DuPont de Nemours Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 15 speakers on the call.

Operator

Good morning, and welcome to the DuPont First Quarter 2022 Earnings Conference 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. Thank you. Chris McCraig, you may begin your conference.

Speaker 1

Good morning, everyone. Thank you for joining us for a review of DuPont's Q1 2022 financial results. Joining me today are Ed Breen, Chief Executive Officer and Lori Koch, Chief Financial Officer. We've prepared slides to supplement our comments during this review, which are posted on the Investor Relations section of DuPont's website and through the webcast link. Please read the forward looking statement disclaimer contained in the slides.

Speaker 1

During this financial review, 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 From our forward looking statements, our 2021 Form 10 ks as updated by current and periodic reports includes detailed Discussion of principal risks and uncertainties, which may cause differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We'll also refer to other non GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and posted to the Investor page of our website.

Speaker 1

I'll now turn the call over to Ed.

Speaker 2

Good morning and thank you for joining our Q1 financial review. We posted strong results this quarter, but before we discuss that, I would like to thank each of our employees for their continued dedication And strong commitment to our customers. Their perseverance in the face of many obstacles is what made our results possible. I'd especially like to express our appreciation for our China based colleagues, many of whom have endured weeks of lockdowns, But have continued to operate and get necessary work done. Also, our hearts go out to those affected by the war in Ukraine, And we sincerely hope this conflict can be ended as soon as possible.

Speaker 2

Our first quarter results from continuing operations included a strong organic sales increase from the prior year or 14% growth including the Laird acquisition contribution. Organic volume increased 3%, led by an 8% increase in the E and I segment. Overall customer demand remains strong across the vast majority of end markets, led by low double digit volume growth In both Semiconductor and Industrial Technologies within the E and I segment and mid single digit volume growth in Water And Shelter Solutions within the Water and Protection business. Our top line growth included 6% average pricing increases that we took To offset the continued cost inflation that we are experiencing, we realized price increases in all businesses totaling about 190,000,000 And a fully offset raw material, logistics and energy cost deflation. I continue to be impressed by the job our teams are doing As we remain our target to remain price cost neutral for the full year 2022, including the incremental actions taken in March, largely in reaction to the conflict driven spike in energy and related costs during the period.

Speaker 2

Turning to Slide 4, I'd like to update you on key focus areas for 2022 stakeholder value creation, including our portfolio transformation, our balanced approach to capital allocation and our continued focus on growth execution. First, we believe we are on track with what we noted previously regarding the timing associated with the M and M divestiture to Celanese. The M and M transaction is anticipated to be complete around the end of the year, and we are also continuing with the process to divest the Delrin business. For the Rogers acquisition, progress is being made on the required regulatory reviews, While we remain optimistic by closing by the end of the second quarter, the process could extend into early Q3. We continue to see no issue that would prevent a close of this transaction.

Speaker 2

I'd like to reiterate that DuPont's financial profile Pro form a for these transactions will firmly position the company with top quartilerevenuegrowth, Operating EBITDA margins and low cyclicality relative to top tier multi industrial companies, Greater focus on secular high growth end markets in electronics, water, industrial technologies, Protection and next generation automotive will serve as a sound basis for innovation led organic growth execution. Regarding the Laird Performance Materials acquisition, we are also on track to achieve cost synergies of $63,000,000 Somewhat ahead of initial expectations. The deal has been a success so far, including overall financial performance ahead of plan For both top and bottom line results and early progress to achieve commercial synergies on top of the cost synergies noted. As one example, we are starting to see some nice synergies with layered process and equipment technology, Enabling more effective solutions for downstream customers, including auto OEMs as well as consumer electronics applications. Regarding future capital allocation and namely the net cash we will receive from our planned divestitures, We will continue to pursue a balanced strategy that includes prioritizing the return of excess capital to shareholders as well as strategic M and A.

Speaker 2

This is consistent with our actions taken over the last year during which we increased our share repurchase And dividend allocation as well as completed the Laird acquisition. Once the Rogers and M and M transactions are completed, We'll be poised to continue to improve our portfolio and financial position as well as accelerate capital return options. Given the magnitude of the anticipated deal proceeds, we expect that there will be room to execute substantial incremental share buybacks, While disciplined M and A will also remain a key deployment priority. Regarding our existing $1,000,000,000 share repurchase program Authorized during Q1, we anticipate completing that authorization during 2022 ahead of the 1 year duration initially guided. Turning to core growth.

Speaker 2

We continue to focus on execution of our innovation based organic growth opportunities. We are pleased with 3% volume growth in the quarter, given production constraints due to lack of raw material availability And supply chain challenges. We are excited about visible growth drivers enabled by our technical innovation teams And application engineers who are squarely focused on helping customers solve their most complex challenges. In E and I, continued top line growth momentum this year is being driven by growth in semiconductor, Healthcare and displays end markets, by cyclical recovery in aerospace markets and by new share gains and innovation wins, Muted somewhat in auto by supply chain constraints. Key examples of recent new product successes Driving growth and strong margin performance include newly launched mechanical planarization pads for semiconductor manufacturing as well as new lithographic photoresist for the high performance computing market.

Speaker 2

In WMP, we expect growth in 2022 coming from each of the lines of business. Safety is seeing market growth across major segments including aerospace, Electrical Infrastructure, Oil and Gas and Healthcare, but muted by lower demand for protective garments. Shelter continues to experience growth opportunities from strong construction and remodeling trends. Water is experiencing strong mid to high single digit growth globally across all technologies. Examples of new innovation drivers for this segment include several new membrane product families within water to drive growth in desalination And wastewater markets, as well as the launch of a new building insulation product offering increased sustainability solutions for customers.

