DuPont de Nemours Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good day and welcome to the DuPont First Quarter 2024 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 Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you.

I'd now like to welcome Chris Mecray to begin the conference. Chris, over to you.

[Chris Mecray, Investor Relations at DuPont de Nemours]

Good morning, and thank you for joining us for DuPont's first-quarter 2024 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer. We've 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'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-K as updated by our current periodic reports includes 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 basis and exclude significant items.

We will also refer to other non-GAAP measures. A reconciliation to the most directly-comparable GAAP financial measures is included in our press release and presentation materials that have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Good morning, and thank you for joining our first-quarter 2024 financial review. Our results for the period exceeded our expectations, driven by better than expected volumes in all segments. Broadly, the first quarter confirmed that we are past the bottom in electronics and on the road to recovery. Our Semiconductor Technologies business reported sequential sales growth of 8% in the first quarter and 10% year-over-year, driven by a pickup in underlying chip demand and normalization of customer inventory levels, both slightly earlier than expected.

In Interconnect Solutions, we saw a second straight quarter of year-over-year volume growth with volumes up 4%. We did, however, continue to see channel inventory destocking as expected, resulting in year-over-year revenue declines in certain industrial-based businesses, but we believe those conditions have bottomed and our assumed recovery timing is also consistent with our previous expectations. That said, and given first quarter performance, we are raising our full year 2024 guidance for net sales, operating EBITDA and adjusted EPS. Lori will further detail the outlook shortly.

Compared to a year-ago period, first quarter reported sales of $2.9 billion declined 3%. Operating EBITDA of $682 million declined 4%, and adjusted EPS of $0.79 per share declined 6%. We continue to prioritize working capital and delivered significant year-over-year improvement in cash flow during the quarter. In late April, we completed the $500 million accelerated share repurchase transaction launched in February, retiring a total of 6.9 million shares in this tranche and bringing total share repurchases to over 15% of our outstanding shares since November 2022.

Turning to Slide 4, I want to reiterate that we remain excited about the growth potential of our businesses centered around five secular high-growth areas. We are excited about the through-cycle strength of our portfolio as end markets recover from recent destocking headwinds and our teams continue to focus on operational excellence. Almost one-third of sales exposure for our portfolio today is focused on electronics, including leadership positions and strong customer relationships serving semiconductor manufacturing, primarily via consumables used in the chip manufacturing process, as well as serving broader consumer-based electronics markets with films, displays and printed circuit board materials used in smartphones, PCs and tablets.

We are very pleased to participate in the AI-driven growth acceleration within electronics our semi-related products geared towards advanced node chips for data centers and other key AI applications such as mobile products. Electronics end markets have positively inflected and we expect continued volume pickup in both Semi and ICS over the course of 2024. Our water business at 12% of our portfolio constitutes a broad range of filtration technologies and operates in markets expected to generate strong growth, driven by evolving wastewater regulation and the global response to concerns around water scarcity and circularity.

We believe demand for filtration products, which have been impacted by slower project work in China in the last year and associated distributor destocking has bottomed and will begin to recover later in the second quarter. We have excellent leadership positions in various end markets within protection and industrial technologies. Within Industrial Technologies, about 10% of the Dupont portfolio is geared to growing healthcare markets, including Spectrum medical devices, Tyvek medical packaging and Liveo biopharma consumables. We have seen ongoing solid demand for devices and expect to see recovery in medical packaging beginning later in the second quarter. Biopharma product demand is expected to recover beginning later in the year after bottoming in recent periods.

DuPont's next-generation auto-market participation constitutes about 10% of total sales and is geared to advanced technologies enabling secular demand trends for hybrid and electric vehicles within battery, motor, and other applications. Demand for our advanced auto-related products has remained healthy and we have a global customer base that includes EV customers in each region. We see excellent longer term opportunity across our auto-related portfolio.

With that, let me turn it over to Lori to review our financial performance and outlook.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Thanks, Ed, and good morning. Our first-quarter results were clearly encouraging with further signs of electronics recovery mashed with bottoming across our industrial-based end-markets. Additionally, our commitment to drive productivity and operational excellence has minimized decremental margins and has helped to produce significant cash flow improvement in recent quarters. Our results have and will continue to benefit from the restructuring actions announced last November.

