DuPont de Nemours Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Sydney, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, There will be a question and answer session.

Operator

If you would like to withdraw your question. Thank you. Chris McRae, you may now begin your conference.

Speaker 1

Good morning and thank you for joining us for DuPont's Q2 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer and Laurie Koch, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward looking statement disclaimer contained in the slides. During this call, we will make forward looking statements regarding our expectations or predictions about the future.

Speaker 1

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 ks, as updated by our current and periodic reports, to include detailed discussion of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations to the next question. And to the next question, we will also refer to other non GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials that have been posted to DuPont's Investor Relations website.

Speaker 1

I'll now turn the call over to Ed.

Speaker 2

Good morning and thank you for joining our Q2 2023 financial review. This morning, we announced quarterly results with revenue and operating EBITDA better than our previously communicated guidance. This performance reflects our team's ongoing strong execution, while facing continued volume pressure in consumer driven end markets, mainly electronics. In the Q2, organic revenue declined 4% versus the year ago period despite mid teens organic declines from the Interconnect Solutions and Semiconductor lines of business within including water, automotive, aerospace as well as healthcare, along with continued carryover benefit of pricing actions taken last to all set inflationary pressure. Notably, operating EBITDA, Operating EBITDA margin and adjusted EPS were all up sequentially from Q1.

Speaker 2

After nearly a year long downturn, We also saw a sequential sales lift in Interconnect Solutions of 7%. We also continue to be proactive in taking additional actions within our control to minimize the impact of volume declines. Given near term slowdown in select end markets, while also focusing on optimizing cash generation. Turning to Slide 4, we continue to advance a number of strategic priorities for accretive and value added capital deployment. Yesterday, we announced completion of the Spectrum acquisition, to a leader in critical specialty devices for healthcare end markets.

Speaker 2

This acquisition fully aligns with our strategic objectives of increasing top line growth through customer driven innovation and expanding our industrial technologies growth pillar, while adding to our current offerings in the high growth healthcare market. Spectrum is being integrated into our Industrial Solutions line of business, where it fits nicely with our existing Livio franchise. With ANGIOS sales of about $500,000,000 Spectrum together with Livio that our Tyvek Healthcare Packaging business increases our total revenue in healthcare markets to about 10% of our portfolio with expected growth rates above the company average. Spectrum's year to date performance has been solid and we are pleased that operating results are in line with our deal model estimates, which include an estimated operating EBITDA margin to approximately 22%. We are excited by Spectrum's complementary fit and specifically our ability to leverage incremental growth opportunities, including synergies from cross selling and the complementary accounts, to new and faster product development and deeper design and co development partnerships with OEMs.

Speaker 2

Further on M and A, we continue to make progress with our Delrayn business divestiture and our expectation of closing this planned Transaction around year end 2023 remains unchanged. There has been good interest in the asset to date. Regarding share repurchases, we expect we will complete the $3,250,000,000 accelerated share repurchase transaction launched last November within a month. We also intend to complete our remaining authorization to a new 2,000,000,000 ASR to be executed shortly thereafter. Regarding the water to the district settlement that was announced in June jointly with Kumours and Corteva.

Speaker 2

This settlement comprehensively covers PFAS related claims of Public Water Systems, serving the vast majority of the U. S. Population. Our portion of the settlement is about $400,000,000 and we expect final approval about 6 months following preliminary approval, which we expect to receive shortly. Regarding broader capital allocation goals.

Speaker 2

Yesterday's closing of the Spectrum deal and the new $2,000,000,000 ASR Essentially completes the deployment of excess cash remaining from the M and M divestiture last November. Our current capitalization remains very sound. And as a reminder, we have no significant debt maturities until November 2025. We are comfortable with a net leverage point around 2x as an equilibrium target going forward. Before I turn it over to Lori to review our financial performance, let me add that we remain excited about the visible growth drivers enabled by our technical innovation teams and application engineers who are squarely focused on helping customers solve to their most complex challenges.

Speaker 2

To name just a few, strong growth is expected in the semiconductor industry with the ongoing global investment in new fabs. Overall growth of the semiconductor industry As anticipated to be high single digits over the coming 5 year period, we are the leading materials to enable the next generation of advanced chip manufacturing and packaging, which includes significant technology and support from the emerging generative AI revolution. Within water, we continue to drive growth in desalination and wastewater markets and in helping customers achieve their sustainability goals. Finally, our Auto Adhesives business is well positioned to continue to capture growth with its product offerings in electric vehicles. With that, I'll turn it over to Lori.

Speaker 3

Thanks, Ed, and good morning. Our focus remains on operational excellence and strong execution, and we are pleased to have delivered financial results ahead of expectations despite volume pressure in some of our most profitable lines of business within Electronics. Turning to our financial highlights on Slide 5. 2nd quarter net sales of $3,100,000,000 decreased 7% as reported and 4% on an organic basis versus the year ago period. Currency results in a 1% headwind from dollar strength against key currencies, most notably the yuan and yen, and we also saw a 2% headwind related to portfolio changes.

