DuPont de Nemours, Inc. (DD) Earnings Call Transcript & Summary

Welcome, and thank you all for standing by. [Operator Instructions] Today's call is also being recorded. [Operator Instructions] And I would now like to turn the call over to Mr. Steve Tusa. Sir, you may begin.

Thanks, operator, and thanks, everybody, for joining us for, I think, what is the last fireside chat of the day. We're very happy to have DuPont. Myself and Jeff Zekauskas on the line, hosting Ed, Lori and Leland from DuPont. As usual, send me questions on e-mail, if you'd like. And we're going to kick it off with Ed making a few comments probably in reference to the slide deck from this morning than anything else, and then we'll move right into Q&A. So with that, Ed, take it away.

Great. Thanks, Steve and Jeff, and it's great to be on here today. I'd rather have seen everybody in person, but it is what it is, and it's the right thing to do, so thanks for hosting it this way. I just -- let me just start off by saying I'm excited to be back as CEO of the company. I'm really highly energized. We've put a lot of things in motion in the last few weeks, which I'm sure Steve and Jeff will talk about over the next hour here, but really excited to be here with the team. And by the way, Steve, I also want to acknowledge, I was reminiscing earlier today about, I think, you've been covering me since the early 2000s when I ran Tyco for that whole run. And here you are back, again, covering a company I'm running. And I always love reading your materials and Jeff's. So it's great to have you focused on us going forward, also with Jeff. All right. I just want to make one overall comment. Our company has done, I think, a great job handling a very tough situation with the coronavirus. I'll give you a little more detail on that, but our employees are all safe. Mostly everyone is back to work with a few exceptions, and the team has really pulled together on the supply chain side, the logistics side, the manufacturing side to really pull things together quickly. By the way, I will talk today about some of these things that we've put into place: a little more rigor around our operational discipline, some additional cost actions we're taking. We're very focused on the N&B-IFF transaction and getting that right and getting it to close when we want to do it. We have a reinvigorated effort on working capital. We did not do well on that last year. We plan on doing very well on it this year. We're very focused on noncore assets being sold, all are in-flight right now, one just closed a few weeks ago, and very focused on our growth initiatives that we'll talk about. Let me just acknowledge the first chart in the deck that we posted, which was guidance. I think it's important that I give you a kind of a little highlight around that, and let me start with revenue in the first quarter. We took $100 million out from our prior guidance, and that's all related to the coronavirus. So we're losing $100 million in sales due to the virus. The impact on EPS of that is $0.04. Now we are highly confident that we're leaving the EPS range at $0.70 to $0.74, which is what we said on the fourth quarter call, and we're making up that $0.04 with additional cost actions, mix enrichment that we're having in a couple of our businesses. And one I would highlight right now is obviously our protective garment business, which is made of Tyvek, which is a nice margin business for us. It is obviously shipping more than we would have before because of the virus. Let me give you just a little color on each of the segments. And I'm going to give you the impact of the coronavirus, so you can kind of get it by business for those that who want to tweak some models around. And let me start with the N&B business. We're losing about $40 million of revenue, $15 million of EBITDA. And that's, again, just because of the virus. And that several of our customers' factories were down in China, so we weren't shipping to them. And I don't expect that we'll recover that in the quarter and N&B as a business is kind of lost. In T&I, it's about $40 million revenue impact, $15 million to EBITDA, mainly into the auto business in China. You all know that the numbers are significantly down over there and February numbers were really bad. And -- but we will, in T&I, make it up through mix enrichment and cost actions that we took. And then in E&I, it's only about $20 million of revenue, $10 million of EBITDA. We probably lose that for the time being. We might get that demand back later, but we won't make that up in the quarter. And S&C, safety and construction, it ends up being neutral to revenue, positive to EBITDA, again, because the garment sales are so much higher. We do have some weakness in China in the water business. It's big in residential over there and industrial, and that is down. But it's been more than made up on the garment side. So when you wrap the whole thing together, a $0.04 EPS impact from corona, but we make it all up on mostly mix, cost actions being taken across the platform. If I go to the full year, we've reduced the revenue by $200 million from prior, so it's somewhat of a minor tweak to the total number. But that's the $100 million we lose on the sales in the first quarter from corona, and we took about another $100 million out for auto that probably hits in the second quarter mostly just because of things haven't picked up yet. From an EPS standpoint, we don't know how to gauge obviously the impact moving forward on corona. If things resolve quickly, we'd be in obviously very good shape. But it is a dynamic situation. Obviously, we're monitoring it daily with our supply chain. So we're leaving our full year guidance in place. And obviously, we'll readdress that if we have to when we do our first quarter earnings depending how things play out over the next days and few weeks. So Steve, I think with that, I think that's kind of an overview kind of high level where we're seeing things. And I'll turn it back to you for questions.