Turning to Slide 5, I'll cover our first quarter financial highlights. Net sales of $2.9 billion decreased 3% versus the year-ago period as a 6% organic sales decline and a 1% currency headwind was partially offset by a favorable portfolio benefit of 4% primarily from the Spectrum acquisition. The organic sales decline reflects a 5% decrease in volume and a 1% decrease in price. Lower volume was driven by the impact of continued channel inventory destocking in Water Solutions, mainly in China, and Safety Solutions, most notably for tieback medical packaging and Industrial Solutions for Kalrez parts and Liveo biopharma products. These declines were partially offset by strong growth in electronics, where Semi and Interconnect Solutions volumes increased 8% in aggregate versus the prior year period.

On a segment view, W&P and E&I organic sales declined 10% and 2% respectively, while organic sales in corporate increased 1%. From a regional perspective, sales decreased on an organic basis globally versus the year-ago period with Europe, North America, and Asia Pacific down 8%, 7% and 4%, respectively. In China, sales volumes were up 3% year-over-year as growth in E&I more than offset declines in W&P due to continued pressure in water markets. First quarter operating EBITDA of $682 million decreased 4% as volume declines were partially offset by the impact of lower product costs and Spectrum earnings contribution. Operating EBITDA during the quarter of 23.3% was down 40 basis points versus the year-ago period.

I am pleased with our cash flow improvement as we focus our efforts on optimizing working capital performance. On a continuing operations basis, cash flow from operations of $493 million, plus capital expenditures of $207 million resulted in adjusted free cash flow of $286 million in the first quarter, a significant increase versus $173 million in the year-ago period. Adjusted free cash flow conversion during the quarter was 86%, significantly ahead of last year.

Turning to Slide 6. Adjusted EPS for the quarter of $0.79 per share decreased from $0.84 in the year-ago period. Lower segment earnings, higher net interest expense and higher depreciation more than offset a $0.06 benefit from a lower share count. Our tax rate for the quarter was 24.6%, up from 23.4% in the year-ago period, driven by geographic mix and earnings. Our full year 2024 base tax rate outlook of 23% to 24% remains unchanged.

Turning to segment results, beginning with E&I on Slide 7. E&I first quarter net sales of $1.4 billion increased 5% as the Spectrum sales contribution of 8% was partially offset by an organic sales decline of 2% and a 1% currency headwind. The organic sales decline reflects a 1% decrease in volume and a 1% decrease in price due to the passthrough of lower metal prices. Effective with our first quarter reporting, I will highlight that we realigned certain product lines within our three E&I lines of business. The changes streamline our cost structure while also optimizing certain product offerings to better focus on our customers. Additional detail has been provided on Slide 15 in the appendix.

For the first quarter of 2024, organic sales for Semiconductor Technologies were up 10% versus the year-ago period due to the start of overall semiconductor market demand recovery along with normalization of customer inventory levels and continued strong demand for OLED display materials. We expect underlying semi demand to continue to improve throughout the year and note that our forecast continues to call for semi-fab utilization rates to increase from the low-70s percent that we saw in the first quarter to a fourth quarter exit rate in the low 80s.

Within Interconnect Solutions, organic sales were up slightly as mid-single digit volume gains were mostly offset by the impact of lower metals prices. This was the second consecutive quarter of year-over-year volume growth for ICS as broad electronic markets continued to recover. Organic sales for Industrial Solutions were down about 20% due primarily to ongoing channel inventory destocking for Kalrez O-rings and for Liveo product lines within biopharma markets. We continue to expect to see order improvement over the next several quarters in our Kalrez business, and Liveo biopharma business is also still expected to recover later in the second half. Operating EBITDA from E&I of $374 million was up 3% versus the year-ago period, driven by strength in Semi and Interconnect Solutions and the earnings contribution from Spectrum, partially offset by the impact of lower volumes in Industrial Solutions.

Turning to Slide 8, W&P first quarter net sales of $1.3 billion declined 11% versus the year-ago period due to a 10% decrease in volume and a 1% currency headwind. Within Safety Solutions, organic sales were down low-teens on lower volume driven mainly by channel inventory destocking, most notably for Tyvek medical packaging products. We believe our customers' inventory is close to normal at this point for Tyvek medical packaging. Within Water, organic sales were down mid-teens driven by distributor inventory destocking and lower industrial demand in China. We continue to have active communication with our distributors and believe orders will pickup towards the end of the second quarter.

