segment results on a divisional basis, so please take note of the divisional disclaimer in our earnings release and slides. Unless otherwise specified, all historical financial measures presented today for the full-year 2018 are on a pro forma basis and our financials where applicable, exclude significant items.

We'll also refer to non-GAAP measures. The reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

With that, I'll turn the call over to Ed.

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

Thanks, Jen, and thanks everyone for joining us. Today, we reported fourth quarter and full-year results for 2018. And as we will discuss on this call, it was a good year on all counts as we delivered innovative solutions to customers, exceeded our cost synergy target, and at the same time, prepared to stand up three industry-leading world-class companies.

In terms of our overarching performance for the full year, we grew adjusted EPS 21% on a pro forma basis to $4.11. We delivered a net sales increase of 8%, with price improvement in all regions and volume growth in most regions. We also increased operating EBITDA 13%. In two months, we plan to separate the new Dow, followed shortly thereafter, by the separation of Corteva from new DuPont. We made significant progress this year toward these important milestones, and I'd like to thank the teams for all their hard work to make this happen.

Now let me recap the high points of the year we concluded. First, we delivered on the earnings objective we set for ourselves, strengthened by well executed capacity additions and many new product launches, leading to overall local price improvement for each of the divisions and volume growth across the majority of our segments.

Second, we upped our cost synergy target to $3.6 billion, 20% higher than our initial target and we have delivered more than $1.8 billion in savings since merger close.

Third, after completing our initial $4 billion share buyback program, we announced a new $3 billion share repurchase authorization and completed a $1.4 billion of that in the fourth quarter. We have returned nearly $10 billion to shareholders since the merger close, and intend to complete another $1.6 billion share repurchase by the end of the quarter.

And finally, we announced the future Boards, including many new directors. Across each Board, our directors bring strong and highly relevant experience, insights and key expertise to help our companies launch, grow and deliver for all stakeholders. We also announced the three CEOs. Each one is a talented leader with deep knowledge of their industry, has a track record of delivering value and is highly focused on increasing shareholder returns. We also have great teams supporting them, successful, dedicated operators who know their respective businesses and our end markets extremely well. As a result of the process we have been through in creating them, we are confident that each company will be well positioned in its markets with appropriate capital structures and plans to invest capital and R&D in ways that will drive significant shareholder value creation now and into the future. I couldn't be more excited about where each one is headed.

Howard will go over our fourth quarter results in more detail, so I'll point out a couple of things that we're keeping an eye on. We saw some short-term softening in the fourth quarter, including a steady drop in the price of oil and destocking in a few of our value change that went beyond normal seasonality. Even in this environment, we were able to offset the headwinds to deliver flat sales year-over-year, which included 1% volume growth. We also delivered year-over-year adjusted EPS growth because of unique levers in our control, such as cost synergies, new capacity additions and product innovations. We believe our market share held up well, our execution was good and our new products are resonating with customers.

As we look at 2019, we are confident that the global economy will grow. However, there is more uncertainty than usual over the precise rate of growth we expect. We anticipate China to continue to grow this year albeit at a slower pace, along with slowing activity in Europe. We expect modest growth in most other regions.

Let me provide some context to our expectations, starting with Materials Science. We have consistently been forecasting a period of margin compression in both the polyurethanes and polyethylene chains due to capacity additions across the industry. These dynamics have turned out largely as we expected, and Jim Fitterling will go into more detail about the trends we saw in the fourth quarter and the start to the year. For Specialty Products, we see benefits in 2019 from global economic growth and from our highly differentiated market positions, as Mark Doyle will explain. And in Agriculture, we expect to realize first half benefits from cost synergies and new products, offset by currency and higher unit costs, as Jim Collins will outline.

With that, let me turn it over to Howard.

Howard Ungerleider -- Chief Financial Officer, DowDuPont and President and Chief Financial Officer, The Dow Chemical Compa

Thanks, Ed. Moving to slide 3 and the summary of our fourth quarter results, we closed the year with solid financial performance for DowDuPont utilizing the levers in our control to offset all of the margin compression we experienced in the quarter. We delivered earnings per share of $0.88, a 6% increase year-over-year. Earnings drivers in the quarter included cost synergies and local price gains. Our operating tax rate was also a tailwind of $0.02 per share. EBITDA was flat at $3.9 billion as these earnings tailwinds were offset by margin compression in Materials Science, lower equity earnings and a currency impact of 2% on sales or $0.03 per share.

Volume grew 1%, with gains in Industrial Intermediates & Infrastructure, Nutrition & Health, Safety & Construction and Ag. From a regional perspective, we achieved high-single digit volume growth in Asia-Pacific and Latin America, which more than offset declines in the US and Canada and EMEA. Local price also rose 1%, with gains in Transportation & Advanced Polymers, Safety & Construction, Performance Materials & coatings and Ag. Currency was a 2% headwind..

We continue to exceed our cost synergy commitments with more than $500 million of savings achieved in the quarter. This brings our year-over-year cost synergy savings to $1.6 billion for 2018, above our increased target of $1.5 billion. Cash flow from operations in the quarter was $5.1 billion, up from $1.8 billion in the year-ago period. On an apples-to-apples basis, after adjusting for the accounting and presentation change for the AR securitization program, our cash flow from operations increased year-over-year by $900 million, and we returned $2.3 billion of cash to our owners, which included $1.4 billion of share repurchases.