Speaker 2

We also have a strong Adhesives business that is positioned well to capture growth with its product offerings in next generation auto And electric vehicles, especially through the commercial synergy opportunities that we expect through the Rogers acquisition. With that, let me turn it to Lori to discuss the details of the quarter as well as our financial outlook.

Speaker 3

Thanks, Beth, and good morning, everyone. As Beth mentioned, we saw continued strong demand during the quarter in key end markets. Global supply chain challenges and cost inflation Persisted and even intensified during the quarter due to the war in Ukraine. In response to inflation, we continued our strategic pricing actions And we're able to fully offset higher costs during the quarter related to raw material, logistics and energy. These factors, Along with our team's continued focus on execution contributed to net sales, operating EBITDA and adjusted EPS results well above expectations.

Speaker 3

Focusing on financial highlights on Slide 5 for the quarter. Net sales of $3,300,000,000 were up 9% on both an as reported Inorganic basis versus the Q1 of 2021. The acquisition of Laird, partially offset by non core divestitures, Provided 2% net tailwind to net sales, while currency was a 2% headwind during the quarter. Organic sales growth included 6% pricing gains and 3% higher volume. Pricing gains reflect the actions taken Offset overall cost inflation, including the spike in energy costs that we are seeing at our site.

Speaker 3

Volume growth reflect Continued strong customer demand with order patents remaining solid, led by electronics, industrial technologies, water and construction end markets. These factors resulted in organic sales growth during the quarter of 10% and 9% for W and P and E and I respectively. On a regional basis, organic sales growth was broad based globally with W and P driving growth in North America And EMEA and ENI driving growth in Asia Pacific. From an earnings perspective, operating EBITDA of $818,000,000 was up 2% versus the year ago period and adjusted EPS of $0.82 per share was up 19%. The increase in operating EBITDA was driven by pricing actions, volume gains and strong earnings from the Layered acquisition, Which more than offset higher inflationary cost pressures as well as weaker product mix in W and P and the absence of a gain on an asset divestiture in E and I last year.

Speaker 3

Operating EBITDA margin during the quarter was 25%, which was better than our expectations set earlier this quarter, But 160 basis points below the year ago period, which I'll explain further. Navigating cost inflation was a key focus during the quarter And our success in doing so was a significant driver in our results. While the majority of the raw material inflation that we have discussed in the past relates to the M and M businesses, Which are now part of discontinued operations. Our RemainCo businesses also have inflation exposure and we saw a spike in energy costs during the quarter, most notably in W and T. We fully offset about $190,000,000 of cost inflation during the quarter, which kept our results whole on a dollar basis.

Speaker 3

While these pricing actions enabled us to maintain a neutral earnings profile, Price cost dynamics resulted in 150 basis point headwind to operating EBITDA margin during the quarter. Our underlying operating EBITDA margin adjusted to exclude price cost factors was 26.5% or essentially flat compared to the year ago period. Further, if you adjust margins in the prior period to exclude the one time gain related to the asset sale in ENI, Our underlying margin of 26.5 percent would have increased about 70 basis points from last year. Another key metric that we track is incremental margins. On a reported basis, incremental margin for the quarter was 6 Percent from the year ago period.

Speaker 3

However, I indicated previously the importance of evaluating our results on an underlying basis. If you remove the impact of price cost, incremental margin was over 20%. And if you also exclude the headwind from the one time asset sale, On top of that, incremental margin was almost 60%. I mentioned these data points to illustrate the volume strength we are seeing within the portfolio. From a cash perspective, cash flow from operations during the quarter of $209,000,000 and capital expenditures $251,000,000 resulted in a free cash outflow of $42,000,000 The cash outflow was the result of variable compensation payments to our employees, which were approximately $100,000,000 more this year than our normal payout and higher working capital trade, inclusive of actions taken to increase inventory and reaction to continued product supply constraints.

Speaker 3

We expect Significant improvement in free cash flow as we move towards the second half of the year, consistent with our typical seasonal pattern. Turning to Slide 6, adjusted EPS of $0.82 per share was up 19% compared to 0.69 and cents per share in the year ago period. Higher volumes and strong results from Baird collectively provided a benefit to adjusted EPS In the quarter of $0.11 per share. These gains more than offset other previously disclosed portfolio related actions, Weaker product mix in W and P and additional captime line startup costs in E and I totaling $0.09 per share in the aggregate. A lower share count and reduced expense from deleveraging actions continue to benefit our EPS results.

Speaker 3

Our base tax rate for the quarter was 21.8 percent and we continue to expect our base tax rate for the full year 2022 to be in the range of 21% to 23%. Turning to segment results, beginning with ENI on Slide 7. ENI delivered net sales growth of 18%, including 9% organic growth and 11% portfolio benefit from Lear And a 2% headwind from currency. Organic growth for E and I includes an 8% increase in volume and a 1% increase in price.

Speaker 4

From a

Speaker 3

line of business view, organic sales growth was led by Semiconductor Technologies, which increased mid teens as robust demand continued, led by the ongoing transition to more advanced nodes, growth in high performance computing and 5 gs communications as well as share gains. Within Industrial Solutions, organic sales growth was up low double digits on a continuation of strong volume growth Thanks for OLED materials for new phone and television launches, ongoing strength for CalRes product offerings most notably for semi CapEx And strong demand for healthcare applications such as biopharma tubing. Interconnect solutions sales decreased low single digits on an organic basis due to a slight volume decline. Volume gains for films and laminates in certain industrial end markets were more than offset by declines in consumer electronics, primarily related to China as well as the anticipated return to more normal seasonal order patterns for smartphones. For the full year, we expect interconnect solutions to be up mid single digits on an organic basis, led by strong demand in the second half And additional capacity coming online later this year from our Kapton expansion.