Great. Thanks. So can we just put the -- I got to kind of check the box on this coronavirus stuff. Can we just put that in perspective? So I guess it's $100 million of impact on a -- I guess 15% of that $5 billion is China related. So it's kind of a -- you're thinking it's like kind of a mid-teens decline that is probably more generated towards the end of the quarter than the beginning of the quarter. Is that kind of the way we should think about these impacts?

Yes. It's about 10% to 12% of the revenue there declined in China. And I'd say mostly it's February and March where you see it. Again, we jumped on a lot of cost actions and expedited them and loosened things up. So I feel, again, in total, we're in good shape. But -- all right, let me just give you a few more numbers that maybe -- on the coronavirus specifically in China. As you highlight, Steve, it's about 15% of our sales is China, so about $3.3 billion of revenue. But we have 3,500 employees over there at 13 manufacturing sites. And out of the 13 manufacturing sites, just to give you a feel for it, 12 of the 13 are up and running, 9 of them are at full capacity, 3 of them are at north of 70% capacity and ramping up every day. And 1 facility we have, which is in Wuhan, where this all started is still shut down. And that's going to start to come up, it looks like, on March 20. So our teams are really cranked up again very, very quickly. And we're not seeing any significant supply chain issues in China, getting things to our factories that we need. So we're really running good. And I would just give you one other -- we only have one other very small water factory that's closed, which is in Italy that the government shut down about 1.5 weeks ago with what's going on over there. So again, in general, our people are getting back to work pretty much running where we need to, not 100% but getting close.

What is the -- can you help us size the offset from the stuff that is being sold in the safety-related sales? Maybe size that -- how big that business is for you guys globally, and then what you've seen in the quarter as the offset? For example, 3M yesterday said that their revenues core would be down moderately versus being up moderately, and they had about 1 point of total company benefit from sales of the masks and other things that they sell in from a safety perspective. Can you just give us a bit of a backdrop on what's that bucket of offsets? How big that is? And what kind of benefit you're seeing here in the near term to offset what's going on from coronavirus in China?

Yes. So the impact that we're seeing in the quarter in increased sales of garments -- protective garments is about $40 million of revenue, and it's a very nice margin business. As you know, Tyvek's a very good, profitable product line. I do want to highlight, we did not raise prices at all in the market, and we actually donated a fair amount of garments for medical workers and first responders over in China. Do remember, again, I certainly want this thing to end el pronto here with the virus, but these are kind of used on a daily basis and you need to use a new suit after you use it. So we're shipping it out and making it literally as fast as we can. We use third parties to actually put the suits together in a lot of cases, and we've really ramped them up. But we only have so much capacity we can crank out the door. But that's about the positive impact, is about $40 million of revenue, very nice margin on the business. As I mentioned, by the way, there's obviously a couple of offsets to that. That's the auto business in China. And you saw the numbers on car sales in February being down over 90%. Again, that will come back here at some point. And the other negative was the water business, but, again, made it up elsewhere. And -- by the way, the demand would be there if it wasn't for the virus. It's been very nice water growth over in the China market. But during this period, it just died down. So my gut is as this thing subsides, that will pick up.

And then globally, when we think about how big your kind of protective -- related protective garment business is as we perhaps start to sell more of that stuff outside of China?

Yes. So the whole Tyvek enterprise for us is about $1.1 billion. I'd say it's about 1/3 protective garments globally.

Got it.

And the interesting thing on Tyvek, by the way, very similar to Kevlar. I know everyone thinks of Tyvek as house wrap. But two of the other very big markets for Tyvek are actually the protective garments, as Lori just mentioned, and the other one is medical packaging. And the medical packaging is actually our -- well, putting aside the virus situation, medical packaging is our fastest-growing part of Tyvek normally. So it really has nice other applications we continue to develop.