Looking at our full-year, DowDuPont delivered strong financial and operational performance as evidenced by several metrics. We achieved solid top and bottom line growth. We outperformed on every one of our increased synergy savings and run rate targets. We generated $4.7 billion of cash from operations, which included discretionary pension contributions of more than $2 billion. We finalized the capital structures for each intended company, achieving the target and credit ratings for each, and we successfully completed debt offerings for new DuPont and new Dow of $12.7 billion and $2 billion, respectively. We also completed a tender for $4.4 billion of heritage DuPont's debt as part of establishing Corteva's capital structure and we've made significant capital returns to shareholders, which for merger closed at the end of the fourth quarter, totaled nearly $10 billion. Summing it up, the DowDuPont team responded to and offset the headwinds we faced, staying focused on executing our new capacity start-ups and our product launches, and advancing activities and our key milestones toward spend.

Turning to our modeling guidance on slide 4. At the macro level, we continued to monitor macroeconomic and geopolitical developments, including ongoing trade negotiations and the pace of economic activity in China. In this environment, we remain focused on the actions in our control, including capitalizing on our growth investments, capturing cost synergy savings, delivering productivity actions and advancing on our spend milestones. We expect first quarter net sales to be in the range of $20 billion to $20.5 billion, operating EBITDA is expected to be in the range of $4.2 to $4.4 billion (ph). Additionally, net interest expense is expected to be up more than $100 million as a result of the new debt we took on in the fourth quarter to implement our capital structures and prepare for spend. And we also seek currency headwinds year-over-year, which will impact EBITDA in the range of $150 million to $200 million.

In the Agriculture division, first half sales are expected to be down low-single digits percent and we see operating EBITDA flat. Excluding currency, sales are expected to be up low-single digits percent. It's always difficult to call the sales split between the first and the second quarter and farmers are still finalizing their planning decisions. First quarter sales are expected to be down low-single digits percent, but up low-single digits percent excluding currency. Operating EBITDA is expect to be down low-single digits percent as synergy delivery and organic growth from new product sales are more than offset by currency pressures and increased input costs.

In the Materials Science division, we expect continued strong consumer demand though at a moderately slower pace that in 2018. We expect operating EBITDA to be down low 20% as volume growth, cost synergies and the benefit from the completion of our US Gulf Coast investments, will be more than offset by lower chain margin spreads that will continue into the first quarter due to the averaging effect, particularly in our polyethylene and isocyanates chains. The division is acting quickly on a series of actions to offset as much of these headwinds as possible, including cost and productivity actions, capitalizing on new capacity additions and driving pricing improvements. As a result of all of these actions, the division expects margins to stabilize and then improve as it moves into the middle of the year.

The Specialty Products division expects gains in local price across most segments to be more than offset by currency, a portfolio headwind and softer volumes resulting in low-single digit percent declines for the quarter. We expect organic revenue growth to be roughly flat with prior year. We expect operating EBITDA to be down low-single digits percent from raw material and currency headwinds, as well as softer volumes, more than offsetting cost synergies and strength in local price. Excluding currency and portfolio, we expect operating EBITDA to be slightly up.

More comments on our segment expectations for the first quarter can be found in the appendix. And with that, I'll turn it over to Jim Fitterling to discuss the Materials Science division's fourth quarter and full-year results.

Jim Fitterling -- Chief Operating Officer, DowDuPont Materials Science Division and Chief Executive Officer, The Dow

Thanks, Howard. Moving to slide 5, Materials Science delivered solid results to close out the year despite some short-term market headwinds. On the demand side, we saw a softness in select end markets related to durable goods, such as appliances and autos, which drove some above-normal destocking. Outside of this demand was relatively strong. And on the margin side, we faced some discrete pressures in the quarter, particularly in isocyanates and polyethylene. We pivoted to counter these headwinds with the multiple actions in our control, including cost synergy savings, disciplined price volume management, feedstock flexibility and capitalizing on our recent capacity expansions.

Here are some division highlights. We, again, captured demand growth across the majority of our core businesses. We achieved high single-digit volume growth in polyurethanes and Industrial Solutions and our Packaging & Specialty Plastics business grew volume 4%. We delivered high single-digit EBITDA growth in Consumer Solutions where we drove pricing actions and adjusted our product mix to focus on higher margin business. We brought online our new high melt index elastomers train and completed the bi-modal polyethylene debottleneck by the end of the quarter.

CapEx for the quarter was $890 million, bringing Dow's full-year CapEx to $2.5 billion. And the Sadara joint venture successfully completed its creditors reliability test in the first attempt. The fourth quarter presented us with some discrete challenges. Brent crude oil started the quarter at more than $80 per barrel and then steadily dropped throughout the quarter, finishing the year in the low $50 per barrel range, a drop of more than 35%. In addition to that, we saw a 40% compression in the naphtha to ethane spread, driven by the oil price drop, as well as weak gasoline demand and higher US natural gas price on cold winter weather.

These trends compressed our feedstock advantage, not just in the Americas, but also for our main joint ventures. And you see that in the nearly $240 million impact, which is split about evenly across our core business and our equity earnings. But we were not immune to this trend. Our results demonstrated resilience because of the factors that we have consistently highlighted, feedstock flexibility, full chain integration, cost-out actions and strong operating discipline.

I'll now take a closer look at our performance of each business on slide 6. Performance Materials & Coatings achieved operating EBITDA growth of 5% as price gains in all regions and benefits from cost synergies more than offset volume decline. Consumer Solutions faced a sequential moderation in siloxane's prices primarily in Asia-Pacific, following an 18-month run up in prices that peaked in the third quarter. In response, the business drove proactive measures to improve its product mix in the quarter, resulting in volume declines. However, price, margin and bottom-line earnings all rose. In Coatings & Performance Monomers, the business expanded operating EBITDA margin in coatings as raw material costs fell. However, Performance Monomer sales and EBITDA declined due to an extended turnaround in the quarter, which is now complete and impacted results by approximately $20 million.