Speaker 3

From a regional perspective, ENI delivered sales growth in all regions With high single digit organic growth in Asia Pacific, noting China was down slightly. Operating EBITDA for E and I of 476,000,000 Increased 9% as volume gains, strong earnings from Baird and pricing actions more than offset the absence of a prior year asset sale gain, higher raw material and logistics costs and a continuation of start up costs associated with our Kapton capacity expansion. Operating EBITDA margin of 31% reflects sequential improvement from the 4th quarter of more than 200 basis points. On a year over year basis, the primary driver of the decline in operating EBITDA margin was the absence of a prior year gain. Adjusting margins in the prior year to exclude the one time benefit, operating EBITDA margin was down 70 basis points year over year as a result Price cost and Kapton startup costs more than offsetting volume gains.

Speaker 3

Turning to Slide 8. W and T delivered net sales growth of 8%, consisting of 10% organic growth and a 2% headwind from currency. Organic growth for W and P reflects broad based pricing actions across the segment implemented to offset cost inflation. Volumes were flat as gains in Shelter and Water Solutions were offset by declines in safety. From a line of business view, organic sales Growth was led by Sheltered Solutions, which was up high teens driven by pricing actions and continued robust demand in North American residential Construction for products such as Tyvek house rack as well as ongoing improvement in commercial construction for quarry and surface products.

Speaker 3

Sales for Water Solutions were up high single digits on an organic basis on volume and pricing gains. Global demand remains strong for all water technologies And across all regions. Within Safety Solutions, sales were up mid single digits on an organic basis as pricing actions were partially offset by lower volumes of Tyvek as we shifted production from garments to other end market applications. Volumes were up slightly for Aramid Fibers on continued improvement in industrial end markets. Operating EBITDA for W and P of $341,000,000 declined 4% versus last year due to a weaker product mix.

Speaker 3

Operating EBITDA margin was better than our expectations that earlier in the quarter, but the impact of price cost With about a 2 10 basis point headwind to margin. Excluding the price cost impact, operating EBITDA margin was about 26%, Approaching more normalized levels for W and T. Before I turn it back over to Ed, I'll close with a few comments on our financial outlook on Slide 9. Despite the strong start to the year and solid demand, the macro environment remains volatile with several key uncertain factors. Based on our expectations and in consideration of these uncertainties, our full year guidance ranges for operating EBITDA and adjusted EPS remain unchanged at $3,250,000,000 to $3,450,000,000 and $3.20 To $3.50 per share, respectively.

Speaker 3

These ranges include a $35,000,000 earnings headwind as a result of the spending operations in Russia. We are increasing our guidance range for net sales to be between $13,300,000,000 $13,700,000,000 To reflect price increases needed to offset cost inflation, which we now anticipate at $600,000,000 in year over year headwinds. Although underlying demand in key end markets such as electronics, industrial technologies and water remain strong, We are seeing further supply chain constraints, primarily from additional government mandated lockdowns in China, which will likely impact volume growth in the 2nd quarter. Based on these anticipated headwinds as well as an element of previously projected 2Q sales realized in the Q1, We expect Q2 2022 sales to be between $3,200,000,000 $3,300,000,000 or up about 5% year over year at the midpoint. Based on these same assumptions, we expect 2nd quarter operating EBITDA between $750,000,000 $800,000,000 And adjusted EPS between $0.70 $0.80 per share.

Speaker 3

At the midpoint of our guidance, 2nd quarter operating EBITDA margin Is expected to decline just over 100 basis points sequentially as supply chain constraints are assumed to impact production rates. We expect operating EBITDA margin in the back half of twenty twenty two to improve on typical seasonal volume strength And improved plant utilization as we clear COVID related production challenges impacting the first half of the year. This outlook assumes moderating China lockdown impacts as we get into mid May, given the positive trajectory in the Shanghai region And our limited exposure around Beijing. However, further outlook risk could be triggered as the lockdown spread to Shenzhen and the Pearl River Delta region, given the concentration of manufacturing and shipping there for DuPont as well as our suppliers. With that, let me turn the call back to Ed.

Speaker 2

Before we take your questions, I'd like to highlight that we published our annual sustainability report this week, And I'm really proud of the progress we made on our 2,030 goals. Our sustainability strategy is grounded in 3 pillars: innovation, Protecting people and the planet and empowering employees and customers. I'll just note a few highlights. DuPont is leveraging our innovation focus to help customers meet their sustainability goals. A great example of that is the new formulations Within our building insulation products that help increase energy efficiency as well as new technologies from our water solutions business That reduced process energy intensity.

Speaker 2

We're also focusing on renewable energy as part of our integrated climate and energy approach. Last year, we signed a virtual power purchase agreement that will supply about 25% of DuPont's total electricity starting in 2023. Additionally, Apple just announced that DuPont was selected to join their supplier clean energy program, which is an example of DuPont working with industry partners To drive sustainability progress at scale. We continue to advance our commitments to DE and I. We are excited about the newest female nominee To our Board of Directors, Christina Johnson, also the strong gender and ethnic representation of our leadership teams Continues despite competitive labor markets.

Speaker 2

There are many great examples and stories in the report of how our teams are delivering on our purpose And driving sustainability. Overall, our teams have done a tremendous job. With that, we are pleased to take your questions. And let me turn it back to the operator We'll open the Q and A.