Speaker 3

Breaking down the 4% organic sales decline, to a 6% volume decline partially offset by a 2% pricing gain, reflecting continued carryover benefit of actions taken last year to offset broad based to the presentation. Volume decline primarily reflects continued demand weakness in consumer electronics, coupled with inventory destocking across the channel and some softness, including destocking in North American construction related markets. Lower volume in these consumer driven end markets was partially mitigated by continued strength in water, automotive, aerospace and healthcare markets. Volume within Electronics and Construction end markets during the quarter was down 15% versus the year ago period, while our remaining industrial based businesses were up about 4 to the operator. From a regional perspective, Europe sales in the quarter were up 4% on an organic basis, while North America and Asia Pacific were down 3% 8%, respectively, versus the year ago period.

Speaker 3

China sales were down 14% on an organic basis, driven mainly by the electronics demand weakness, but increased sequentially versus the Q1. 2nd quarter operating EBITDA of $738,000,000 decreased 11% versus the year ago period, driven by lower volumes and the impact of reduced production rates in electronics as we align inventory with demand. Operating EBITDA margin during the quarter of 23.9 and A expense was down 110 basis points versus the year ago period, driven by volume pressure, reduced production rates and mix headwinds in the High Margin Semi Business. On a sequential basis, operating EBITDA and operating EBITDA margin were up from the Q1. Decremental margin for the quarter was 40%.

Speaker 3

Excluding the impact of absorption headwinds related to reduced production rates within electronics, Decremental margin was below 20%, enabled by aggressive actions taken year to date to reduce discretionary spend. Adjusted EPS in the quarter of $0.85 per share was down 3% versus last year, which I will detail shortly. To the operator. Looking at cash performance, I would first like to highlight that we have made a reporting change effective with today's Q2 results and are now providing cash flow disclosures separated between continuing and discontinued operations. This change is being made to improve visibility into cash flow generation and cash flow conversion of the ongoing businesses.

Speaker 3

On a continuing operations basis, cash flow from operations during the quarter of 400,000,000 to the Investor Relations Act of $123,000,000 resulted in adjusted free cash flow of $277,000,000 and associated conversion of 73%. This reflects significant improvement versus last year on a comparable basis driven by lower inventory. Adjusted free cash flow included a benefit of about $80,000,000 in reduced inventory and a headwind of about $200,000,000 related to interest payments. Optimizing cash flow continues to be a top priority for us. While adjusted free cash flow and conversion improved sequentially, We still have work to do to get to our targeted levels and expect further improvement in working capital metrics by year end.

Speaker 3

To Turning to Slide 6. Adjusted EPS for the quarter of $0.85 decreased 3% compared to $0.88 in the year ago period. Lower segment results more than offset below the line benefits, including a $0.19 benefit related to lower net interest expense and a lower share count. Our higher tax rate and exchange losses during the quarter resulted in adjusted EPS headwinds of $0.08 per share. Our tax rate for the quarter was 23.7%, up from 22.6% in the year ago period, driven primarily by geographic mix of earnings.

Speaker 3

Turning to segment results, beginning with ENI on Slide 7. ENI 2nd quarter net sales of $1,300,000,000 decreased 14% as organic sales declined 12% due to lower volume along with currency headwinds and an unfavorable portfolio impact of 1% each. At the line of business level, volumes for Semiconductor Technologies decreased 19%, while Interconnect Solutions volumes decreased 15% versus the year ago period. The decline in semi tech resulted from a continuation of lower semiconductor fab utilization rates due to weekend market demand as well as inventory destocking across the channel. Chip fab utilization rates in the 2nd quarter averaged in the low 70s on a percentage basis.

Speaker 3

The decline in interconnect was driven by continued weak smartphone, PC and tablet demand along with channel inventory stocking. Our PCB customers in China operate in the Q2 with utilization rates slightly improved from the mid-40s during the Q1, which was a cycle low. The PCB market has been in slowdown for a year now and we are beginning to see signs of improvement within our interconnect business, illustrated by 1st to 2nd quarter sequential growth of about 7% with further expected sequential growth in the 3rd quarter. Sales for Industrial Solutions were flat on an organic basis as pricing and ongoing strength in broad based industrial markets to the operator for the Q1 of 2019. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Operating EBITDA for ENI of $349,000,000 was down versus the year ago period, primarily due to volume declines and lower operating rates to better align inventory with demand, partially offset by reduced discretionary spend. Turning to Slide 8. W and P's 2nd quarter net sales of $1,500,000,000 were flat versus last year as organic sales growth of 1% taken last year, mostly offset by a 4% decrease in segment volumes due to declines in Shelter Solutions. At the line of business level, organic sales growth was led by water solutions, which was up mid teens. Our continued demand for growth for water filtration led by reverse osmosis and ion exchange resins along with benefits from carryover pricing.