But that's not within that 1/3 you just mentioned, correct? That would be outside of that 1/3?

Correct.

Correct.

Right. And so that 1/3, I mean do you have the capacity there to double that in any given year?

No. So we're -- as you might know, we're putting a new Tyvek line in right now. It's our biggest capital expenditure that we have. But what will happen when we do that, we will get significant increased capacity out of that, but we will also shut down our 2 oldest Tyvek lines we have that aren't as productive from a manufacturing standpoint. So we'll increase, Lori, our capacity by about...

About net 10%.

Yes, about 10% to 15%, somewhere net...

And where were you running on a utilization basis before all this happened?

At 100%.

Flat out.

Yes, Okay. So...

We have incremental capacity that we can release every year through capacity release. And then if we need capacity in excess of that, we go to mix enrichment. So we'll kind of kick off the lower-margin stuff, add the higher-margin stuff until we get this new line around the end of 2021.

Got it. So then when we think about the extra $100 million that you're highlighting for the year, it's unclear to me. Is that related to what's going on today? Or is that just weaker economic trends that you had seen over the last couple of months coming through? Whether it's just weaker auto or other things that are going on out there?

It's -- I mean look, it's basically auto. I mean I don't know where the number is going to settle in, but we were counting on global auto being down around 1%, maybe 2%. And it's obviously going to be down more than that. I mean I don't know what you think, but I saw a report yesterday that auto sales globally would be 83% now instead of 88%, 89%. And I saw another report that said 80%. So it's clearly going to be lower than what we planned on. And again, probably mostly related to the virus situation, but it is...

Right. So that's kind of -- right. So it's auto, but it's kind of virus-related obviously, potentially virus related?

Correct.

Yes. Okay. That makes some sense. When we think about what's going on in the other crisis area of the world, which would be what's happening between the Middle East and other OPEC guys, what is -- can you maybe just talk about how oil price would influence you guys? I think there's probably a bit of misunderstanding about what -- how oil used to influence you guys when you were a bigger company with more commodity chemical exposure versus how it influences you now. Maybe talk about the puts and takes around the decline in oil price?

Yes. By the way, the net is it's very little impact for us and it's because of kind of your opening salvo there. We don't have a lot of those businesses where we get goods sold around, but I'll let Lori give some detail on it.

Yes. So there are favorable benefits on the raw material side primarily in T&I and S&C and then across the board in logistics, so whatever happens with fuel charges. But those are primarily offset by weakness into the oil and gas markets that we sell into. So for example, back to protective garments, we sell those into the oil and gas industry. If those markets are weak, our sales will be down. Within N&B, we saw microbial control into the oil and gas market. So as there's less wells being dug, there's a reduction in sales there. And then we also sell Kalrez and other products within the T&I business that has some oil impact. They're net-net neutral. Whatever favorable things we see on the input side are offset by demand weakness.

What -- how much of your inputs are influenced by oil price ex N&B?

So it's mainly within S&C and T&I. It's hard to size it because some of them are on long-term contracts. So we don't have a rule of thumb like maybe 3M did, but that's where the primary headwind is.

Okay. And it's my understanding that oil and gas for you, though, is like, I don't know, low single-digit percentage of revenues, probably like 2% to 3% or something like that? Or is it bigger than that end-market wise?

It might be in that platform, yes.

It's in that ZIP code. It's not that big of a scheme.

Okay. Got it. I'm going to -- sorry, one -- I guess one more line of question here, and then I'll pass it off to Jeff. So what -- how do we think about the potential for cost action beyond the $90 million? I mean you made the management change. I think there's a view out there that there could be perhaps a bit more rigor around getting costs out. I mean how should we think about the opportunity? Is this a -- there's a lot of opportunity to get like just brute force structural cost out? Or there's an opportunity to be more kind of productive on a run rate year-over-year basis? And can you help us size what the opportunity could be, maybe in the context of using the low end of the $100 million you have today and the high end of $1 billion that you took out when you merged a few years ago? Maybe those are the goalposts with which to kind of discuss what the opportunity actually is?