Operator

Thank you. Your first question comes from Steve Tusa from JP Morgan, please

Speaker 2

go ahead.

Speaker 3

Hey, guys. This is actually Sam Yellen on for Steve. Thanks for taking my question.

Speaker 2

Can you

Speaker 3

talk about the sequential trends from 2Q to 2H? It looks like a big step up in EBITDA. Is that the China recovery or something else? And as part of that, maybe give us an update on the price cost spread on a quarterly basis. What are you expecting in 2Q and then in 2H1 comparing to the neutral you did in Q1?

Speaker 3

And then is there anything else we're missing? Thank you. No, thanks, Ashley. Yes, the second half ramp from the first half is really just Reflection of our seasonal volume improvement in the back half within E and I, it's primarily driven by smartphones as we go into the Christmas season and within water, A lot in the construction space as we see a ramp there. So the lift on volume is dropping to the bottom line, which is translating to the EBITDA improvement and the margin In the second half as we drive leverage through the P and L.

Speaker 3

On your question around net price, we'll expect All year to remain neutral on net price cost. So we raised the midpoint of the guidance for the full year to reflect About another $100,000,000 of raw material escalation on a full year basis. So we're now expecting somewhere in the range of $600,000,000 that will fully offset with price. So that won't change coming out of the Q1 for the rest of the year.

Speaker 2

Ashley, I would just add to Lori's point, the first half 2nd half ramp, it is our typical seasonality. If you go back and look at last year, it's about a 7 Percent sequential lift first half, second half and that's typically what we do because of the items that Laurie mentioned. So nothing unusual in the pattern there.

Speaker 3

Got it. Thank you.

Speaker 4

Thank you.

Operator

Your next question comes from Scott Davis From Melius Research, please go ahead.

Speaker 4

Hey, good morning, everyone. Good morning, Matt. Laurie and Chris, welcome. Welcome aboard, Chris. Anyways,

Speaker 5

is there something can we talk in terms of like backlog or book to bill? Did backlog actually grow in the quarter? I mean or any metric, I guess, you can give us to give us a sense of Top line pent up demand?

Speaker 2

Yes, Scott. The backlog looks great. It's been staying at very elevated levels. We look at it weekly. There is really no end market that's not feeling good.

Speaker 2

As you know, auto is down a little just because of auto production, but that's not a demand driven thing. It's just chip shortages and supply chain issues. But All our end markets from an order pattern standpoint feel good as of looking at it this week. So no issues there at all. And really the only issues We're dealing with here again, it's not demand driven.

Speaker 2

It's really more centered around supply chain and China and COVID lockdowns For the guide on the Q2, but if we didn't have those issues, our sales would definitely be higher in the Q2, but that's what we're dealing with there.

Speaker 5

Yes, it makes sense. And is price as we speak kind of now, is price still going up Inflation is still going up or are we at a point now where we've kind of hit some sort of plateau?

Speaker 2

It seems like we've plateaued, Scott. We all the Price increases are implemented. When the war broke out, we did a whole another round of price increases mainly because the natural gas Lifting as significantly as it did. And by the way, other constraints in there, but that was the big one. So we did a round of increases Again, which we had just finished doing, we did it again in every business.

Speaker 2

And as we said, we caught all the inflation In the quarter, by the way, on the rolls on logistics and on energy. So we caught everything with $190,000,000 of that we saw. And as Laurie just mentioned a minute ago, we think it's plateaued. If it hasn't, we'll do another round of price increases. I feel like we can get it If we have to, but it does appear to have plateaued.

Speaker 2

So we will have an incremental $600,000,000 of inflation if things hold where they're at For this year and we'll have that all covered with price.

Speaker 4

Okay, sounds great. Good luck. Thanks everybody. Appreciate it.

Operator

Your next question comes from Jeff Sprague from Vertical Research. Please go ahead.

Speaker 6

Thank you. Good morning, everyone. Hey, Jeff. Good morning. Ed, on share repurchase, you're excuse me, it's Battling a little cold here.

Speaker 6

Hopefully, it's not COVID. Your language on share repurchase went from it being important Last quarter to substantial incremental share repurchase. So I sense a bit of a pivot there in your posture. Maybe you could just elaborate a little bit more, and do you need to wait for the M and M proceeds to actually do more? Or can you get A bit of a running start on maybe the incremental that you're talking about.

Speaker 2

Yes. So Jeff, you I think summarized it well. We're leaning much more towards a decent large, if you could call it, share repurchase with where our multiples at. I don't think this is where DuPont's model will be sitting in the future. And obviously, softness in everyone's stock price Just because of recent external events out there.

Speaker 2

So we're going to step on the $1,000,000,000 share repurchase a little bit quicker as we said in our prepared remarks So by quarter, 4 months, something like that and get it done early. And I would expect, as conversations with the Board That we're going to look at a much larger share repurchase program. I don't think we need to wait till the proceeds are necessarily in, but I would like to make sure Nothing else crazy is going on in the world. We do have a $5,200,000,000 outstanding loan on the Rogers A piece that will get paid off. So our leverage will be north of 3 and with that, but when we get Proceeds from M and M, you kind of know the math.

Speaker 2

We're sitting on lots of 1,000,000,000 of dollars here. So yes, you do hear a little bit of shift in tone Because of where the multiples at, the market is a little bit tough right now for everybody and my gut is we're going to step on it in a bigger way.

Speaker 6

That's great to hear. And then also, could you just, maybe this is for Lori, just how significant on the top line was China, the Kind of the lockdowns and supply chain and COVID issues and how big a part of kind of the Q2 outlook is it?