Speaker 3

Safety Solutions sales were up mid single digits on an organic basis, driven by carryover pricing and volume strength in Kevlar and Nomex within aerospace and automotive market, especially for EVs, coupled with Tyvek's strength in Healthcare. Shelter solutions were down 12% on an organic basis, driven by demand softness in construction markets as well as destocking, although we do expect a reduced impact from destocking in the second half. Operating EBITDA for W&P during the quarter was $368,000,000 up 6%, while operating EBITDA margin of 24 point percent increased 140 basis points versus the year ago period. The improvement resulted primarily from net pricing gains and disciplined cost control, to the Q3 and full year 2023. Regarding the demand environment, we continue to expect fairly steady demand in most of our industrial end markets within E and I and W and P, although we expect sales moderation in our water business due to slower demand in China.

Speaker 3

Within Electronics, we saw stabilization and some early lift in our interconnect solutions business with 7% to the Q2 and we expect mid single digit sequential growth to follow in the Q3. We believe semi markets likely bottom during the Q2 and we assume that net sales in the second half will improve slightly on a sequential basis. Given ongoing consumer electronics demand headwinds, notably in China, we have tempered the rate of second half growth in prior assumptions. We are adjusting our full year 2023 guidance to account for the slower cadence of recovery in electronics, including our efforts to continue to reduce production to align inventory with demand. In addition, our Q3 and full year guidance now includes to make a contribution from Spectrum beginning August 1.

Speaker 3

For the full year, we now expect net sales to between $12,450,000,000 and $12,550,000,000 operating EBITDA to be between $2,975,000,000 $3,025,000,000 and adjusted EPS to be between $3.40 $3.50 per share. For the Q3 2023, We expect revenue of approximately $3,150,000,000 operating EBITDA of approximately $755,000,000 and adjusted EPS of approximately $0.84 per share. With that, we are pleased to take your questions. And let me turn it back to the operator to open the Q and A.

Operator

Your first question comes from the line of John McNulty from BMO Capital Markets. Your line is open.

Speaker 4

Hi, good morning. This is Bhavesh Lodaya for John. Maybe on the water business, the water business tends to be a bit less Technically, compared to your other businesses, can you add some color on what is driving the softness in China? What changed there since maybe last And what kind of recovery do you expect maybe over the next couple of quarters?

Speaker 2

Yes. We think the next Couple of quarters are just a little bit lighter because of China and it's really slowness in the industrial Economy in China right now, which obviously should rebound here at some point, but we're expecting that to be a little softer in the second half of the year. By the way, that's Growth we've had in that business is double digit growth. So we're just saying it's going to moderate some still growth, but just lower growth on the second half of the year. But as that business has done quarter in quarter out, it grows at a pretty nice clip and I expect as China improves some, That growth rate will pick up also.

Speaker 2

Remember, 70% of that business is a renewable business. That's steady. So I think a couple of quarters, maybe a little later in China is what we're seeing.

Speaker 4

Got it. And then in electronics, great to see the inflection coming in, in the Connect Solutions. We have also seen some positive MSI data points. What are you hearing in Semi Technologies? Like when do you expect an inflection there?

Speaker 4

And maybe any color on your order books for electronics that you are seeing this quarter so far?

Speaker 2

Yes. So just by the way, just back to the ICS one, that started to decline And destocking started about the middle of 2022. So it's almost been kind of 10 months that being in a downturn in the Q1, it was really when it bottomed. And then we did see 7% sequential pickup We're expecting mid single digit pickup by the forecast we have for the Q3. So obviously, that's starting to come nicely off the bottom.

Speaker 2

The semi one is the one we tempered a little more in the second half. We look like we hit the bottom in the second quarter. We are not gauging much upturn in the Q3 in semi. We're assuming we have another quarter kind of near the bottom or just very slightly up from that. And then we think somewhere the inflection point is more in the Q4, but it's hard to tell what month you actually see it.

Speaker 2

So we did pick it up a little bit the forecast in the 4th But not significantly. So that's the thing we kind of tapped down when we gave you the guidance here today. But I think we've seen the bottom in semi and we're seeing the lift begin in Remember, ICS is still negative. It has a ways to come back still, but it was down over 20% and we're starting to write it back, but It will still be negative in the 3rd and 4th quarter on a year over year compare.

Speaker 5

Appreciate the time. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from Christopher Parkinson from Mizuho Securities.