Yes. So Steve, the -- look, we're expediting some of the cost actions that we want to do and we also upsized them. So I'll give a very detailed kind of report on this when we do the end of the first quarter. But approximately where we're at right now is we're taking out functional costs mostly. And it's going to be about $250 million on a run rate basis. By the way, when we did the earnings call, it was $150 million on a run rate basis. We will get about $180 million of that in the -- in year 2020. Obviously, we missed the first quarter mostly. A lot of this kicks in the second quarter on. So we've kind of doubled from what we said on the earnings, but we were at $90 million in year for savings, and we're going to be double that for the year. By the way, now obviously, I didn't change yearly guidance. I'll say it this way to you. This is Ed Breen's confident version of our yearly guidance that we gave, that I feel way more balanced now than I did as I dug in and studied the details here. So I feel very balanced the way I would normally do it, but that's including this $180 million in year to make me comfortable with that. By the way, I should highlight to -- again, it's mostly functional cost, G&A. Remember, we were going to take cost out anyway, but I want to expedite because we are taking N&B out of the portfolio, and we're taking noncore assets out of the portfolio. And therefore, our footprint needs to be smaller from an overhead structure anyway. And in addition to that, just taking extra cost out. So we are not touching our R&D spend. We're maintaining a robust level of $900 million. And we're not cutting back on any growth expenditures on the CapEx side at all. I don't want to affect our ability obviously to grow the company. So it's really on the G&A piece. We do have a couple of big CapEx projects that are all growth initiated, as I mentioned a few minutes ago, the biggest one being the Tyvek line. And the other one, our second biggest one, which we're really trying to ramp as quick as we can to get it done and get going is our Kapton line because we're maxed out on Kapton because of 5G coming in the shipments into that. So again, I'm not touching where the growth will be but really taking G&A out.

Can this be another $250 million, $300 million? Or can it be kind of $500 million, $600 million?

Over time, I think there's at least another couple of hundred million. But the bigger issue, Steve -- on the cost side. But the bigger issue over time is -- I think for DuPont is how are we going to improve the gross margin line of the company. I've been of the feeling that we can improve that. A lot of that is our factory efficiency program, obviously. And another component of that is price. Now price is a little more difficult in the environment we sit in right today, but I'm just -- generally year-in and year-out, there's a price lever here and there is a deficiency in our factories. So not by creating things like lining Tyvek up really improves our efficiency from some lines that are over 40 years old. But I think that's the next big focus area as we keep working the cost side to streamline in the company. And then the one other area we're working on, but we're doing it kind of modularly, not a big bang theory, is a little more efficiency in our IT platform. Remember, we brought in FMC, we brought in Dow, we've got DuPont assets, so we don't have the most efficient system there. And that's a multiyear program that we'll work on. So that's where, I think, the bigger buckets are over time to improve that.

One last quick one. Is any of that gross margin opportunity driven by product rationalization, where you may just kind of walk away from some sales because there is a bit of a bifurcation between high- and low-gross margin products?

Yes. So Steve, I'm smiling because you said that. At our staff meeting 2 weeks ago, Lori and I launched a program. We're Paretoing every P&L in the company by literally down the country levels, and we're Paretoing every customer. By the way, I've done this many times in my career. It's pretty interesting what you usually find. Some customers, you end up -- you'd say a distributor should handle it. Some, it's a price issue. So we're literally going through that exercise through the company right now. By the way, the -- just as a side note, our gross margins will improve when N&B exits the business by a couple of points probably, but -- by the way, that's no cut to N&B. They're about the highest gross -- or margin profile in the industry, but they just happen to run lower than the overall DuPont portfolio. But anyway, that's the program we're kicking off.

Got it. Okay. Jeff, I'm going to hand it off to you here.

Okay. Ed, I was wondering if you could describe the state of the transaction with IFF in the nutrition business. I think originally, you thought that the transaction might close by the end of the first quarter of 2021 with the idea that there were many different subsidiaries with different tax considerations that had to be all rolled together. Is it possible that you can close that in January of 2021? Or is the end of the first quarter of '21 still looking like a better time?