Speaker 3

Yes. In total, there's 2 major pieces that are impacting the 2Q guidance. So for and they're both related to China. So first is a shift Of sales that we had expected to land in 2Q that landed in 1Q and that was primarily with customers pulling in And volume because of what was going on in China. We would size that at about $35,000,000 of sales.

Speaker 3

And then as far as The shutdown that happened started to get progressively worse in mid March and we're anticipating a mid May reopening. We estimate that we missed about $20,000,000 worth of sales. And there's also an impact on our margins with our plants not running at full capacity. So we have Two sites in China that went into full lockdown mode in mid March. We expect them to be fully reopened by mid May.

Speaker 3

And then we had some key raw materials within our electronics business that we sourced from China, so we weren't able to get full supply, so we ran some of our domestic Plants at lower unit rates and so that was impacting our margin profile in the Q2 as well.

Speaker 2

Yes. To give you a specific one what Lori In circles of Ohio, we make our Kapton, which is a high margin product. We're fully sold out. We got half of a monomer that we need out of China and we had Late shipments out of China. So we did have supply of the monomer.

Speaker 2

So instead of shutting running it full tilt and then shutting the facility down, we just eased off the Run rates, we know when we're now getting supply from China. So there's an example, it kind of hits your rates for a month, month and a half I like that. So it's just these one offs because of the China lockdowns, which hopefully dissipate as we exit the quarter.

Speaker 3

Yes. And I think the other piece, Jeff, too, with our guidance The Q2, but beyond just China and then the production related effects with Russia. So we noted in our slides that we pulled Russia out. On a full year basis, it's about $35,000,000 of EBITDA, probably about $80,000,000 of sales, but that's impacting primarily 2Q and beyond.

Speaker 4

And then Jeff, when you look

Speaker 2

at the full year guide, we beat by $90,000,000 in EBITDA in the Q1 kind of from consensus. We're down kind of $60,000,000 in the second quarter off of I'll use you guys' consensus, all because of what Lori just described here, but then we have nothing in the second half that's unusual. It's our normal seasonal ramp, that's 7% that I mentioned. That's what we're counting on, including we'll get some better unit rates from the things we just described to you. So no real big change in order patterns for us that we would typically see.

Speaker 6

Great. Thanks for that color. Appreciate it.

Operator

Your next question comes from John Walsh from Credit Suisse. Please go ahead.

Speaker 7

Hi, good morning and thanks for taking the questions here.

Speaker 2

Good morning, John.

Speaker 7

I guess just first thinking about a couple of end markets that you touch where there's some investor angst, I mean, residential, auto, consumer smartphones. Can you talk about what you're kind of Expecting there from volume and then what you're expecting from price either if you can break it out what's inflation and then That price component that you have because of the higher value you're adding to the customers offering there?

Speaker 3

Yes, I would say as far as demand is concerned in the 3 end markets, as you had noted, so we saw strength in residential construction. We expect that to continue to be a point of strength in the Q2. We did note softness in consumer electronics, but that was primarily in China with respect to the lockdown, And also a little bit of an impact of our own doing of seasonality with respect to when we do our normal smartphone shipments. So we've telegraphed in the past that The first half will be weaker, the second half will be stronger because of a change in seasonal patterns, as we sell into the smartphone market. But on a full year basis, we expect That end market to be up mid single digits.

Speaker 3

And then in auto, you've seen the revisions downward with respect to IHS auto bills. I think now it's Sitting at 4% on a full year basis. So our estimates would probably be a little bit lighter than that with respect to what we think that the market will do. But The underlying demand remains strong. It's just really a matter of supply chain, specifically around the chip constraints that are impacting that.

Speaker 3

But I think the highlight too there is we do continue to see very strong growth within the EV space. And so for us, A large portion of that comes from our adhesives business. We saw really nice growth in our EV related sales in Q1 and we expect To about double those sales in Q2 in line with where the EV market is going in general. And we really look forward to the incoming business From Rogers to pair with our business to really take advantage of the opportunity there. On the price side, I wouldn't say it materially differs across those end markets with what we're seeing with That's, to inflation by segment.

Speaker 3

So within E and I, the inflation is not as material as what it is within W and You see that in price. So we got about 1% in E and I in price and about 10% in W and P. So there is a difference there. But nothing more than just around the raw material inflation related items.

Speaker 7

Great. Thank you. And then maybe one quick follow-up to Jeff's question around capital allocation. Maybe can you just update us on what the deal pipeline looks like and if you're seeing sellers' expectations Change given what's happened in the public markets? Thank you.

Speaker 2

Yes. So, my gut is as we sit right now, I don't see any deal that we would want to do until we're in this 2023. And I'm not saying I know Something is available in 2023, but the way stock prices are moving around right now and all. It just makes it A tougher environment, so I don't see anything happening until we get into 2023. And quite frankly, we don't have any We have things we're a couple of things we're interested in, as I said before, but I don't see them actionable anytime in the near Future, so that could change, so don't hold me to that.

Speaker 2

But, I can't see anything happening until we're nicely into 2023, if Depending on what's going on.

Speaker 7

Great. Appreciate it. Thanks for taking the questions.

Speaker 4

Yes.

Operator

Your next question comes from Chris Parkinson from Mizuho. Please go ahead.

Speaker 8

Great. Thank you so much. There are a lot of moving parts to the DuPont Capital Allocation thesis, just including the net proceeds from deals based free cash flow generation, working capital and then obviously your stated buyback goals. When it's all said and done, Ed, I appreciate your remarks Sure, the deal outlook for 2023. Just absent anything new in 2022, what is the kind of the base range That you based on the current buyback that you believe you'll have cash on the balance sheet, just plus or minus?