Speaker 6

Great. Thank you so much. If we can circle back very quickly to the ICS side, there's been a bit of a difference between how China handset sales have been trending Of late versus the rest of the Western world in terms of how to think about that. I'd love some comments on how to think about that into the second half of the year, as well as you do have a few customers with some potential new launches in the second half. So just Ed, in terms of the normalization process, It would be very helpful to get some commentary on how to think about that as it turns more into the second half, but probably more importantly, even in the 2024 based on kind of the renewed, I'd say, much lower bar than we've seen in the past, let's say, year and a half or so.

Speaker 6

Thank you.

Speaker 2

Yes. Let me comment, I'll turn it to Laurie. I would just I don't want to say customer names, but we're in good shape this year on the new model is being introduced by a couple of the large cell phone players. So from a market share standpoint, We know which phones we're in and we're in a better position than we were last year. Not that we were in a bad position at all last year, but We feel like we're in a good position with the launch of the new models coming in.

Speaker 2

We know what we're in, in those phones. And by the way, clearly one of the things I think you all know we're in is to the Kapton technology for the 5 gs antenna is a key component for us, along with some other components, but that's a key one. Or you want to just talk about the timing of?

Speaker 3

Yes. On the smartphone and broadly the consumer electronics recovery, that was part of the revision that we had in the second half. To our original expectations on a full year basis. For smartphones, we'd be down about 1% and PCs down about 7%. We provide expectations on each of each of those markets along with industry forecast for smartphones down to be more in the 5% range and PC is to low double digit.

Speaker 3

So, but that does embed year over year growth in the Q4. So it sounds like 1 more quarter of year over year down in the in the Q3 and then recovery in the 4th into a more normal market and most likely setting up for a strong 2024 as those markets walking through the destock and returning to more of a normal demand and growth matter.

Speaker 6

That's very helpful. And this is a very quick follow-up just on the W and P side. You've seen some very, very solid growth out of Water Solutions, But you did have some comments as it pertains to the kind of the second half based on some fairly difficult comps to my understanding. Can you just hit on kind of what's The outlook for this business, just is that just is your commentary solely a function of just the difficult comps and you'd expect kind of a reacceleration in 2024? But if you could just hit on that kind of that cadence and how we should be continuously thinking about that business in the long term, that would be very helpful.

Speaker 6

Thank you.

Speaker 2

Yes. I think the way you look at it, that business is consistent. It is choppy some quarters, just we have a big installation we're doing and all that. So It's not going to be every single quarter, but generally that business grows kind of mid to high single digits pretty consistently. This past quarter, we had even a better quarter than that on the growth rates.

Speaker 2

But again, it can be lumpy, but when you kind of smooth out the whole year, I think that's the way to look at it, Kind of in that 6% to 8% growth range, when you smooth out the year. And look, I expect China activity will pick up. Yes, it's hard to tell if there's a little bit of excess inventory also that is part of it. But we're again expecting a couple to lighter quarters. I have a quarter's width growth in the 3rd quarter, but just lighter than we had in the second quarter.

Speaker 2

And I think again, it's a consistent business and it has been since we had it. So I would expect it to continue to grow in that range.

Speaker 3

And to Ed's comment on the lumpiness, if you put a 2 year stack on the volume, we're up high single digits every quarter. So there is lumpiness comments around sometimes some project work going on, but in general, it's really strong growth for us. And there's no change in our go forward forecast, especially with The requirements are going on around sustainability and the access to seawater. Those are the key growth drivers for us.

Speaker 2

And the key here is there's a replacement business that's 70

Operator

Your next question comes from John Roberts from Credit Suisse.

Speaker 7

Thank you. Ed, is it fair to say that Delrin will be a private equity transaction? It would seem to be Hard for Strategic to do a closing by year end at this point.

Speaker 2

Yes. We're pretty confident we'll close it on year end. I would just say private equity has been interested along with strategic, but I don't want to get into any more than that At this point in time, but I think we're highly confident we'll have a deal. There's been nice interest in it.

Speaker 7

And then secondly, there's been some challenges to the 3 ms PFAS settlement. Are you anticipating having to go through a similar process with your settlement?

Speaker 2

Yes. John, what happened here was very typical of these bigger type of settlements that happened in these class actions. If you go back and look Any of the other big ones, you always get that, I think what you're referring to is the challenge from some state AGs and all that. I don't think by what We're hearing that there's going to be a problem here. We're thinking in the very near future, we get preliminary approval from the judge.

Speaker 2

And as we said in our prepared remarks, it would be about 6 months after that preliminary approval from the judge where we would then be finished with that and make the payment.

Speaker 7

Thank you.

Operator

Your next question comes from Steve Tusa from JPMorgan.

Speaker 6

Hi, good morning.

Speaker 2

Hey, good morning, Steve.

Speaker 8

Can you just give us a bit

Speaker 6

of an update on the I know these businesses aren't the most Raw material centric anymore, but maybe just a bit of an update on the raw material outlook for this year. I'm not sure if you called it out in the beginning of the call, The $100,000,000 you were talking about before?