Shelter Solutions were flat on an organic basis compared to the year-ago period and we expect sequential lift in the second quarter. Operating EBITDA for W&P during the quarter of $295 million decreased 14% due to lower volumes, partially offset by the impact of lower product costs. Turning to Slide 9, I'll provide an update on our full year 2024 guidance as well as our expectations for the second quarter. We are raising our full year guidance for net sales, operating EBITDA and adjusted EPS. At the midpoint of the revised ranges provided, we now expect full year net sales of about $12.25 billion, operating EBITDA of about $2.975 billion and adjusted EPS of $3.60 a share, which now indicates expected year-over-year earnings growth.

For the second quarter of 2024, we expect net sales of about $3.025 billion, operating EBITDA of about $710 million, and adjusted EPS of $0.84 per share. The sequential sales and earnings lift in the second quarter assumes volume improvement driven by favorable seasonality in both ICS and shelter continued electronics recovery and reduced destocking impacts in water and medical packaging. Year-over-year sales and earnings growth in the second half embedded within our full year guidance is expected to be driven by further electronics market recovery, including continued improvement in semiconductor fab and PCB utilization rates, along with our return to volume growth in W&P. Second half earnings drivers include both volume improvement as well as expected mix benefits.

With that, I'll turn it back to Ed.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Lori. I'd like to note that we published our annual sustainability report earlier this week, highlighting the work of our global team to meet our commitments across all aspects of ESG, and I'm pleased with the progress and speed with which we are advancing our 2030 goals. There are three dimensions to our sustainability strategy: innovation, protecting people on the planet, and empowering employees and communities. I'd like to mention just a few recent accomplishments.

More than 80% of our innovation portfolio is expected to advance our customer sustainability roadmap. This is a critical metric that aligns our product development with customers' expectations for both performance and sustainability. We were pleased to be recognized for this commitment by Samsung Electronics, which awarded us as a best ESG partner this past year. On Climate, we delivered another year of strong performance surpassing our 2030 goals, which are aligned with the ambition of the Paris Accord. This past year, we achieved a 58% reduction in Scope 1 and Scope 2 greenhouse gas emissions from a 2019 baseline, exceeding our 2030 goal of 50%. And we achieved a 39% reduction from the 2020 baseline and Scope 3 emissions, also ahead of our 2030 goal.

This past year, we made strong progress in the continued deployment of a company-wide operational excellence framework designed to drive continuous improvement in productivity, including deployment of standardized tools, best-in-class technologies and practices that enhance workflows, reduce errors, minimize waste, and improve safety. Related to this, 2023 was our safest year on record for employees and contractors.

Finally, our strong governance practices underpin our sustainability strategy as we remain committed to transparent reporting on our policies and performance with oversight from our Board. A key focus in 2023 was strengthening the DuPont supplier code of conduct with our new responsible supplier program. These are just a few of the many great examples in the report of how our teams are delivering on our purpose and driving sustainability.

With that, we are pleased to take your questions and let me turn it back to the operator to open the Q&A.

Questions and Answers

[Operator]

[Operator Instructions]. Your first question comes from the line of Jeffrey Sprague from Vertical Research Partners. Your line is open.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Thank you. Good morning, Ed and Lori. I hope everybody is well.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Good morning, Jeff.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Hello, good morning. Hey, Ed, good to see the bottom is apparently in here. And really the nature of my question is, you did a lot of hard work trying to protect margins and minimize decrementals through this protracted period of volume declines. Now that we're heading the other way, I just wonder if you could give us any perspective on, I don't know, costs that need to come back or how you feel about structural costs, and maybe the punchline is just a little bit of guidance on your incrementals as we think about volumes going the other way in E&I.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah, Jeff. So the cost actions we took, the bulk of them will stay in place. I would say out of the $150 million we did in -- we announced in November, we'll get about $100 million of that cost savings this year. And I would say out of the $150 million though, if you get into 2025 and we're really cranking along in all our end markets, we probably bring back about $30 million or $40 million of cost, which is kind of on the factory footprint side, where we'll need to add a little bit of cost there. So that would be it a little bit probably in 2025 on comp because we didn't payout at 100% on our bonus plans and probably won't be -- it could be 100% this year. So maybe that comp year-over-year won't be that different, but certainly from last year 2023, there's a little bit of that headwind there in '24, potentially not in '25.