Industrial intermediates & Infrastructure operating EBITDA declined by 18%, primarily driven by a contraction in isocyanates that impacted core business results, particularly in Polyurethanes as well as some softening in appliance and automotive end markets. The contraction in isocyanates spreads along with a 25% margin compression in MEG also led to year-over-year reduction in equity earnings. These headwinds more than offset demand growth and benefits from cost synergies. Sales gains in both Polyurethanes and Chlor-Alkali and Vinyl and Industrial Solutions, were led by robust volume growth due to increased supply from Sadara. In the Polyurethanes chain, the moderation in isocyanates prices that we forecasted for some time accelerated in the quarter with MDI prices dropping about 40% year-over-year. In our view, the fly up margins that we captured over the past year completely unwound over the course of the fourth quarter, notably in Asia-Pacific and Europe, where we have the largest merchant isocyanates exposure.

Moving to Packaging & Specially Plastics, operating EBITDA declined 13% in the quarter. Cost synergies, increased supply from growth projects and lower commissioning and start-up costs, were more than offset by reduced equity earnings and the margin contraction across polyethylene products. The 40% compression in the naphtha to ethane spread, coupled with polyethylene price declines, aligned with what we forecasted for polyethylene margins for some time. Given that demand remained solid, our view is that polyethylene margins will stabilize in the first half of the year, potentially with some volatility in feedstock cost depending on how new crackers start-ups are eventually balanced by new NGL fractionation capacity. It is worth noting that we did not face a demand issue in Packaging & Specialty Plastics in the quarter. We grew volume on higher demand across most regions and new capacity from Sadara and the US Gulf Coast. Demand growth was led by our Industrial and Consumer Packaging and Flexible Food & Specially Packaging markets. The business also achieved volume gains in elastomers and wire and cable applications.

Taking a broader look at the full year, Materials Science delivered an exceptional year financially and operationally. We achieved double-digit sales and operating EBITDA growth with gains in every operating segment. We brought online three new facilities, our next-general NORDEL Metallocene EPDM plant, a new world-scale proprietary tubular low-density polyethylene facility and a new high melt index elastomers train.

We also completed the capacity expansion of our bio-modal gas phase polyethylene unit in St. Charles, Louisiana. These were the final units of our Wave I US Gulf Coast investments. Product from each unit is now in the market and we have performed at or above designed rates on each one. CapEx for the Dow tower in 2018 was $2.5 billion compared to $3.3 billion in 2017 and below our D&A level. In addition, Sadara successfully passed the critical Creditors' Reliability test and we consistently outperformed on our synergy commitments driving toward a leaner cost structure.

Looking ahead at this early stage in 2019, we're seeing a stabilization in our key product spreads and demand remains robust. We see the first half of the year as a time to focus on stabilizing prices in order to rebuild margins as we move into the middle of the year. Team Dow remains focused on the task at hand, controlling what we can control, harnessing our growth projects, driving innovation. And we are taking proactive measures to mitigate near to headwinds, including deferring certain spending to adjust to the current macros and spreads and continuing to address our cost synergy and stranded cost actions. And we're progressing our spend milestones to deliver a successful separation and spend in two months time.

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

Marc Doyle -- Chief Operating Officer for the Specialty Products Division, DowDuPont and Chief Executive Officer-E

Thanks, Jim. Turning to slide 7, Specialty Products reported strong results amid a softening macro environment, which unfolded during the quarter, specifically in automotive and consumer electronics end markets. We overcame macro conditions to again deliver organic revenue growth and solid earnings improvement. Our leadership position in diverse and attractive end markets is built on customer relationships and value-added innovation, which together with our intense focus on productivity, enables us to outperform the industry in any market environment. This quarter, we continued to drive double-digit growth in our probiotics portfolio. We're nearing completion of our capacity expansion and expect to have the new volume online by the end of the quarter.

Additionally, our overall Nutrition & Health sales in the Asia-Pacific market continued to grow by double digits. Our Tyvek business continues to be strong in the high-growth industrial and medical application space and other bright spots include semiconductors enabled by their broad end-market applications, life protection with our Kevlar high strength materials and our Nomex business where we are benefiting from exposure to the high growth aerospace industry and continued strong demand for protective garments.

We reported 2% organic revenue gains with Safety & Construction leading the way with organic sales growth of 6%. We also realized strong organic growth of 4% in Nutrition & Health and 3% in Transportation & Advanced Polymers. Operating EBITDA for the division again grew double digits, with gains in all segments driven by cost synergies, higher local price, a customer settlement and our Hemlock joint venture and higher volumes, which more than offset rising raw material costs. We continue to focus on disciplined pricing practices. We again delivered an overall 2% improvement in price with contribution from almost all of the segments. Our pricing discipline allows us to offset raw material costs and ensures we realize the benefit of the value our products deliver to our customers.

Turning now to the segments on slide 8, Electronics & Imaging organic sales declined 1%. We delivered sustained strength in our semiconductor technologies business through new customer wins and 3D NAND growth in Asia. Continued softness in the photovoltaics space and the impact of lower smartphone sales on our interconnect solutions business offset these gains. Operating EBITDA increased 8% driven by -- 18% driven by higher equity earnings again on an asset sale, cost synergies and higher volume, partially offset by lower local price. Excluding equity affiliate income, operating EBITDA rose 9%. Looking forward, we anticipate equity affiliate income for the segment to decline as a result of a reduction in customer settlements contributing approximately $175 million to $200 million this year, which is a year-over-year reduction of approximately $210 million to $240 million.