So Jeff, if I just had to give you a point date that we're all working towards on the IFF side, the N&B side, it's February 1, 2021. And I think you can count that as a very safe date, we're going to do it. Our time lines potentially get us there a little quicker, but we don't want to close a transaction around the end of the year on our books. And so we probably wait 30 days to do it, so I think it's a very safe date to plan on. By the way, we have all of our teams up and running, all the work streams up and running, fully staffed. By the way, just to give you examples, we have a team for site separation; obviously, organization and talent; contracts; purchasing; IP. There's literally like 12 core teams up and running, literally covering everything you need to. So we're making really good progress here. We did file our S-4 -- or anticipate filing our S-4 in the second quarter here of 2020. We already filed the Hart-Scott-Rodino on February 3. So everything is progressing real nice. The teams are working really well together. And by the way, within N&B and IFF, there is just a lot of excitement because of the strategic nature of this combo and the power it should give us some in the industry with the greatest breadth of offering that by far than anyone else has. And by the way, if you really walk through, I would say, some of the key areas we sell into, whether it's on the fragrance side, the personal care side, the fabric care side, the meatless meat market, the breadth of products IFF has and the breadth of products that DuPont and N&B has is pretty unbelievable when you look at what each can do. And I know IFF has put some charts out, I won't go through the detail with you. The meatless meat ones, for instance, we have 5 ingredients. We usually put into a meatless cheeseburger, and IFF has 5 ingredients that go in. By the way, cold water detergent, they have 2 fragrance and encapsulation, and we have enzymes and microbial control. I mean it's really incredible I think what we can do going forward. So the high level of excitement, but February 1 will be the date.

And you made a choice to I think stick with IFF in that you're going to take on the role of the Lead Director at IFF in 2021. But you also decided to leave the Board of Corteva. Can you talk a little bit about your decision to leave the one and to enter the Board of the other?

Yes. Well, I mean Corteva is now a year into it. I obviously never said this publicly. My plan is to do a couple of years on the Corteva Board with the transition. I think things have settled down really nicely at Corteva. By the way, I'm not here to pitch them. But since I am still on the Board and just going to be leaving, I feel very nice about their plan for 2020. I think they've put a solid plan in place. And I just feel very good about where they're at. Their product launches are looking awesome. They're ramping up. Things are happening the way they should. By the way, after the first half of the year being really rough with weather and all that, so I just feel like the IFF, N&B is such a big company. As an enterprise of almost $50 billion, it's so important that we get it right. And I thought some of my attention on the integration and getting that up and running properly, and all that is more important from a -- if I could say, from a shareholder standpoint. Things that need to get done, make sure they go well, so we get the value. By the way, one of the other things I would just point out for those listening is -- forgetting the coronavirus and everyone's stocks being impacted by -- right now. But even when we announced the deal, I think if we prove to the market the power of this combination, and we are the global leader by far with the breadth of what we have also the multiple of IFF can expand past where the multiple of IFF was to begin with. And by the way, there's certainly benchmarks at 2 or 3 other companies in the industry that have multiples that are 400, 500 points higher on a consistent basis. And done right, there's no reason we don't have upside there, let alone what we're putting together, and the synergies from a growth and cost standpoint that we're going to get from the deal. So there's a lot to do there, but I'm really excited about it.

Sure. When -- so DuPont is reconfiguring itself and often, the idea of the electronics business being part of an RMT transaction comes up. You have such experience with RMT transactions. Does a partner have to be relatively the same size in order to do a transaction like this? Or can you do an RMT transaction with a company that has a much smaller EBITDA than you do?