Speaker 3

Yes. So that was a net hedge fund between price and RAS. And so we did increase that to about $140,000,000 from our to review of $100,000,000 So we have seen a step up and we expect to benefit from deflation. To remind you, it was around the $800,000,000 last year of a headwind that we saw and so we've got obviously a fair bit of room to go to get all of that money back, but we're making really nice progress. Initially, a lot of the deflation is coming from the Energy and Logistics side.

Speaker 3

You can see what the natural gas price that have gotten from the peaks that we saw in the Q3 of last year and with the stabilization in the supply chain, we're seeing nice improvement in logistics. So The one piece that we're working through was just the timing of when that falls through the P and L. So we actually in the Q1 predominantly a little bit in the Q2 actually saw some to the carryover from the escalation in 2022 from a P and L perspective. And as we head into the back half of the year, we'll start to see those benefits that we've been getting from a procurement perspective drop into the P and L.

Speaker 2

Yes, Steve, it kind of takes 4 to 5 months on the raws to work its way through in our system that we bill a customer. So some of this we're obviously going to see now in 2024, But the procurement team has been working very aggressively and Laurie and I meet with them on a very consistent basis because it's a big part of Seeing up on 2024 for us. And by the way, Steve, just as a side note, the margins on E and I, Remember, not much of the walls were in E and I. We only raised prices 2% there. The predominant part of it is going to be in W and P.

Speaker 2

And the thing that affected the margins in E and I is really the absorption charge that we've taken by the way, we're going to take it again in the Q3, we're probably going to take it in the Q4, just to make sure everything's teed up for 2024 And that's affected our like in the 3rd in the second quarter that affected our margins in E and I by about 400 basis points. So Without the absorption, we know we're running that business north of 30 even in a reduced volume environment. So I feel very confident You all watched us run that in that 32%, 33% EBITDA range. I'm very comfortable when I look at our math that we're in good shape there as we rebound.

Speaker 6

And is there any risk around anything you're seeing in pricing in W and P that When you look out to the second half or into next year, any aggression on pricing in those businesses?

Speaker 2

So very Well, the one area we're going to give up some price that we forecasted in the second half of the year is in the construction related markets. We also had to raise very significantly in those markets because of what the raws did last year. So we've made an assumption in this forecast that we'll give up some of the price in there. Otherwise, we're feeling pretty solid across the rest of the portfolio.

Speaker 3

Okay, great. Thanks a lot.

Speaker 2

Thanks, Steve.

Operator

Your next question comes from David Begleiter from Dutch Bank.

Speaker 9

Thank you. Ed and Laurie, how much did Spectrum add to Q3 and 2023 guidance?

Speaker 3

Yes. So in total, it will give you about a little north of $200,000,000 in sales at a 22% margin. It's pretty consistent across the month, so you'll take 2 months of it in the Q3 and then the full 3 months in the Q4. From an EPS perspective, it's really only about a penny on a full year basis once you factor in the loss of the interest income from the cash that we to the deal. So it's more of an EBITDA function versus EPS ratio.

Speaker 9

Got it. And then just on destocking and shelter, where do you think we are? I know you said we're closely in here or it's moderating. How much further do you think we have to go In Shelter Solutions destocking.

Speaker 2

I think it's mostly done destocking by the end of this third quarter. And that's talking to a couple of our key distributors and customers. 1 of the big Fox guys, by way, was doing a rebalancing of all their inventory by moving it around to different stores and regions. That's how they were doing it. And they're pretty much through that process.

Speaker 2

So I think at the end of Q3, we're kind of there.

Speaker 5

Thank you.

Speaker 2

Yes. Thanks.

Operator

Your next question comes from Mike Leithead from Barclays.

Speaker 10

Great. Thanks. Good morning, guys. First question, your corporate and retained business came in a bit better than it historically has. Can you just help us unpack what happened this quarter there and just how that should trend going forward?

Speaker 3

Yes. So we had a really strong growth within corporate M and M. It was driven by the achesives which is the largest segment of it and it's really from the EV growth and the overall auto build growth. So auto builds were up about 16% in the Q2. We would have posted a to a similar number and we see really nice performance in the EDP.

Speaker 3

So that's what drove the improvement year over year primarily.

Speaker 10

Great. And then second, just on ENI, you talked about reducing production rates to help manage inventory. Do you expect that there still be some degree of drag in the second half to earnings? And then just relatedly, how should we expect working capital to finish out this year?

Speaker 2

Yes. We're definitely going to take the absorption this quarter. We're in now 3rd quarter, about 40,000,000 and the same in the Q4 as our plan. So we're really good inventory aligned up very well with demand. So we just feel it's the prudent thing to do right now.

Speaker 2

So that's what's baked into the plan that we did in here today.