Speaker 8

Thank you.

Speaker 3

Sir, are you talking after the considering the proceeds from the M and M sales? Yes. Yes. Yes. If you look at the proceeds from the M and M sales, the cash flow generation in 20222023 as well as where our leverage Targets are at 2.75 times where we would expect to be.

Speaker 3

You quickly get to the $10,000,000,000 to $11,000,000,000 range of cash to deploy After we pay on the Rogers debt. So, as we had mentioned on the call, it's significant. And we'll look to Take a balanced approach to driving significant share repurchase as well as M and A opportunity.

Speaker 8

Got it. And the second question I have just, obviously, over the last couple of weeks, there's been a bit of a noise across Global Electronics, some of your peers, Which has been pertinent to semis, 5 gs, base consumer electronics demands. A lot of that's driving from China, but just can you just give us a quick update overall About how your team is thinking about your relative sub segments within E and I, just given the current demand environment? And then also How you would project your relative performance versus some of your core U. S.

Speaker 8

Peers? Thank you.

Speaker 3

Yes. So we see very strong demand continuing in electronics. And so we had very strong results in Q1. On a full year basis, we expect To be up pushing double digits within electronics between price and volume and we'll obviously add to that as we close the Rogers transaction later this year. So we see a lot of strength.

Speaker 3

We see a lot of opportunity. If you look at we do a lot of detailed analysis about our results versus peers and Couple of them have already been out before us and we stack up very nicely when you compare like for like product lines. And so, we also stack up very nicely when you compare Our results versus some of the key benchmarks out there. So for example, MSI is one of the key components of the semi business. People are expecting that to be up 7% to 8%.

Speaker 3

We've mentioned that we should outperform by 200 to 300 basis points. And if you look at our Q1 results And Fannie, we were in line with that expectation. So, we are very excited about the portfolio. We'll look to continue to see where we can opportunistically Genetically, broaden and strengthen that portfolio as well.

Speaker 8

Thank you as always.

Operator

Your next question comes from Steve Byrne from Bank of America. Please go ahead.

Speaker 9

Yes, thank you. Are there any water treating technologies that are really deficient in your platform? Would you consider acquiring or developing anything you don't have and maybe more broadly in water, Would you consider moving downstream to essentially utilize your expertise in the breadth of Water treating technologies you have to provide service to customers as a downstream expansion Similar to

Speaker 2

Ecolab. Yes, I would say 2 things, Steve. Our portfolio, we feel very good about and It's a fairly broad portfolio, so we touch most of the water filtration type markets out there, wastewater, Home applications, which are big for us in China, desalination, as we mentioned on our prepared remarks. So we feel good about the breadth of what we have and the Technology oomph we have behind it and we continue to bring new products out to market. The one area that We would look at and by that doesn't mean it's an acquisition that could be organically done as we need to expand our manufacturing footprint And we need a bigger presence with manufacturing in the Asia market, which is a very fast growing market for us.

Speaker 2

So We've been studying very hard a project there to bring up a facility in the next couple of years in that area. So that's a high priority for us. And then This kind of goes to the second part of your question there. The one opportunity we have or potentially have in our R and D teams and Patient teams are looking at is digitizing the water business. So we know when replacement components are needed ahead of time and it's kind of systematized And that could be a real opportunity for us to kind of satisfy our customers, by doing it that way.

Speaker 2

And that Opportunity, we've been studying hard for the last year.

Speaker 9

Thank you for that, Ed. And maybe any update from you on PFAS issues, anything any trends that you're observing, any changes to inbound inquiries that you can comment on?

Speaker 2

Yes, nothing new has changed in the landscape except I'll just say we continue to be In conversations with the plaintiffs down in the MDL, I feel like we will make progress this year On that, by the way, the judge has continued to encourage us. The judge down there in charge of these MDL cases has actually encouraged us And the plane is to be talking and coming up with a settlement. And so, I'll just leave it at that for now, But nothing new besides that.

Speaker 9

Thank you.

Speaker 4

Yes.

Operator

Your next question comes from David Begleiter from Deutsche Bank. Please go ahead.

Speaker 10

Good morning.

Speaker 11

EBITDA view was 270 for this

Speaker 3

year. Yes. So in the Q1, they were under the Impact to the same things that we were with respect to the China COVID situation. We're really looking forward to the second half when We will own them and they have a pretty sizable expected ramp. I suppose end markets really open up coming out of the China recovery and they continue You see a nice growth opportunity within the EV space.

Speaker 3

And so I think if you look at the second half trajectory that's being planned by Rogers, it would be more in line with where our expectations were on

Speaker 4

a full year basis for that portfolio.

Speaker 3

They Patients were on a full year basis for that portfolio.

Speaker 2

They have the backlog. A lot of it is in the EV space. We've looked at it. So it's just The matter of, well, A, getting over the lockdown issue in China and then actually accomplishing the ramp in their production rates. But we think Second half of the year, they'll be right around the zip code of where we would expect it.

Speaker 11

Great. And Laurie, can you comment on what was M and M EBITDA In the quarter?

Speaker 3

Yes. So that will come out Friday in the queue. So in the queue, we'll deconstruct the discontinued operations number that we've reported today. I can give you a high level that they were impacted obviously by the China COVID situation as well and the auto end markets obviously being their largest factor, but they did continue to do a really nice job of getting price.

Speaker 11

Great. Thank you very much.

Speaker 6

Thanks, David.

Operator

Your next question comes from Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. Can you update us on the how the Delrin Sale process is going?