Yes -- no, Jeff, there are certain rules to follow, and I can't take the time to talk about it more, but it's nice to be of similar size. But you don't have to be -- you could do it with a company that is smaller. Oh, by the way, IFF was a little smaller than N&B because cash payments can go back and forth. So as you know, in the IFF transaction, we're ending up with 55.4% ownership of our shareholder base, but we're also getting $7.3 billion of cash from it. So it just depends on how much cash you transfer back and forth and where the debt load of the company ends and are you comfortable with that. So you just have to make that math work. By the way, one of the reasons I like RMTs -- and by the way, not everything I'm going to do in life is an RMT, but I just -- I like it because they're very tax-efficient for our shareholders. And by the way, you don't do it just to get cost. I'd love to do it because of the strategy of creating a great company. That's obviously the reason you do it. So if there is a partner that strategically just makes a lot of sense, again, like IFF and N&B, you get to do it on a fully tax-efficient basis. It's a pretty powerful mechanism. Now by the way, I know shareholders have to wait a year for us to get it done, but when it gets done, we're creating one heck of a company. By the way, I'd also point out, when we get the $7.3 billion of cash, I think most people might understand this, but we're going to use about $5 billion to pay down debt, again, because our EBITDA will be smaller in DuPont, and we want to improve our credit metrics a little bit more even, so that will really be a nice help for us. We will have over $2 billion of excess cash from that deal. And my gut is if the -- hopefully, the market is not like this, but I would lean towards share repurchase at some point knowing that we have that $2 billion of cash. And by the way, highlight is we did put in one of our charts today, we entered the market on a share repurchase starting about the beginning of last week. We're actively going to be in the market here, buying back about $400 million of shares over the next couple of months.

Transportation and industrial comes up as a possible separation candidate, electronics comes up. But I never really hear much about safety and protection coming up as a candidate. Do you look across all of your businesses? Or is safety and protection somehow a little bit different than the other 2 segments?

Well, the other thing, I'll give you one of its big differences. IT is inside a company. It's a mini conglomerate in a conglomerate. So maybe that's why you don't hear it as much, where like T&I, it's not a pure-play. But you know what I mean it's more of a pure-play engineered materials type of business. But quite frankly, let me just clarify. We have enacted a lot of programs the last few weeks internally. I think we can make a lot of improvement internally on what we're working on. So as I said on the -- we said on fourth quarter and I just reiterate it a little stronger here, I'm not looking at doing anything structurally big right at the moment. I'm very focused operationally with Lori and the team on the business. And I want to get things the way I feel comfortable with them first, and we're moving fast. So that -- by the way, I'm not looking at doing an M&A deal right now. By the way, if another water deal came across for a couple of hundred million that I like, of course, I would do that. But I'm not looking at a $2 billion, $3 billion acquisition right now. Now by the way, when I get into the fall or late fall or something, I might change my mind on that as I feel comfort about what we're doing internally. But it's kind of all hands on deck and let's run this thing as best we can. And we're always going to look at strategic alternatives. You know me from my past life too. If there's an opportunity for value creation for shareholders, of course, we're going to look at it. And we'll see as we go down the road, but right now, it's run the company.

Okay. Maybe as a last question, Ed, you had been the Chairman of DuPont and then you stepped into the CEO role, replacing Marc Doyle. What are your intentions as far as the management of DuPont? Will you engage in a search to have a new CEO come in? Do you plan to manage the company over a multiyear period? How do you see yourself as managing DuPont in the future?

Well, I hope my wife's not listening in, but putting that aside, no, I'm not here short term. I'm here to run the company. The Board knows that. Obviously, we didn't announce me as the acting CEO that we were going to go out on a search. I'm back. I'm running the company. And by the way, as I said in my opening comment, I'm very excited to be back running and I think we can make a ton of progress.

Okay. That's great. Steve, I'll turn it back to you.

Great. Thanks, Jeff. Just on that -- on -- following up on that kind of buyback question. You guys have a couple of million bucks -- a couple of billion dollars of maturities coming up. You plan to refi those, I would assume?

Yes. Yes. Yes, we have one coming up in November. I believe it's the next one, so yes.

Okay. And just stepping back to that, the product rationalization commentary. How big is that? How big is that bucket? Is that kind of like, hey, the normal 10% of sales is kind of going to be rationalized over time in favor of the higher-margin stuff? And is that something that you think you can grow revenues through? Or will this be a bit of a drag over time on your revenue growth?

I mean look, if we divest something else, yes, sure that's a drag. But it's not an organic revenue dragging on the business. I mean Steve, when I'm doing this Pareto, we obviously look at a bunch of other metrics too, that I like to look at. And one of them is, secularly, is it in the space we want to be in long term. What is the organic growth rate of the business? What's the return on invested capital? There's a lot of things go into it. So my gut is we'll make some other moves and obviously that will improve our gross margin profile also. But we're really focused on where is the high-growth areas where we can invest our R&D dollars, maybe do some M&A down the road, again, not now. I don't want to dilute the effort here, and continue to change the profile of the company. And by the way, you could still face -- see things in the portfolio, as I do, that are not in noncore. And maybe I want to get rid of the few more things and reinvest that in a M&A deal that makes a lot more sense for us in the future. So that's how we're thinking about it. And then I'll talk more about this on the first quarter earnings call as we get through more and more of the analysis.