Speaker 3

Yes. We saw a nice improvement in inventory in the Q2, about $80,000,000 of a reduction. We'll look to continue to drive that down as we get into the end of the year. Yes, we had an improvement sequentially in both cash generation and cash conversion. We'll look to continue to improve that as we get into the back half of the year.

Speaker 3

Our 3rd quarter is typically our strongest quarter for cash generation because we don't have an interest payment, which we have in the second and the fourth quarter. To pay our annual bonus in the Q1. So the Q3 is the cleanest from that perspective. And just to note that I had mentioned on the script, just to make sure that you We'll move to a continuing ops basis presentation and cash flow. So we'll take out all the noise from the discontinued ops components, which are primarily in this year the funding of the escrow account, which will take place at some point in the second half and then the funding of the other MOB items that we will pull that out and just kind of focus on continuing operations and the make of cash generation.

Speaker 10

Great. Thank you.

Operator

Your next question comes from Josh Spector from UBS.

Speaker 8

Yes. Hi. Thanks for taking my question. I guess first, I wanted to ask on the 3Q guidance. If we look organic sales and EBITDA, you're kind of guiding flat sequentially, but you're talking about ICIS up mid single digits.

Speaker 8

Sounds like raw materials could be a little bit better to help. Typically with ICSF, you get a mix benefit there. So what drives that flat EBITDA? What are some of the Setting items that would keep EBITDA flat versus having it up sequentially on an organic basis.

Speaker 3

Yes. So the 3 biggest items that we had mentioned, first being the water deceleration. So we see some moderation in water as we get into the back half of the year I mean, on a really strong quarter, in the Q2. We had also mentioned that we do expect to have to get back some price, primarily in the shelter to the business within water. And then the 3rd, probably smallest piece, but something worth raising was we do see to some small destocking within biopharma.

Speaker 3

So it's been pretty well telegraphed across some of the other players, and we are starting to see that a little bit in our Livio business in the Industrial Solutions business in EI.

Speaker 8

Okay. No, that's helpful. And I guess when I think about ICS and look into 2024, so I haven't done the full math, but maybe organic, you're down something like 10% this year. I guess when we look at smartphone growth, PC growth, there's not a massive inflection next year. There's better growth forecasted maybe low single digits.

Speaker 8

I guess, how do you think about that ICS business performing relative to that? Do we overbuild some inventory, so we don't get The full bounce back or do you expect it stronger? If you could frame that, that would be helpful. Thanks.

Speaker 5

Yes.

Speaker 3

I mean, it's kind of hard to say at this point how the restocking potentially could happen in those two spaces. We would expect it to perform nicely alongside the market. The one tailwind that will happen for us in a year over year perspective on EBITDA, we won't have those absorption headwinds that we had in 2022. So the predominance of those absorption

Speaker 5

Okay. Thank you. Your

Operator

next question comes from Vincent Andrews from Morgan Stanley.

Speaker 10

Thank you and good morning. Wondering if you can speak just a little bit about the cost work you've been doing kind of past, present and future. Just looking at the Income statement, I've got SG and A down about $76,000,000 year to date, R and D down $32,000,000 and then sundry expense Down 40. And maybe you can kind of contextualize those decreases and how they'll play out over the balance of the year and which segments presumably we're seeing the most and the ones that are having the most macro concerns and maybe just also remind us what sundry expense actually is.

Speaker 3

Yes. So the predominance of Foundry, it's really not even in operating EBITDA. So it's where our interest income comes in. It's also where some gains on asset sales that don't get reported in operating EBITDA or to adjusted EPS comment. So it's not really primarily related to our operating business results.

Speaker 3

There's detail in the queue when that comes out tomorrow about what all of the other specifics are, but that's not really a reflection at all of any of our efforts to control the discretionary spend. From that perspective, though, we have been very aggressive on controlling the discretionary spend to minimize the decrementals And I think we've done a nice job doing that. So in the first half, our decrementals as reported were 40%. If you take out the headwinds from the absorption that we've been driving to reduce inventory, we're more down in the to mid-20s. And so that's really a reflection of the aggressive actions we've taken from both.

Speaker 3

We did a small restructuring to be able to reduce some headcount primarily in the G and A space that we're really trying to keep R and D and marketing and sales pretty clean. And then we have been taking some reductions to our annual discretionary compensation or bonus. That's what you're seeing more so coming in through the R and D line. That would be a piece of that. And then on the SG and A line would be the small actions that we took to reduce headcount as well as the discretionary segment.

Speaker 2

Yes. By the way, we've been tensioning real good. It's our travel and entertainment budgets. We're trying to keep them The sales people are traveling, the application engineers, but we're really being careful on people holding management meetings all over the world and all that. So we're just being We've really put the word out to our team.

Speaker 2

Hey, while we're in a tougher environment here, we'll come out of it nice, but just watch anything on the discretionary side.