Incrementals in the second half of the year, maybe just give you that for us as we start bouncing back here. Remember, we get some absorption benefit, obviously, because of the improvement in our sales rate, our incrementals are planned to be around 56% in the second half of the year. And I also think, Jeff, we've derisked the second half of the year now with the baseline we're working off of now. We only have to ramp $340 million in sales first half to second half, which is 6% and our EBITDA is planned in our guidance to ramp about 14% that gets you the 56% of incremental. So I think it's significantly derisked from potentially where we were.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, the 56% is first half, second half. If you look at our margin profile in the second half versus the first half in the implied guide, it is up, you know, almost 200 basis points, the low 25% range, which is a nice tailwind as we head into 2025.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. And Jeff, maybe just one other because the electronics is bouncing back nice. We've always consistently quarter in, quarter out ran that business at like 31% to 32% EBITDA margins. And going forward, remember with Spectrum in there, we press the EBITDA margin just because it's a great business, but they're a little bit lower than the average. So it brings it down like 100 basis points. But having said that, we should be able to run that business as we're cranking back at like 32% EBITDA margin as we get into 2025.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Great. And actually the follow-up question that's going to play into the margin calculus also. If you just think about kind of electronics over time, you know, parts of it sort of being a price down market naturally nature of the business. But when we think of some of the more sophisticated things going on in Semi and the like and maybe other places in the E&I portfolio, how do you feel about your ability to get price or to avoid price down over time in these businesses?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. Well, Jeff, usually the price down is a 1%, that's kind of what we've averaged. So it's not really significant. Having said that, more and more of this portfolio over the next set of years is going to be advanced nodes with all the AI coming. And by the way, the AI then moving down into mobile devices. So -- and as you know, we're advantaged there. That's how we always outgrow MSI by 200 basis points to 300 basis points. So as more of the business skews there, that helps our margins just from a mix perspective, but we also get price on the more advanced platforms that we have in electronics. So ICS will probably still lose price. That's more our PCB stuff there with the laminates and displays and all that. We'll lose a little bit of price, but I got to think we'll do a little better on the chip side.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Great. Thanks for the color.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah, thanks, Jeff.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Thank you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Your next question comes from the line of Steve Tusa of J.P. Morgan. Your line is open.

[Steve Tusa, Analyst at J.P. Morgan]

Hi, good morning.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Hey, good morning, Steve.

[Steve Tusa, Analyst at J.P. Morgan]

I think you guys had said you expected like 10% sequential bounce off the first quarter. This is a little -- the EBITDA -- I mean, good first quarter, but the EBITDA in quarter-over-quarter is a little bit lower than that, more like, you know, 4%, 5%, I guess, on your guide. And anything that changed that view? Was there anything pulled forward in the first quarter that kind of takes out of the second quarter, or just [Indecipherable]?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. No, I think it was more of a reflection of the over delivery of Q1. So originally, when we said a 10% sequential lift, we were guiding to Q1 of $610, so would have got you roughly to $670. So delivering the $682 mutes the ramp a little bit, but we still are now at $710 versus the original $670. So actually some upside to the expectations that we had backin February when we gave that number.

[Steve Tusa, Analyst at J.P. Morgan]

Okay. That makes sense. And is there anything that is, you know, a little worse than you would have expected? It seems like obviously electronics is coming along really nicely. The other stuff may be a little more sticky on the industrial side. And anything that, you know, is kind of standing out is just not coming along as you would have expected on the industrial side recovery?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Steve, it's pretty much as we said last quarter, shelter will be up sequentially first to second, mostly because of seasonality, but that clearly had bottomed-out already the water -- by the way, we just had our manager of our water business over in China the last two weeks and they're saying they're going to start placing more orders towards the back end of this quarter. So that feels the same. Same with the healthcare medical packaging business towards the end of this quarter, beginning of next quarter. And the only two that are delayed on their bottom by the way, but they haven't recovered yet, but this is no change from what we said before is our biopharma business looks more like the back half of the calendar year and our business looks like a second half recovery. So pretty much in-line. By the way, the one other bright spot I liked, we had been negative on growth in China through last year and we had 3% growth in China. So that market has been slowly turning back up for us. And by the way, that 3% was predominantly because the electronics business turned, we were up 15% in E&I in China in the first quarter. So that's turned nicely for us. And our semi customers in China were ordering at about that -- was about that same rate, sales rate, about 15% growth including the local China semi customers, not the multinational. So that was good to see.

[Steve Tusa, Analyst at J.P. Morgan]

Okay. And then just last quickly, any updates on price raws spread? For you guys, I know it's less important these days, but any update there? Thanks.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, we did have a little more favorability than what we thought in Q1 that we believe will hold for the year that contributed partially to the Q1 beat. So if you look at the -- the Q1 beat, it was about $110 million or so on revenue and then about $70 million on earnings. So obviously, we got some upside there outside of volume and that was primarily better price-cost spreads.