Nutrition & Biosciences grew organic sales by 1% driven by strong volume gains of 4% in Nutrition & Health. Probiotics drove strong growth with sales up more than 20% this quarter. We also continued to expand our Asia footprint where sales grew by greater than 10%. Within Industrial Biosciences, volume declined by 3% driven by a slowdown in US and Canada energy markets due to oil prices, which negatively impacted both our microbial control and biorefineries businesses. Operating EBITDA for the segment grew 4% driven by cost synergies and a portfolio benefit, which was partially offset by higher raw material costs.

Safety & Construction, organic sales increased 6% led by broad-based growth across industrial, aerospace and personal protection, partially offset by softness in construction and US residential markets. Our pricing strength continues to steadily improve and this quarter we delivered 3% growth with improvement across all of our product lines, which was the direct benefit of targeted actions to drive value-in-use pricing across our portfolio.

Operating EBITDA for the quarter was up 20% driven by cost synergies, local pricing strength and higher volume, partially offset by higher raw material costs.

Transportation & Advanced Polymers delivered solid top and bottom line growth amid challenging end market conditions that impacted our volume growth, which was down 5%. Automotive and electronics end markets, primarily in Europe and Asia-Pacific, were down due to inventory destocking. However, even given a tough macro environment, we were able to continue to deliver significant pricing strength with improvement of 8% in the quarter. Operating EBITDA grew by 7% driven by local price increases and cost synergies, partially offset by higher raw material costs and lower volume.

In summary, I am excited about the performance of our portfolio this year which enabled full-year organic sales growth of 5% and operating EBITA growth of 18% or 12% when excluding the benefit from non-operating pension/OPEB expense. This results in an operating leverage of greater than our medium-term target of 1.5x and enabled our adjusted operating EBITDA margins to expand to greater than 28%.

Looking beyond the first quarter, we continue to see strength in most of our end markets including semiconductor, aerospace, health and nutrition, industrial and infrastructure and expect to regain volume in certain end markets that are at a period of destocking in late 2018 and early 2019.The strength of our customer driven innovation, additional contribution from capacity expansions and continued focus on productivity will enable us to again drive operating leverage and improve returns. For the full year, we expect sales to be about flat on an as reported basis impacted by portfolio and currency headwinds.

On an organic basis, as we move beyond the short-term softness we are seeing in the first quarter of 2019 we anticipate our sales growth for the remainder of the year to balance out to be in line with the low end of our medium-term targets that we set out at our investment event in November, resulting in full-year organic growth of about 2% to 3%. We expect operating EBITDA for the year to be slightly down on an as reported basis. Excluding the anticipated declines in equity affiliate income and negative currency, we expect 2019 operating EBITDA growth of 3% to 5% driven by cost synergies, local pricing strength and volume gains, partially offset by raw material headwinds.

More comments on our 2019 expectations can be found in the appendix.

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

James C. Collins -- Chief Operating Officer, Corteva Agriscience and Agriculture Division of DowDuPont

Thanks, Marc. Turning to slide 9, here are the highlights for the Agriculture division. Fourth quarter sales increased 1% while organic sales rose 9%. Operating EBITDA grew 4% meeting our guidance of $2.7 billion and operating margins expanded by 30 basis points. Our 9% growth inorganic sales was driven by a solid combination of higher local price and volume gains. The local price gains were consistent across both seed and crop protection and were led by Asia-Pacific and Latin America. We worked hard to offset 5 points from currency pressures, primarily from the Brazilian real. Volume increased 4% driven by gains in crop protection from new product sales and an early start to the safrinha selling season in Latin America.

Partly offsetting the organic sales growth was portfolio reductions of 3%. The portfolio change was a result of the Brazil seeds remedy that we executed in last year's fourth quarter to complete the merger. Our crop protection business led the way with 10% organic sales growth from new product sales. Crop protection volumes grew 5% driven by strong sales of Vessarya, the leading treatment for Asian soybean rust in Brazil, Pyraxalt, a novel insecticide for rice brown plant hopper control in Asia-Pacific and Enlist herbicides. These gains more than offset declines in US and Canada on higher channel inventories and fall applied chemistry.

Local price rose 5% as we responded to continued currency pressure, which in the fourth quarter was 4%, primarily in Latin America. Seed organics sales increased 8%. Price increased 5% in a competitive market. Volumes improved by 3%, including early safrinha sales in Latin America of PowerCore Ultra and PowerCore Enlist and expected market share gains in soy and corn. Corn seed sale volumes also grew in US and Canada. due to the timing of shipments. The remedy loss in Brazil reduced seed sales by 6 percentage points.

The Ag segment operating EBITDA increased 4% to $233 million. The improvement reflected sales gains and synergies, partly offset by higher unit costs, investments to support new product launches and higher commissions to support higher sales. Higher unit rates reflected higher seed costs and higher raw materials in crop protection as well as rising freight and warehousing expenses.

We also recorded approximately $14 million in one-time benefits, including a product line sale. Both periods had nearly $60 million in licensing and collaboration agreements.

So, turning to the operational highlights on slide 10. We made meaningful progress against our five priorities to deliver shareholder value. In 2018, we delivered operating EBITDA of $2.7 billion, up 4% in a tough market. We raised the Ag division's synergy targets and in the third and fourth quarters began to see proof points that we are recovering our share in the Brazil corn market from the remedy. In addition, we launched a strong set of new product launches in crop protection that are delivering top and bottom line growth. The highlights for the year clearly was receiving Chinese regulatory approval for two key traits, Enlist E3 for soybeans and Qrome for corn. We are extremely excited about both approvals, which have been in the queue for quite some time and are a great demonstration of the strength of our innovation capability. Enlist E3, the most advanced weed control trait technology for soybeans is the larger opportunity of the two. We expect that Enlist E3 commercial sales will begin in 2019 although the exact timing will vary by country. In the second half of 2019, we will continue to invest in the commercial sales effort. Robust ramp-up plans and extensive seed production will ensure that Enlist E3 soybeans are broadly available to farmers in 2020.