Speaker 10

Okay. And then just as a follow-up, Ed, nothing happening presumably on the bolt on M and A side of the table for the rest of the year or Any thoughts there?

Speaker 2

No. No, I don't think you'll see anything obviously the rest of this year and at least well into next Sure. I think I said on the last call, a good year pause. We love where we've got the balance sheet at. As I think Laurie mentioned on the call or I did, we're Going to have leverage exit in the near somewhere around 2x, that's where we want to be.

Speaker 2

And we're in a great spot. I don't feel like we need to do anything. Yes. So we are aware we got to where we need to be. Okay.

Speaker 10

Excellent. Thanks very much.

Speaker 2

Thanks.

Operator

Your next question comes from Frank Mitsch from Fermium Research.

Speaker 11

Hey, good morning. Ed, I had the Riverhouse Benedict at Odets on Sunday. It was very nice. So congrats on that.

Speaker 2

Thank you.

Speaker 11

You haven't had it yet? I highly recommend it. I highly recommend it. Hey, Following up on the M and A question, auto adhesives is still in your corporate line item. When might we expect that to be folded back into one of the businesses and or is that a candidate for divestiture?

Speaker 2

No, it's not a candidate for divestiture. It's very core to us. We like the position we have, especially with the EV opportunity we have, and we're already obviously seeing a lot of wins there. The growth rate has been phenomenal. So we like that business.

Speaker 2

And by the way, we I don't think we're going to make any move short term on Pulling it out of there where we're reporting it at this point in time. We just we've got everything running the way we want. So you won't see anything in the next couple of quarters.

Speaker 11

Okay. Thank you. And then if I look geographically, I mean Europe has been up year over year based on price. What are your thoughts in terms of volume growth in that region?

Speaker 3

Yes, so volume growth in general in Europe is about flat. I would expect a similar performance as we get to the back half of the year. And really the region has been the toughest for us has been Asia Pacific, which we've been highlighting, which obviously is China. The price piece though, it will start to wane as we get into the back half of the year. So we saw it kind of cut in half as it went from Q1 to Q2 and then As we get into Q3 and Q4, we really it would be flat to slightly negative given some of the price that we would have to give back primarily in the shelter space

Speaker 2

Great.

Speaker 11

Thank you.

Speaker 2

Thanks, Rick.

Operator

Your next question comes from Steve Byrne from Bank of America.

Speaker 12

Yes. Thank you. The EPA has estimated several 1,000 water districts that would need to comply with the proposed MCLs. My question for you is, Ed, you've mentioned you think you could get final approval on the settlement in 6 months or so. Do you need a certain fraction of those water districts to opt in?

Speaker 12

And can you comment on how that is going? And do you have a view on how they will comply? Do you expect they will mostly use Carbon or do you think some of them might employ RO or line exchange, your technologies?

Speaker 2

Yes. So look, there is a percent that have, I'll call it, opt in or we can walk away from the settlement. So, by the way, that's a very high percentage and we think It's teeing up that that will not be a problem. Remember, a lot of these water districts have been being talked to by the plaintiffs side This hasn't been done in a vacuum. So they've been talked to along the way here to get to this, to preliminary settlement.

Speaker 2

So I think shortly, as I said, we will get it approved by the judge on a preliminary basis and then you for all the opt ins to make sure you get that done and then you have final approval once you hit that threshold. It's really up to each of the different water districts how they're going to handle that to clean up any PFOS that's in there. So I don't want to comment on that.

Speaker 12

And then You mentioned that 70% of your water business is renewables. I was just curious, I was just curious, what fraction of that are you selling directly to the customer versus going through An intermediary service provider and do you have interest in changing that fraction by getting more aggressive in your own sales force.

Speaker 3

I don't see any change in our go to market strategy. The predominance of his direct as we go to the customers and put the projects in place and we're just replacing the filters, which is where the recurring revenue base comes from. So this is a, As we had mentioned earlier on the call, kind of mid to high single digit grower for us, a lot of opportunities we go forward around the sustainability and then the access to clean water.

Speaker 2

Thank you. Thanks, Steve.

Operator

Your next question comes from Arun Viswanathan from RBC Capital Markets.

Speaker 13

Great. Thanks for taking my question. I just wanted to ask about the electronics market here. Could you just elaborate on the destocking, the volume trajectory, I guess, from here? I think previously you'd expected this year to be the main volume negative hit.

Speaker 13

You'll be facing easier comps next year. Do you think you should grow and kind of say the mid single digit level for next year? Or where do you expect Electronics volumes to be next year. Thanks.