[Steve Tusa, Analyst at J.P. Morgan]

Great. Thanks a lot.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Steve.

[Operator]

Your next question comes from the line of Scott Davis of Melius Research. Your line is open.

[Scott Davis, Analyst at Melius Research]

Hey, good morning, Ed, Lori, and Chris.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Good morning, Scott.

[Scott Davis, Analyst at Melius Research]

It's maybe hard to define explicitly, Ed, but you've mentioned a couple of quarters in a row the AI chip and data center benefit. It help us understand the materiality when you think about new chip designs and such and the content of your product that's going to be needed, does it structurally raise the growth rate, do you think over, you know, call it, a five year period or is there enough stuff get cannibalized and it kind of nets out to a slight positive, but perhaps I don't know, I just have no idea. So I'll ask you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. So the AI -- so the data center size for us is about $700 million of our revenue and $250 million of that, a ballpark, it's kind of hard to tell exactly, Scott, but about $250 million is AI specific and that is growing north of 20% right now that base. And I do think it's skewed -- look, I think we're going into a super-cycle in semiconductor here over the next decade because of all this AI. And remember, the AI now everyone is going to push it down into your devices. So it's going to be a pretty broad-based growth market. My gut is in next year, I don't want to get into the forecast yet for 2025, but I got to imagine the E&I business is going to grow high-single-digits in 2025. And, you know, were expecting fab utilization to exit -- starting the year in the low 70s, exiting the year in the low 80s. And I would think we're probably in the low 90s by the middle of next year and that would give us that high single-digit growth rate. And then the AI chips, by the way, really help us because it's our -- it's a higher-margin business in our mix. So it should tee up for a really nice 2025. But that market is going to continue to grow north of 20% here and it's -- it's got a long-cycle coming up.

[Scott Davis, Analyst at Melius Research]

Okay. So material for sure. So just to back up a little bit in Water Solutions in China, I know it's not -- it's a little minutia, but was there a pre-buy or some sort of -- I don't want to call channel stuffing because that's not what I mean. But was there some sort of weird behaviors that, that customer ended-up with so much excess inventory? Is it purely just the macro turned, you know, a little sideways or down on the folks and they were caught with extra inventory?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. So it wasn't one customer, Scott, just to clarify, I don't know if you meant it that way. We have many distributors, but four main distributors in China that do the bulk of our business that we don't do direct, by the way. We do a lot of direct business too. And I think what -- I mean, what they verbalized us obviously and again, our team was just there with them this past week is industrial production slowed down, they were ordering at a higher rate and they had to go through a destock. And the destock by is not as long as some of the other destocks. It looks like if it's ending here at the end of this quarter, it was about five, six months of kind of working their inventories back down. So we think we're in pretty good shape going into the third quarter here. And again, we expect orders to start coming in kind of in the June timeframe to start picking up there. So it's more of the macro more of the macro, I guess, I would say, Scott.

[Scott Davis, Analyst at Melius Research]

Okay. Fair enough. Thank you, Ed, Lori, Chris, appreciate it. Good luck this year.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thank you.

[Scott Davis, Analyst at Melius Research]

Good quarter, next quarter. Great to see you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Okay. Thanks.

[Operator]

Your next question comes from the line of John Roberts of Mizuho. Your line is open. Thank you. Just one from me. Maybe, Lori, you could give us an update on adhesives, multi-base, and Tedlar. I would have thought they'd be down like your industrial segment. They've got some auto exposure there, which was probably weak, but actually corporate sales were up 1% year-over-year. What's going on there?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. So we continue to see strength on the EV side of auto. So as you had mentioned, overall auto builds are weaker right now, but there's still a lot of upside within the EV side. So that was up double-digits in the quarter and we expect that to stay for the year. A lot of the upside in the volume in the quarter came from Tedlar, which is in the photovoltaic space. So we had really nice volumes within Tedlar that gave us the 1% organic for the quarter.

[Operator]

Your next question comes from the line of Chris Parkinson of Wolfe Research. Your line is open.