And then just on this kind of nylon thing that you saw last year. Any risk to calling a bit of a stabilization in the pricing dynamics there? And then how big is that business? It is exposed to that kind of price fluctuation in that market? I think the story was that the pricing was just artificially high as opposed to it being something that's kind of moving with markets, if you will.

Yes. Well, by the way, Steve, let me give you just a couple of comments. I'll have Lori jump in also. The EBITDA margins this year for all of T&I -- by the way, obviously nylon is a nice piece of that. It's still a healthy 24-ish percent. So this is not a commodity business. I would totally say yes, pricing ran up for 2 reasons: One, there were some force majeures in the industry, which, by the way, are totally fixed now. So supply is full bore again. By the way, it's at a time when the market economics collapsed here and the demand is not the same, so -- and obviously, coronavirus just throws that demand question on top of it. So we kind of got a double whammy. It left us right up here. It just dropped the pricing quicker than I think any of us would have thought. Remember that the pricing started to decline in the second quarter last year. It was not precipitous at all, but the biggest drop now is the -- you'll -- that you'll see year-over-year deltas for us are actually in the quarter we're sitting in now. Then as you model it out, the pricing does decline through the year according to the way we've modeled for you, but it gets less and less as the year goes on, the bigger hit you see right up front here in the first quarter. Lori, do you want to size it?

Yes. So nylon is about a $2 billion business for us, so the predominance of that is in the compounded nylon. So very little of it is kind of what we call titan or straight nylon. We have material compound a bit flat and other type of materials that have a high-end play. So while the price trend may match what the commodity PA 66 nylon price looks like, we are above that from our price perspective because of the added value that we have in the material. So...

Yes. And right now...

But does it move with that price? Like is it a variable price? Or really, you're just chasing kind of whatever market demand comes -- does?

No. So there's distinct markets for nylon. So it's not like we just sell nylon into the market, don't know where it goes. It's with our -- it's a lot that goes into auto. It's custom applications with the automakers or specced in for that model build. It's not easily specked out, so the volume is quite sticky.

Got it. So this isn't really a type -- the type of revenue that's going to move with some variable market price of a commodity. This is much more about -- if I told you auto builds will be flat regardless of what oil price or something does, that business is going to be kind of flattish.

I mean so -- yes, it won't follow oil. Where it did get out a whack back at the end of 2017 was when the nylon market went very, very tight because they were force majeures for some of the providers in this space. So that's what caused it versus some type of demand -- end-market demand dislocation.

But that's, I guess, my point. Sorry to belabor this. If that is now stable, then that shouldn't be a risk going forward. The risk is really just around the end-market demand for that product?

Correct.

Correct. Yes. Steve, we have -- as Lori said, we have a ton of applications in autos with this product. So it's a matter of where is the auto production at, very simply. And by the way, as Lori said, 80% of it's compounded, therefore, "not to monetize the other 20%," we kind of sell at a commodity market. That percent recently was 75%-25% because demand's strong, so a little more was going to commodity. But it should run kind of 80%-20% is the way we'd like to run it longer term. And again, we get specked in. We're in for quite a period of time obviously in a model. So it's a good business just hurting us on a compared this year, but it's good business. And T&I should be able to run its business kind of a mid-20 EBITDA business. And remember, a lot of the work in T&I is application engineering with our customers. It's not as much direct engineering. That's where our strength is, doing the application engineering piece.

Right. Okay. I think that's all the time we have. Guys, I really appreciate you making the effort to be flexible and do the dial-in, the virtual conference. The content is fantastic. We appreciate all the details around the business. Best of luck through the end of the first quarter here, and we'll talk to you in April.

Great. Thank you very much.

Thanks.

Okay. Take care, you guys.

Thanks, Jeff.

Thanks, and take care. Bye-bye.

Thank you. That does conclude today's conference. Thank you all for participating. You may now disconnect.