Speaker 3

Yes. So we as we had mentioned, we believe within ICS that we'll continue to see to sequential improvement as we head into Q3 and then I mean a little bit of potential improvement as we head into Q4. In the semi, we don't see a material bump in sequential sales until we get into the Q4, but definitely the year over year volume headwinds We'll start to ease and we see full year overall E and I organic growth of about 10%, and that's primarily a volume reflection of product price within that segment. So, it's probably a little early to call what 2024 looks like. I think there's a Pretty good sense that it would be positive just given that you won't have a destock going on even if the demand is flat, which would be hard to see.

Speaker 3

You don't have that headwind from the destock year over year. So we're really encouraged as we head into 2024 from the tailwinds that we'll see from not only market recovery in to the electronics, but also the lapping of the absorption headwinds that we've taken this year to control inventory. And then the further benefit from deflation as it fully runs through our P and L are kind of the key components that we're keeping track.

Speaker 13

Great. Thanks. And just real quickly on the share buyback plans. So you'll be completing the 3.25 very soon. Could you just describe how we should think about The other $2,000,000,000 that you commenced shortly thereafter, would that be done ratably or how should we think about that, how it flows in?

Speaker 13

Thanks. Yes.

Speaker 3

Yes. So it will be similar structure as to the first 3.25. Yes, we'll complete that within a month and then shortly thereafter, we'll to execute the $2,000,000,000 ASR, so you'll get 80% of the shares upfront and then you'll get the 20% clean up in the back and it probably will take us about 6 to complete that full program. It's usually about a quarter for every $1,000,000,000 of shares that you're taking out. Thanks.

Speaker 10

Thanks.

Operator

Your next question comes from Mike Sison from Wells Fargo.

Speaker 5

Hey, good morning. In terms of Semi Technologies and Interconnect Solutions, I think historically after Destocking event, you do see some restocking. But given it's taken so long for the destocking to end, how do you think that plays out this time around? Is there any differences Between the regions on that.

Speaker 3

Yes, I mean, it's hard to say what everyone's going to do with respect to the restock after coming through such a So probably a little too early to say what's going to happen from a recycling perspective, but it looks like all things are probably going to a nice recovery next year. I mean, everyone to the stockholders' calls and it's been no matter what point you all with the stabilization that's happening in the supply chain, generally everybody seems to be in that boat.

Speaker 5

Got it. And then just a quick follow-up. ENI has historically been above 30% for EBITDA margins and sort of get back there, is it just simply getting all the volume back.

Speaker 2

Yes, it's really 2 things. You're getting the volumes back, but remember a point I think I made earlier when Steve Tusa was on. The EBITDA margins ex the absorption in the Q2 were already over 30%. So the absorption is what pulled it down the charge we So there sort of expanded the 26.6 ish number. So we know we can even in a softer volume environment, we're running it a little north of 30%.

Speaker 2

And as you said and I said earlier, we run this business 32%, 33% EBITDA margins and we'll get nice throughput as the volumes continue to come back.

Speaker 3

Got it. Thank you.

Speaker 2

Yes, thanks.

Operator

Your final question comes from Patrick Cunningham from Citibank.

Speaker 1

Hi, good morning. Is there any update to your expectations for $20,000,000 in synergy capture from Spectrum and what should we expect for the cadence there?

Speaker 3

Yes. No updates to that. We still But, dollars 20,000,000 it probably will take the better part of 12 to 18 months to get the full $20,000,000 out. I mean, obviously, for us, to this more of a revenue synergy opportunity as we bring the 2 portfolios together and merge our expertise in biopharma with their expertise in medical device from a revenue synergy perspective.

Speaker 1

Got it. That's helpful. And how do you Expect the Healthcare business to trend throughout the year, both on the legacy and the Spectrum side. There's been some commentary pointing to pockets of destocking as Companies deplete safety stocks. Have you seen any of that from any of your businesses?

Speaker 2

Yes. So our Livio business, I think Laurie mentioned this a little while ago On the biopharma side, we're seeing some destocking there. And I think I heard I think 6 other companies I heard in the last week when they to the results that they were seeing some destocking in biopharma. My gut is that last a couple of quarters, just to correct that a little bit. And it was another one of those markets just like semi.

Speaker 2

I remember I was getting calls from CEOs in the healthcare business to We need more, we need more. And I think just like Sanjay, everyone overshot. There's a little bit of a correction going on there. But I'd say that's Probably the 3rd and Q4, a little correction there. As Laurie mentioned earlier, the spectrum numbers are kind of right along where we thought they would be.

Speaker 2

So they look like they're teed up for the year. We thought they were going to happen the second half of the year here. And I would expect, again, that the growth in our healthcare businesses We'll be above company average, certainly above GDP.

Speaker 1

Great. Thank you.

Speaker 2

Yes. Thank you.

Operator

I now turn the call over to Chris MacRae for concluding remarks.

Speaker 1

Okay. Thanks everybody for joining our call. Just for your reference, a copy of the transcript will be posted on our website once available. This concludes our call. Thank you.

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Earnings Conference Call
DuPont de Nemours Q2 2023
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