[Christopher Parkinson, Analyst at Wolfe Research]

Great. Thank you so much. Just want to turn on the ICS side. You've seen a bit of a market-share shift between Chinese OEs versus the Americans and the Northeast Asians. And I know you have exposure everywhere. And at the same time, you've also seen an increase in the sophistication of Chinese handsets. So can you just kind of parse through that in terms of -- in terms of where the market is right here, right now, and how the street should be thinking about your relative content exposures and how we should think about that business recovering throughout '24 and perhaps '25? Thank you so much.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

What do you -- Chris, maybe just high-level that if you go back to the middle of last year, the PCB utilization rates were kind of all the way down in the mid 40s. In the first quarter, they're kind of in the mid-50s. We think, we exit the year in the low 60s. And so in the second half of the year will kind of be in the low 60s. And normal, by the way, for PCB utilization rates is kind of low 70s. They never run in the 90s like the 70s do. So you can kind of see the progression of that plan out here kind of over the next year.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, we continue to see wins within the metalization space more on the circuitry side. So we've seen a nice volume lift in the -- in the first-quarter and we expect that to be maintained for the rest of the year. We have had some share gains outside of that in the premium smartphone space on both the phone side and then the other device side as well with PCs and others.

[Christopher Parkinson, Analyst at Wolfe Research]

Got it. And Lori, my favorite question as a follow-up is on W&P margins. I mean, obviously, over the last few quarters, there have been a bunch of put and takes inclusive of the destocking. But with that progressively improving throughout '24, can you help us just give us the latest and greatest on how you're thinking about the long term margin optionality in terms of op efficiencies, leverage, mix, so on and so forth? Thank you so much.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, we still see the entitlement for W&P margins in that 27% range. And so as you know, they've been challenged in the first quarter, really a function of the lower volumes. There's a lot of heavy assets in that business that take a hit when the volumes are down. We've done a nice job controlling cost to minimize the decrementals to low levels, but that is impacting it. And then the larger impact comes from just the mix side. So the tieback business is down primarily because of the medical packaging destock that's going on that we expect to start to see resolution here at the end of this quarter and then improvement as we head into the back half. And so when you start to see those two items weighing, we do see nice margin improvement first half, second half. So the first half margins will probably stay at that 23% level and then we see them ticking up about 100 basis points as we get to the back half of the year.

[Christopher Parkinson, Analyst at Wolfe Research]

Thank you so much.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Chris.

[Operator]

Your next question comes from the line of David Begleiter of Deutsche Bank. Your line is open.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

And Ed, you only raised the full year guidance by the amount of the Q1 beat. Is that because it's still early in the year? Or are you a little more cautious on the back half demand environment?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. David, no change on our thinking on the back half. It's just -- as I said earlier, I feel good we've derisked the ramp in the year. So I don't feel any different about it. And hopefully, it ends up being a little bit conservative, but...

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very good. And can you just provide us another update on PFAS right now? Thank you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah, nothing significantly new there, David. My -- the next thing coming up is the -- that we would want to settle is the state AG cases. I don't think that will be a 2024 event. I think it's more of a 2025 event. And then there's probably a couple of states that we will settle separately from the class action. It's where we had locations set. And so I think you might potentially see one or two of those get settled maybe during this calendar year. So that's where it's at. I think, David, the good news that with the settlement -- by the way, the other settlement is done now, the water districts is totally done signed off by the judge. And I think the nice thing about that when it comes to all the firefighting film is that it became very clear in that litigation and in what was written about it that the exposure of the consortium of Corteva, DuPont, and Chemours is 3% to 7% of the total exposure. And then remember, DuPont is a third of the 3% to 7%. So I think that helps box in what these numbers are going to be as we settle the other cases.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very good. Thank you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thank you.

[Operator]

Your next question comes from the line of Mike Leithead of Barclays. Your line is open.

[Mike Leithead, Analyst at Barclays]

Great. Thank you. Good morning, guys.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Good morning.

[Mike Leithead, Analyst at Barclays]

My first question. Good morning. First question I wanted to ask on W&P. I wanted to ask about price. It seems like it's holding in, I'd say, fairly well despite double-digit volume declines in the past few quarters. So what's your expectation for price? Should we expect this to stay relatively flat as we move through the year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. So yeah, we delivered flat price overall in W&P in the quarter. We still have some expectation to give back 1% or 2% primarily in the shelter business as we go throughout the year, but we have done a really nice job, as you had mentioned, holding on -- holding on to price.

[Mike Leithead, Analyst at Barclays]

Got it. That's helpful. And then bigger picture, Ed, how is Spectrum performing relative to your initial expectations?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah, right, right on what we told our Board. It's nice to see that they are basically not going through a destock, which is good. And they -- I think we've told you this before, we -- the business is growing nicely, but there's also a major ramp going on with one key medical device company and that ramp is -- by the way, it was a very significant ramp. So we were -- that was the one area we've been watching really close and they are ramping very nice with that customer more -- it's more of a manufacturing ramp we had to go through that was pretty significant and that's on track also. So feeling good about that. And it's clearly an area we like, you know, between -- it's between Tyvek medical packaging of the Spectrum business and the Liveo business, it's a really nice percentage of our portfolio now as we mentioned in our prepared remarks. So it's 10% of the company and it's just a nice end market, stable end market to be in with a very solid steady growth rate. So we're really liking that business.