Qrome on the other hand already has been introduced on a limited basis in the Western Corn Belt, but likewise we will be ramping up production this year. In other words, we are actively laying the groundwork this year for a full commercial launch of Enlist E3 and Qrome next year. We also have begun reaching out to our strategic business partners about out-licensing Qrome, Enlist and E3 in the future. In fact, we have already completed initial licensing agreements with several key players.

Today, we have provided guidance for the first half, which incorporates the Northern Hemisphere selling season. Based on what we're hearing from our customers and due to our unique direct farmer route to market, we've also estimated the split between the two quarters. First half sales are expected to decline by low single-digits percent. But excluding currency, we expect first half sales to rise by low single digits. We expect currency to be a headwind for the half, led by the Euro and the Brazilian real, compared to a tailwind from currency in a prior-year period. Organic sales growth is expected to be driven by new product launches, partly offset by higher channel inventories and some reduction in first year sales associated with implementing our multi-channel, multi-brand strategy, as we move customers to different products and brands. First half operating EBITDA is expected to be flat, as gains from organic sales and cost synergies are offset by higher unit costs. Higher unit costs are driven by new product launches, whose margins will improve as they reach the economies of scales, royalties and higher ingredient costs out of China, which we will lap mid-year in 2019 .

The first quarter is expected to see a sales decline in the low single digits percent. Excluding currency, we expect a sales increase of low single digits percent. We expect first quarter sales to be negatively impacted by timing, including an early start to the safrinha season in the fourth quarter and delayed planting decisions pushing sales into the second quarter.

From a planted area perspective, we expect to shift from soybeans to be neutral to our results. While some soybean acres are expected to shift to corn, much is expected to shift to cotton and wheat. First quarter operating EBITDA is projected to decline by the low single digits percent. EBITDA drivers are similar to the first half. In closing, we're excited about the progress we are making and look forward to giving you further updates on what to expect from us as we get closer to spin.

I'll now turn it over to Lori to open the Q&A.

Lori Koch -- Investor Relations

Thank you, Jim. With that, let's move on to your question. First, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Rochelle, please provide the Q&A instructions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question today will come from PJ Juvekar with Citi.

PJ Juvekar -- Citigroup -- Analyst

Yes, Good morning. Thank you. A question on Dow Chemical. In polyethylene, it seems like the industry had destocking occur in 4Q as oil prices came down. So what are converter (ph) inventories today? And then on to producer inventories, I guess the last number we saw from ACC was 4.9 billion pounds of producer inventory, which was quite high. So did the industry not slow down plants and where do Dow's inventory stand? Thank you.

Jim Fitterling -- Chief Operating Officer, DowDuPont Materials Science Division and Chief Executive Officer, The Dow

Hi, PJ, this is Jim. As the year -- as the quarter progressed, obviously, we saw that deceleration in oil pricing toward the end of the year and the last couple of weeks of December were pretty quiet in terms of the export markets. And so I think that's what led to the build up that you saw in the US inventory numbers. Some of that's starting to turn around in the first quarter. We are seeing some pricing movements in January, February. So we're kind of up 3 (ph) in January, February. I would say the bulk of the new capacity came on in the back half of 2018. If you look forward into 2019, you don't have that much new capacity coming on. So I expect operating rates are going to improve 200 basis points to 300 basis points through the year. But clearly, we've got to rebuild some margins in the quarter. So I think it was mostly sentiment at the end of the year that drove that buildup in inventory and I think what we will see as we come out of Chinese new year, you're going to see a pull on the demand side that's going to start to rebuild those volumes and margins. Volume was up 4% for us in Packaging and Specialty Plastics. And at DowDuPont level, we sit -- still saw strong demand in China, we were up 10%.

Operator

And next we'll move to Vincent Andrews with Morgan Stanley.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you. Good morning everyone. Jim, could you expand a bit on E3 soybean? What does broadly available mean? How many -- how many millions of acres are you targeting in 2020 and 2021? And what type of cost will be associated with -- with the launch and presumably maintaining, still selling the other stack herbicide-tolerant trait and do you envision the potential over to destack those two traits together? Thanks.

James C. Collins -- Chief Operating Officer, Corteva Agriscience and Agriculture Division of DowDuPont

Great, Vincent. Thanks for the -- thanks for the question. You're right, we're really excited about those two approvals after such a long wait. We have -- we're ramping up the parent seed production for those two traits this year, so 2019 will really be a very limited -- continued limited commercial launch based on the quantities of materials that we have. We can -- we could essentially have a couple of million units or a couple of million acres out there of both Enlist and Qrome from our previous work. But we will drive that really hard. As we get into 2020, you could see as much as 10% of our soybean line up in North America into the Enlist balanced by the other offerings that we have.

On the crop protection side, on the cost side, we've got a lot of experience already with the Enlist and Enlist Duo combination that's out there. We're stranded on corn and stranded on cotton. So we don't anticipate -- growers already have good sense for what that treatment per acre will cost and then we've seen tremendous uptake on that. So demand is high and we're excited about it and we're going to ramp this up as fast as we can.

Operator

And Jeff Zekaukas with J.P. Morgan will have our next question.

Jeffrey Zekauskas -- J.P. Morgan -- Analyst

Thanks very much. I think that three months ago, you thought that cash flow from operations in the fourth quarter would be about $7.5 billion. And I think it came in at roughly $5 billion. What was the difference between your expectation and what actually took place? And do cash flows from operations look in the first quarter?