Speaker 2

Yes. So Delrin, by the way, we've been putting the data room together and all that. We're Just getting ready to launch on that and we would expect that Deloren will take about a year just like the other part of M and M to actually close the deal. We'll get a deal done in a 4 or 5 month window and then regulatory approval that will kind of take like a year. So data room is getting finished up.

Speaker 2

And obviously, we've had inbound phone calls about it, but we haven't really gone into deep engagement yet. We're just getting ready to do that kind of in the next couple of weeks.

Speaker 1

And Ed, you provided initially some expectations for valuation during the sale of Mobility business. Would you Care to do the same about Dalrynn, maybe in broad terms, what are your expectations for the multiple?

Speaker 2

No, I am not going to do that because we sold 90 Percent of it at 14.1 times. So I think what we said more than happened. And I will say Delrin is a very good business. It's a very high EBITDA business. So we're looking forward to a nice sale there.

Speaker 1

Fair enough. Thanks a lot.

Speaker 2

Thank you, Alex.

Operator

Your next question comes from John Spector from UBS. Please go ahead.

Speaker 12

Yes. Hi. This is Josh Spector. So just a question on W and P and then pricing

Speaker 1

All right.

Speaker 12

And margins particularly. I think in the past that segment margins have been mid to upper 20%, now you're kind of more low to mid 20%. Very clear that you're getting pricing to offset inflation, but do you have any visibility to get pricing more than inflation over the next 18 months, 2 years? Should we expect margins to expand in the outlook over time? Thanks.

Speaker 3

Yes. So The underlying margin as we look at it excluding pricing costs was closer to 26% in the quarter as we noted on the call. So starting to get back to the more normalized margins We would expect for the segment in the upper 20s. So and in normal times too outside the inflation, we would expect to get 1% to 2% Price out of that portfolio that does drop to the bottom line with respect to new product innovations and favorable mix, as we move into the more higher margin segment. So We'll continue to see headwinds on as reported margins as we go out this year just because of price cost and we'll continue to

Speaker 4

let you know what that adjustment looks like so you can

Speaker 3

get to more of an underlying margin basis opportunity. It looks like so you can get some more of an underlying margin basis opportunity for the W and P segment.

Speaker 12

Okay. But I guess we should take that to mean that this is if inflation stays where it is and you're pricing towards that, this becomes More of the new normal and then it's normal incremental margins. You're not expecting accelerated pricing to persist To drive margins back up in this segment over time, that's not your expectation.

Speaker 2

No, I think what would occur is hopefully commodity prices Come down and we hold obviously some of the price because of the products that we have. I would think that's the more Rational way things could play out here. And you're not incorrect. This business can run at like 28% EBITDA margin. So we're certainly not pleased at 26, but 26, we don't feel bad about in this environment, but we would certainly strive to be More in that 28 range and we have been there before.

Speaker 2

So as Laurie said, part of it, you'll just get by. If you just take all this price cost out For a second, because it's not normal times, we'll get a couple of points of pricing every year with our new product introductions. We don't get fade like you do in electronics, so we Truly can get incremental net pricing in the business, which will help, but our biggest opportunity as we've highlighted in the past is continue to get Capacity released from these bigger assets like Tyvek and Nomex, we got a lot of programs around that. And that will drive the Throughput through those facilities, which really has an impact on the numbers. So we do think this business should run a couple of 100 basis points higher and we'll get there.

Speaker 12

Okay. Thank you.

Speaker 1

Yes. Thanks.

Operator

Your next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.

Speaker 13

Thank you and good morning everyone.

Speaker 2

Good morning, Steve.

Speaker 4

If I

Speaker 13

could just ask in Safety Solutions, Where you are sort of on, I guess, what would be considered hard COVID comps with Tyvek into healthcare,

Speaker 4

and

Speaker 13

it was that part of what was driving sort of the weaker product mix The overall segment?

Speaker 3

Yes, that was it. So it was a function of last year, we were producing Full on Tyvek garments and so we were limiting changeovers on the lines just given that we weren't making other end markets like medical and other types of end market uses for Tyvek. And so as you now go into a more normalized environment, you have more changeovers. So therefore, your production is a little bit less and that was what was driving the impact of the weaker mix within VW and P segment.

Operator

Okay.

Speaker 13

And just as a follow-up, Laurie, and maybe this will make more sense or easier to follow once we have the queue. But Just looking at sort of what corporate did on an EBITDA basis in the quarter versus, if I look at slide 14 and You got a corporate expense of $135,000,000 stranded cost of $50,000,000 which would total up to $185,000,000 and then you've got Unquantified results of retained businesses in Biomaterials. So can you give us a little bit of a help on sort of how this is going to progress Over the year, presumably you start making progress on those stranded costs, the corporate, we can kind of run rate, but what about that third piece of the retained businesses in Biomaterials?

Speaker 3

Yes. So there are 3 buckets as you had mentioned. And so the retained pieces, the margins I would say are in the mid Teams, once you get on an upward trajectory as we get outside of the COVID lockdown, so the largest piece of the retained business is the adhesives business. And it did see an impact in the quarter with respect to the China situation. So that's the biggest season and We will disclose the revenue of the retained businesses in the Q on Friday.

Speaker 3

When you get that, you'll be able to calculate kind of what the margin profile was for that space. With respect to normal corporate expenses, those would be on the range of $135,000,000 on a full year basis as we In our supplemental guidance, and so you would expect around $25,000,000 $26,000,000 for the quarter. And then the third piece are the net stranded And we continue to be in the range of about a net $50,000,000 on a full year basis and that's our target to get after as we look to eliminate those going forward.