[Mike Leithead, Analyst at Barclays]

Great. Thank you.

[Operator]

Your next question comes from the line of Josh Spector of UBS. Your line is open.

[Josh Spector, Analyst at UBS Group]

Hi, thanks for taking my question here. Curious if you could talk about your expectation on buybacks versus M&A. I know you talked about no M&A in 2024 kind of through the September period. Can you extend that through the rest of this year and maybe think about '25 in terms of your total capital allocation?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah, I would say -- so we're not planning on any acquisition this year. But if we -- if when we do one, I would think it's more in the tuck-in size. We're not looking at anything big. We would love to add to the healthcare platform. And there's a fair amount of what I call tuck-in opportunities there. So I mean, it's possible we could do one this year, but it's not really in our plans. Our team, Lori and I have said that the team is all hands-on deck operationally as we were going through the destock and that was our focus area. We still have an outstanding ASR for -- we just completed the $1500 million ASR. We have one more to do. So we would plan on doing that obviously this year. And then after that, I think will it be a nice mix of some tuck-in acquisition. And depending where our stock price is, you know, I've always been a pretty big share repurchaser when I feel our stock or multiple is not where it should be. So I don't think you'll see any change in our thinking there.

[Josh Spector, Analyst at UBS Group]

Got it. Thanks, Ed.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Josh.

[Operator]

Thank you. Your next question comes from the line of Michael Hirsh of Wells Fargo. Your line is open.

[Michael Hirsh, Analyst at Wells Fargo & Company]

Hi, this is Richard on for Mike. So just wanted to ask in terms of -- hi, in terms of the guidance for the full year and what you're seeing in terms of demand and destocking coming to an end. Should we expect year-over-year volume growth starting in the third quarter or how are you looking at volumes in the second half of the year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. In the guide that we gave, we do see a return to volume growth in the second half. It ramps as you go from 3Q to 4Q, really just a comp because 4Q was our weakest quarter last year, but yet we will be returning to growth from both a volume and an earnings perspective in the second half.

[Michael Hirsh, Analyst at Wells Fargo & Company]

Okay, great. And then just in terms of your comments on China recovery, was that more specific to E&I, or maybe you can talk about what you're seeing on the Water Solutions side? And -- because you do cite that industrial demand remains weak in China, but I guess you're saying it's recovering better than your thought.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, no change there. So the volume uptick that we saw in China in the first quarter was primarily E&I, as Ed had mentioned, we are up kind of mid-teens for volumes in China. We still do see industrial weakness that's impacting W&P, primarily in the water space. So no change to our expectations. But we will get the orders in from the key distributors towards the end of this quarter and be able to ship those to see a ramp sequentially in water and then a further ramp as you head into the second half.

[Michael Hirsh, Analyst at Wells Fargo & Company]

Great. Thank you.

[Operator]

Your next question comes from the line of Frank Mitsch of Fermium Research. Your line is open. Yes, hi, good morning. Lori, if I could follow-up on a free cash flow question, what are your expectations? You did 86% free cash flow conversion in 1Q. What is your expectations for 2024?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, I think we'll be at or near our target of greater than 90%. So I was really pleased with the Q1 performance of 86%. That's a sizable improvement from where we were last year, which was around 45%. I do expect to take a little bit of a dip down in Q2 really reflecting the payment of our biannual interest expense. So that's about $200 million. We pay it in May and in November. So we'll see a headwind in Q2. But overall, I expect us to deliver nice -- nice free cash flow conversion for the year really around the target.

[Frank J. Mitsch, Analyst at Fermium Research]

Terrific. And Ed, you commented multiple times on how progress -- you're seeing the progress in Asia, especially in China, you know, the year-over-year negative deltas has been lessening down to 4% organic decline in 1Q. Are you anticipating that to be flat or up in 2Q and beyond in terms of the year-over-year comp?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. We expect overall China to be both pricing, volume and currency headwinds about flat for the year. So as you had mentioned, the Q1 numbers, we were up in volume, but overall, it was about flat with the currency headwinds. So yes, improvement in volume that we expect to see, and then some currency headwinds as the year goes on.