Howard Ungerleider -- Chief Financial Officer, DowDuPont and President and Chief Financial Officer, The Dow Chemical Compa

Yeah. Jeff, this is Howard. Good morning to you. Let me start with the fourth quarter versus same quarter a year ago. When you look at cash from ops in the quarter it was $5.1 billion. On a reported basis, that was up versus $1.8 billion, but we have the AR securitization accounting change, so you've got to do an apples-to-apples. When you make that adjustment, cash from ops in Q4 was up $900 million, which is over 20%. You're right on your point about the full-year number. You know, I would say -- just a few pieces of math to make sure that you've got all the math right, merger-related costs were about $3 billion for the year all-in, pension contributions were $3 billion -- about $3 billion of the -- over $2.2 billion of that was voluntary that we did just setting up the capital structures of the three companies. The one surprise delta versus the third quarter when we last talked, was really working capital, specifically inventory. There was about a $1 billion higher inventory in the fourth quarter. Three drivers for that all about equally balanced. One, you heard Jim Collins talk about the organic growth in Ag sales, so we had a really strong fourth quarter versus a year ago. So that was about a third of the delta. We passed the CRT in Sadara that Jim Fitterling talked about. So, we that asset really hard and so that built up some inventory. And we -- I would say, we exceeded our expectations. We did not expect to pass it in the first go and we did. And then the third was just on the select destocking that Ed talked about in the couple of the chains. That was the delta and it was about -- it was about a $1.1 billion higher than expectation.

Operator

And next we move on to David Begleiter with Deutsche Bank.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Could you walk around the world from an activity standpoint in January and February? Is destocking completed? Where is the worst in terms of slowdown? And specifically in China, are we expecting New Year plant shutdowns to be the usual or maybe longer than expected given the tariff and trade uncertainty? Thank you.

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

Yeah, thanks David. This is Ed. Let me give you a little color on it. The softness we saw as we move through the fourth quarter from a geography standpoint was mainly China, and secondarily, a little softening in Europe, the Rest of the World kind of holding up exactly where it'd been. And if you break that down kind of by end market, we saw softness clearly in auto and we sold in consumer electronics, but mostly on the smartphone side and a little bit additional softening on US residential, which didn't surprise us. Actually not all three of those weren't overly surprising based on forecasts and other companies comments. So that was where it was at. I would say a high portion of what we're seeing right now to your question, is the destocking activity going on? It's hard to peg exactly when you've flushed that through the system, but I would say it's probably going through the first quarter and somewhere into the second quarter. You kind of work your ways through that and you get kind of back to normalized levels.

So as you look at the forecast by way on the DuPont side, that's kind of what we teed up, a lighter first half of the year; second half of the year about where we expect with the leverage to the bottom line on our growth rate, very similar to what we said at the guidance at the November Investor Meeting, but a little bit more muted in that first quarter and into the second quarter based on the destocking. And maybe just want to overall comment also, if you look at the -- all the DuPont end markets, I would say when you break that down, a percentage is -- about 75% of the portfolio did exactly what it did all year and then the soft areas I just mentioned was maybe 25% of the portfolio where we're seeing that destocking take place, and again, that will correct itself over the next few months.

Operator

And next, move on to Chris Parkinson with Credit Suisse.

Chris Parkinson -- Credit Suisse -- Analyst

Great. Thank you. It seems there are a few moving parts within Specialty with certain end markets trending fairly well and others showing at least some degree of weakness. Can you just parse out the key growth trends specifically for Nutrition & Biosciences, and maybe just hit on anything on E&I and S&C? And just whether or not, any near-term cautiousness, would you characterize that as being driven by China trade tariffs versus something else you're seeing in that end market? Thank you.

Marc Doyle -- Chief Operating Officer for the Specialty Products Division, DowDuPont and Chief Executive Officer-E

Yeah, Chris, this is Marc. Let me take that one. There have been high levels for N&B, we're seeing strength in most of the segments. The food and beverage market continues to be solid for us, probiotics obviously, continues to be a star driving growth in Asia in general and that includes Asia's specialty food ingredients, our systems offerings are continuing to gain position there.

The area of weakness is more on the Industrial Biosciences side and this is really connected to, we think, temporary factors, including US residential construction. We have a lot of sales of the Sirona (ph) product into the corporate market and that was impacted and then the sort of dynamics in the oil and gas industry have an effect on our microbial control business. And so those are the two areas that we're tracking and expecting to see some improvement.

In terms of the other segments you mentioned, I mean E&I is kind of a continuation of what we've been saying for the last couple of quarters, which is photovoltaics has continued to be a tough space. Although volumes are coming back, we are still suffering a lot of pricing pressure there. And we are expecting that to improve through 2019 and semi continues to be a bright spot for us. Consumer electronics market was down in the fourth quarter, as we mentioned, from smartphones, but we are expecting, again, a recovery in the second half of this year. And Safety & Construction (inaudible) I'd just say, across the board a lot of strength in end markets there, and that's a real bright spot for us through 2019. US residential construction is less than 20% of that of the Safety & Construction space. That's the only soft spot for us right now in S&C.

Operator

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

John McNulty -- BMO Capital Markets -- Analyst

Yeah, thanks for taking my question. Jim in MatCo it seems like -- it seems like there's a lot of levers that you're looking to pull to try to shore up things. I guess, as we look through the year and you get a little bit past this destock phase, I mean look, the first quarter numbers looked pretty -- pretty difficult. Like can we get to a period where you're down high single-digits for the year in that business with all the levers that you're pulling and maybe can you walk us through some of those levers that you do have at your disposal now?