Speaker 13

Okay. Thanks very much.

Operator

Your next question comes from Mike Sison from Wells Fargo. Please go ahead.

Speaker 10

Hey, good morning. Just I guess a quick follow-up on Rogers. I guess if they're being affected by China in 2Q, Sequentially EBITDA probably does improve a lot. And then if we get on the run rate that you noted for the second half, We're probably somewhere in the low 200s for EBITDA. And I know you don't own the business yet.

Speaker 10

But so just as a follow-up, Why do you think things will improve in the second half? And then any updates on synergies that you can accelerate given It seems like 2022 is going to come in a little bit short for Rogers this year.

Speaker 2

Yes. Rogers will not run around $200,000,000 in the second half of the year. They have The demand is there. We know the book. By the way, again muted pretty significantly by COVID, China, and don't forget, it's auto related, a lot of the business.

Speaker 2

So that not being as hot as it should even though end market demand is there. But they'll be running at a much more significant rate, in the Q3 assuming, again, the COVID stuff is all cleaned up, lockdowns Have ended and we have line of sight where we're allowed to talk about synergy work on the cost side of $115,000,000 we're highly confident in. And on a percentage basis, with the combo of that coming in with our like business, it's not a percent It's on the high end at all. So like Laird, it was 60, we now line of sight detail by detail to 63. This one we have We're really racking and stacking where we have a lot of it identified.

Speaker 2

So we'll get at it really quick. And remember, one of the things that will happen immediately on the Rogers synergies is there's Corporate expense of some significance because it's a public company and that will be cleaned up very, very quickly and then we'll start on the rest of Synergy, so, but it will run at a very different rate in the second half of the year.

Speaker 10

Right. So for 3, we should really be thinking about $270,000,000 plus whatever growth that the industry should provide is kind of the base case For when we model in Rogers for 2023.

Speaker 2

Yes, I think that's fair. With synergies kicking with synergies then, you got them kicking in, we'll hopefully move fast on that.

Speaker 10

Understood. Thank you.

Speaker 4

Okay. Thanks, Mike.

Operator

And your next question comes from Arun Viswanathan from RBC Capital Markets, please go ahead.

Speaker 14

Great. Thanks for taking my question. I Yes, I just had a longer term question. So several years ago, your electronics business faced a lot of pressure In China, around innovation and with the Solnit Paste product, I know that's been disposed of, but do you see that kind of issues cropping up in any of your markets in the future? That would be my first question.

Speaker 14

Thanks.

Speaker 2

No, I don't at all. There's nothing in the portfolio, actually nothing 95% of the portfolio is Cutting Edge Technology, if you haven't had the chance, we did all the teach ins recently on the electronics business. I think we're in a very strong Technology position and we're constantly innovating by it's a fast paced innovation in electronics both. We're innovating literally monthly Coming out with new products in the marketplace, we're always on the cutting edge. So I don't see that.

Speaker 2

I think what you were mentioning was solament based, which yes, was more of a Commoditized business that was current, but that's not where the portfolio is headed and certainly not In addition to the acquisitions with Laird and Rogers, they're very key positions we have in great technology plays.

Speaker 14

Okay. Thanks for confirming that. And then, if I could, is there any update you could provide on, any of the PFAS Dynamics, do you expect any kind of settlement by year end with the water districts or what are you

Speaker 1

working on that side? Thanks.

Speaker 2

Yes. No, we've been as we've mentioned before, we've been talking about settlement with the plaintiffs, and by mostly obviously around the water cases. And as I mentioned a few minutes ago, the judge has even encouraged both parties to be talking to each other. I think that was made public, I don't know, a month or 6 weeks ago. So hopefully good progress this year.

Speaker 13

Thanks.

Speaker 2

Great. Thanks,

Operator

And the last question for today comes from Laurence Alexander from Jefferies. Please go ahead.

Speaker 13

I guess a question about your degree of visibility. In terms of how customers are sharing Development schedules and order books and the shift in DuPont's portfolio, how many quarters out do you feel you have good visibility at this point?

Speaker 3

Yes. We do look at that to see how our order patterns are. I would say on average, we have about 60 days visibility to orders that come in, in combination between E and I and W and P. It's a little bit longer in W and P than what it is in E and I. But as we had mentioned earlier in the call, we look at the 20 day order pattern every week and it has not changed in any significance for The past several months and so we continue to see very strong underlying demand.

Speaker 3

Some of our backlog within the water space and within the adhesive space has started to build with the dynamics that we're navigating within the China COVID situation, but overall demand remains very, very strong.

Speaker 4

And then,

Speaker 2

Bert, I would just give you one other angle. Obviously, we look at very hard and you sort of, I think, just made this comment. We work very closely With our customers on design wins, by the way, as does Laird and Rogers, it's a very key component of the business. So we can see Again, we changed the overall demand out 6 months, but we can see where trends are developing, where we're going to have nice Lift in business. So as Laurie just mentioned, our adhesives business, we are bidding on and working with design and on a lot of in the battery and the auto next generation auto market.

Speaker 2

And we know where we're getting wins or Close to getting wins. So that's something we track very, very closely to look at those trends, same within semiconductor, same within the water business. So that's important to us to look at also.

Speaker 13

Thank you.

Speaker 6

Thank you.

Operator

I will turn the call back over to Chris McRae for closing remarks.

Speaker 1

All right. Thanks everybody for joining the call. And just for your reference, a copy The transcript will be posted on our IR website shortly. This concludes our call. Thanks again.

Operator

This concludes today's conference call. You may now disconnect. Thank you.

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Earnings Conference Call
DuPont de Nemours Q1 2022
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