[Frank J. Mitsch, Analyst at Fermium Research]

Understood. Thanks so much.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Frank.

[Operator]

Your next question comes from the line of Patrick Cunningham of Citi. Your line is open.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Let's go to the next one.

[Operator]

Your next question comes from the line of Steve Byrne of Bank of America. Your line is open.

[Steve Byrne, Analyst at Bank of America]

Yes, thank you. The three-year stack on volumes in your Water and Protection segment is flat. The losses over the last four or five quarters essentially offset the gains in 2021 and you had kind of flat volumes in '22. So just a question about that. Do you see that as suggesting just modest underlying volume growth, or do you think that there might be some losses to generic products in that segment? And you know, did you have visibility on those inventory levels that were -- that have been destocked now?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. I mean, I think the history has been impacted a lot by COVID. So we saw a unwind of the garments that were a sizable benefit during the 2020 time frame than you saw an unwind -- not unlike most of the peers out there that saw a run-up from the garment perspective. And then once we move through that, then we transitioned into the general industrial destock. So I think we need to look into 2025 to really get a good read on the volumes in that business. And right now, we're expecting low to mid-single digit volume growth in 2025 off of a more normal macro. So no concerns overall around the efficacy of those products in the market. It's really just getting beyond those chunky one-timers around COVID and then the broader industrial destocking to be able to see the true growth profile of that business.

[Steve Byrne, Analyst at Bank of America]

And then Kalrez and Tedlar, these are both fluoropolymer products. Just a question for you on that. Do you have any customers that are saying, I'm going to switch to something else just to avoid the fluoropolymer issue and how are you managing your own wastewater from the manufacturing those products?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

No, I mean, in fact, in Tedlar, we're actually seeing some questions around it is a PFAS free. So there's some opportunity there to maybe pickup some share on the Advanced materials side or the PV side and be opportunistic. So no direct feedback from customers. And obviously, we published our sustainability report earlier this week. There's a lot of examples in there around our commitments to that as well as just overall water -- water key drivers around the sustainability footprint.

[Steve Byrne, Analyst at Bank of America]

Okay, thank you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thanks, Steve.

[Operator]

And our last question comes from the line of Laurence Alexander from Jefferies LLC. Your line is open.

[Laurence Alexander, Analyst at Jefferies Financial Group]

Good morning. Just a quick one on the electronics side. How far do you see the growth trajectory for that business or how much can you expand it before you need to do a significant round of capex additions?

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Yeah. The good news on the E&I side, by the way, which is very different than the W&P side is they're not heavy assets. More of our CapEx on the electronics side, Laurence, actually goes into our testing equipment. We have to have very state-of-the-art testing equipment in the key regions where our customers are. And so that's where we'll add some CapEx over time. But we kind of modularly upgrade the electronics manufacturing locations. So that's not going to be a big capex spend for us. But my gut is we'll be looking at some expansion work here as we see this kind of super cycle coming on the semi side. So that's -- if by the way, if this were like our business, as you know, we're launching line 8 over in Luxembourg. We've already done our first test runs of product, by the way, which is going very well. Well, but that project was $450 million. We don't have anything like that on the electronics side. So that's good and it's quicker to upgrade the manufacturing capacity also in the electronics side. So we'll stay on top of that as we see this growth over the next 30 years come.

[Laurence Alexander, Analyst at Jefferies Financial Group]

Okay, great. Thank you.

[Ed Breen, Chief Executive Officer at DuPont de Nemours]

Thank you, Laurence.

[Operator]

There are no further questions at this time. So I'd like to hand the call back to Chris Mecray.

[Chris Mecray, Investor Relations at DuPont de Nemours]

Okay. Thank you everybody for joining the call. We appreciate your interest and as always, we'll post a copy of the transcript on the DuPont IR website. This concludes the call. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.

Participants

Corporate Executives

• Chris Mecray, Investor Relations
• Ed Breen, Chief Executive Officer
• Lori Koch, Chief Financial Officer

Analysts

• Jeffrey T. Sprague, Vertical Research Partners
• Steve Tusa, J.P. Morgan
• Scott Davis, Melius Research
• Christopher Parkinson, Wolfe Research
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Mike Leithead, Barclays PLC
• Josh Spector, UBS Group AG
• Michael Hirsh, Wells Fargo & Company
• Frank J. Mitsch, Fermium Research
• Steve Byrne, Bank of America Co.
• Laurence Alexander, Jefferies Financial Group Inc.