Jim Fitterling -- Chief Operating Officer, DowDuPont Materials Science Division and Chief Executive Officer, The Dow

Good morning John. Sorry, I'd say a couple of things. On the core business, we were down about $120 million in the quarter. The things that we're trying to do right now, obviously pricing has stabilized and it's starting to improve on plastics, and I'm seeing some signs of that on the pMDI as well. And so that will help us as we build through the quarter. Second quarter, third quarter are typically the strongest demand quarter. So we'll build into that. So we're going to have to see kind of a mirror image on the first half of the year to what happened in the back half of '18. But that's what we're driving toward. As I mentioned on the broadcast, we were off on CapEx, so we finished the year at $2.5 billion of CapEx and I think we're going to stay at those kind of levels on CapEx, so that helps our cash.

As we continue to separate out the three divisions, that's going to obviously help some of the cost burden and help us get the stranded costs out through the year as well. And then we're going to defer some spending, it won't be anything that will in -- damage plant reliability. We will still continue to do maintenance and those kind of things, but we'll defer some discretionary spending that we don't need to do right now into latter half of the year or even into 2020 depending on how long the macro continues.

Operator

And next I move to Steve Byrne with Bank of America Merrill Lynch.

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

Hi, thanks. This is Ian on for Steve. Wanted to follow up on the outlook in Material and in Dow and Corteva, and appreciate you aren't giving guidance for the segments today. I think some investors might be a little confused about the first half and one quarter outlook taking into account there should be significant synergies in both these businesses. So any color you can provide on the bridge to how we should think about full-year EBITDA for those segments would be helpful. Thank you.

Jim Fitterling -- Chief Operating Officer, DowDuPont Materials Science Division and Chief Executive Officer, The Dow

Yeah, on Materials Science, what I would say is, we continue to see the businesses grow at about 1.5 times GDP, so that -- from a demand standpoint, I do not see a demand problem. Most of the pressures that we felt toward the end of the year were really oil price and spread compression pressures on top of the negative sentiment that was developing through the fourth quarter. And so, obviously, we're turning the corner on that right now and trying to rebuild that and I think it will take us through the first quarter and into the second quarter to get that built back.

Having said that, the new capacity that's coming on in our industry this year is not all that much. Most of the new capacity, the biggest amount came on in 2018. So at these rates, it looks like operating rates are going to continue to increase throughout the year. And then obviously, I'm not trying to predict oil price, but oil price hit the low 50s in terms of dollars per barrel. So if we see any strengthening in oil price, that would be helpful through the year.

James C. Collins -- Chief Operating Officer, Corteva Agriscience and Agriculture Division of DowDuPont

And Ian, this is Jim Collins. For Corteva, it's really -- it's really kind of the same story for the first quarter and the first half, kind of three core messages. I mean you're right, we've got some good tales growth, we've got the synergies flowing through, but those are being offset first by some pretty significant currency headwinds and you'll see in the outlook, come about -- well over $300 million of top line hit, mostly due to the Brazilian real. We pick up with our -- we pick up a lot of euro exposure too here in the first half, along with some of those Eastern European countries. In addition to that, we have a little bit of timing going on. We had some shift of some revenues that kind of moved early into that safrinha season and into the fourth quarter. And then these market facilitation program payments that resulted out of USDA's work with the Trump administration on helping growers, some of these guys have lot of cash right there at the end of the quarter. So they went out and bought up a little bit early. So we saw some North American volumes that hit early.

And then I'd say when -- maybe the third offset is cost of goods. We're picking up some raw material costs from shipments in from China as they worked on some of their environmental reforms and it's moving some of those raws (ph) up and then as we increase the penetration of some of these new products, our royalty -- our royalty rates are moving up on us a little bit. So that's kind of -- that explains the half. We not really -- you're right talking about full year at this point. We will give you some more color on that a little bit later, but -- and I think thinking about the year that -- we will be generally up on EBITDA and we'll be able to talk about that as the full-year really unfolds.

Operator

And next we'll hear from Jonas Oxgaard with Bernstein.

Jonas Oxgaard -- Bernstein -- Analyst

Morning guys.

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

Good morning, Jonas.

Jonas Oxgaard -- Bernstein -- Analyst

One of the bright spots last year was the pricing in transportation. It was up quarter after quarter after quarter. But in your guidance for the year, you say, oh, it looks like you expect overall pricing to be about flat. But -- and you talk about transportation being offset by electronic. But electronics was only down about 1%. So, are you expecting the transportation price gains to cease or how should we think about this?

Marc Doyle -- Chief Operating Officer for the Specialty Products Division, DowDuPont and Chief Executive Officer-E

Yeah. Hi Jonas, it's Marc. I'll take that one. No, we're expecting to continue to see some pricing this year roll through in Transportation & Advanced Polymers based on continued tightness in the nylon chain and our performance continues to be strong there in terms of both finding new applications for high temperature and specialty nylons, and we expect the -- the industry is going to continue to kind of operate at about the same levels as 2018. So I think we'll see some more pricing. We do have some price pressure in E&I that came through in the fourth quarter associated with (inaudible) largely. And as you said, it doesn't offset the pricing gains in the other segment and so net net, there's some benefits there that will probably continue through 2019.

Operator

And next we'll hear from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks for taking my question guys. Good morning. I just wanted to review my assessment of the guidance. It looks like on first blush, the Q1 operating EBITDA may be in the $4.5 billion to $5 billion range. I know it's difficult to guide explicitly. And then the full year, it looks like it could be down a little bit. I guess, is that right or are you expecting year-on-year growth in both full-year Q1 -- sorry, Q1 and full-year EBITDA? Thanks.

Howard Ungerleider -- Chief Financial Officer, DowDuPont and President and Chief Financial Officer, The Dow Chemical Compa

Yeah. Arun, maybe we can take it offline and we don't give an exact number. I would say when you look at the slide, operating EBITDA, we're guiding down low teens percent, but it's really three different stories, right. It's something that -- the Jim Collin's discussion around Corteva, around stronger second quarter versus first quarter because of the seed shift with the commodity prices. Fitterling already covered the MatCo piece around building margin back. So the first quarter is probably going to look more like a mirror image of Q4, although with a little bit of the averaging effect because we entered December at the low margin point of the quarter. So that's how we enter January and we're rebuilding back. I mean Jim talked about the three and three polyethylene in January and February and then already some announcements out on isocyanates and then I'll let either Ed or Marc talked about SpeCo (ph), if you want to give any more color on that.

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

Yeah, no look, I think the SpeCo will and I think the first quarter will be our lightest, probably bleed a little of that destocking I talked about going into the second quarter and then we're expecting normal trends the second half of the year for a growth rate from an EBITDA standpoint and leverage as we talked about at the Investor Day, at least 1.5 times on the leverage side. So we will build back there and it's very clear talking to our channel partners that you know the destocking has taken place. By just one data point, the biggest weakness we saw was auto and it was auto in China. And you know the auto builds were down 18% and -- but car sales actually were down 13%. So you kind of see at the high macro level that the destocking is taking place, which probably is good once we get through it.

Operator

And next to move on to John Roberts with UBS.

John Roberts -- UBS -- Analyst

Thank you. Did you only give full-year guidance for Specialty Co, because Dow and Corteva don't plan to give full-year guidance given the less predictability of their businesses or do they plan to give full-year guidance when they're independent?

Howard Ungerleider -- Chief Financial Officer, DowDuPont and President and Chief Financial Officer, The Dow Chemical Compa

I'll cover MatCo. This is Howard. I mean, no, we do not plan on giving full-year guidance for Dow. I would tell you that we tried that last year. We gave the full-year guidance. I would say the Bulls didn't like the numbers we gave, the Bears didn't like the numbers we gave. We met the guidance that we delivered back in January. So we're going to do it one quarter at a time, we'll try to give you all the moving parts as best as we know, and then you can insert the margins per the different capacities that you would expect.

James C. Collins -- Chief Operating Officer, Corteva Agriscience and Agriculture Division of DowDuPont

Yeah, for Corteva, clearly a lot of moving parts in the market. So we were feeling good about giving first half, which is the bulk of our business in 2019, so it's pretty indicative of how our -- of the kind of how our year is going to start. But we will be giving a lot more color on how we view full year as we go forward at the interactions we will have with you guys, and we'll keep updating that as it unfolds.

Operator

And our final question today will come from Robert Koort with Goldman Sachs.

Robert Koort -- Goldman Sachs -- Analyst

Thank you for squeezing me in. Ed, I think you talked about destocking ending sometime in the first half, and I guess I'm struck by -- on the downside of things, there's supply chain, procurement officers that maybe thought they could buy something cheaper, so that's part of why there's destocking there. You mentioned the auto markets in the DuPont business book. What other conditions are out there that leads to such an extended destock cycle, and how do you calibrate when it returns? Is that the order books you see out there, is it a hunch, is it some historic precedent, what gives you that (multiple speakers)?

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

One data point I would point to, there's a lot of third-party forecasts out there on some of these different end markets and you know auto builds globally, maybe just use IHS. They are still talking about auto builds being down 3.5% first quarter; about 1% second quarter, then building up the 4% to 5% in the second half of the year. So you could kind of -- kind of I think as an indicator of kind of how you'd see the destocking take place more so than the downturn on the auto build. I think on the smartphone side there's four or five forecasts out there talking to you know the cellphone makers and some are slightly up, some slightly down, but I'd say you know cellphone sales look like they were flattened out in 2019. So again the destocking is happening now. But it's not like there is a continuing drop in demand in the business. And I'd also say on the housing side, well, that's the smaller of the three soft area. There's clearly forecasts out there, third-party forecasts that say housing is going to be up 2% on the year, but actually down 1% in the first quarter. So again, I think those trends all foretell a little bit extra severeness with the destocking. It's like down market and that will recover.

Lori Koch -- Investor Relations

Thank you everyone for joining our call. We appreciate your interest in DowDuPont. For your reference a copy of our transcript will be posted on DowDuPont website later today. This concludes our call.

Operator

And that will conclude today's conference call. We thank you for your participation.

Duration: 60 minutes

Call participants:

Jennifer K. Driscoll -- Director, Investor Relations

Edward D. Breen -- Chief Executive Officer of DowDuPont and Executive Chairman for future DuPont

Howard Ungerleider -- Chief Financial Officer, DowDuPont and President and Chief Financial Officer, The Dow Chemical Compa

Jim Fitterling -- Chief Operating Officer, DowDuPont Materials Science Division and Chief Executive Officer, The Dow

Marc Doyle -- Chief Operating Officer for the Specialty Products Division, DowDuPont and Chief Executive Officer-E

James C. Collins -- Chief Operating Officer, Corteva Agriscience and Agriculture Division of DowDuPont

Lori Koch -- Investor Relations

PJ Juvekar -- Citigroup -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Jeffrey Zekauskas -- J.P. Morgan -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Chris Parkinson -- Credit Suisse -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

Jonas Oxgaard -- Bernstein -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

John Roberts -- UBS -- Analyst

Robert Koort -- Goldman Sachs -- Analyst

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