DuPont de Nemours Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 14 speakers on the call.

Operator

Good morning, and welcome to DuPont 2Q 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 McCray, you may begin your conference.

Speaker 1

Good morning, everyone. Thank you for joining us for a review of DuPont's Q2 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 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 materially from the forward looking statements. Our 2021 Form 10 ks, as updated by current and periodic reports, It includes detailed discussion of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We'll also refer to other non GAAP measures.

Speaker 1

A reconciliation to the most directly comparable GAAP measures are included in our press release posted to the Investor page of our website. I'll now turn the call over to Ed.

Speaker 2

Good morning, and thank you for joining our 2nd quarter financial review. We posted strong quarterly results above expectations in a difficult environment. Our top line revenue growth of 7% Versus the year ago period included solid organic growth of 9%. Overall customer demand remained strong across our key end markets As E and I delivered a 6% volume increase, driven by ongoing strength in Semiconductor Technologies and Industrial Solutions. In terms of inflation, our pricing actions continue to fully offset higher costs associated with raw materials, Logistics and Energy.

Speaker 2

Early in the quarter, our expectation for full year 2022 was about $600,000,000 of increased cost And that number has now risen to over $700,000,000 mainly due to higher energy and logistics costs. We still expect to remain price cost neutral in the second half and for the full year based on pricing actions we have taken. Overall, our 2nd quarter results reflect year over year and sequential earnings growth. These results highlight the strength of our end markets And our team's efforts to successfully navigate the challenging macro environment, which was further complicated by China's COVID lockdowns during the quarter. We were very pleased that the lockdowns alleviated by mid June and that our China based colleagues who operated diligently under difficult circumstances Have been able to return to some form of normalcy.

Speaker 2

More broadly, our focus on execution continues to drive results As we increase our use of digital tools and other plant site investments to drive additional productivity and capacity release. Finally, with regards to sustainability, I am pleased to highlight that last month, we announced our commitment to setting targets to reduce greenhouse gas emissions In line with the Paris Accord Science Based Targets Initiative or SBTI, this is an important step toward reducing our overall climate impact And it builds on our existing commitment to protect the planet by reducing the carbon footprint across our value chains In partnership with customers and suppliers. Turning to Slide 4, I'd like to update you on key initiatives for 2022 stakeholder value creation, namely our portfolio transformation and our balanced approach to capital allocation. In addition, I will highlight our continued focus on growth execution on the following slide. 1st, as it relates to the Rogers acquisition, Progress is being made on the required regulatory reviews with China being the last jurisdiction outstanding.

Speaker 2

We expect the deal to close during the Q3. Regarding Rogers' Q1 2022 performance, We were satisfied with top line progress for the business with growth in the high single digits and we are especially pleased to see new wins and ongoing growth in the electric vehicle space. Rogers business in the period was impacted by a price cost gap And several operational challenges that held back full earnings potential, but we remain confident in the actions that the Rogers team is taking And we expect improvement as we move forward. For the M and M transactions, we are on track regarding timing associated with the M and M divestiture to Celanese, with a completion anticipated around to Celanese with a completion anticipated around year end. We continue to make the necessary progress to separate the business And we were pleased to see Celanese secure permanent financing in the last few weeks.

Speaker 2

We also continue to move forward with plans to divest the DelRent business and affirm our expectation for completion around mid year 2023. This past July 1 marked the 1 year anniversary of our acquisition of Layered Performance Materials. I've commented previously on how successful this acquisition has been for us, including overall financial performance ahead of plan on both the top and bottom lines. We also continue to advance commercial synergy opportunities On top of cost synergies previously noted. Finally, we completed the sale of the Biomaterials business at the end of May, which was the last of our previously announced non core business divestitures.

Speaker 2

Since 2019, We generated gross proceeds of over $2,200,000,000 by divesting 8 non core businesses, which collectively produced lower growth, lower margins and overall higher volatility in earnings. We received solid value for these divestitures, selling them at a low double digit EBITDA multiple. Shifting to capital allocation, we continue to pursue a balanced strategy that includes prioritizing the return of excess capital to shareholders as well as bolt on M and A. During the Q2, we repurchased $500,000,000 of shares, Bringing our year to date total to $875,000,000 which represents 2.5% of total shares outstanding. We anticipate completing the $500,000,000 of authorization remaining on our existing share repurchase program during the remainder of this year.

Speaker 2

As I noted during our last earnings call, given the magnitude of anticipated proceeds from the M and M divestitures, We expect there will be room to execute substantial incremental share buybacks, while disciplined M and A Also remain a key deployment priority over time as we continue to seek accretive and opportunistic transactions They can leverage our existing growth even further. Finally, our balance sheet remains strong and this remains a key priority, particularly in uncertain volatile macro environment. Turning to Slide 5, another key value driver for us Innovation led growth. Greater focus on secular high growth end markets in electronics, water, Protection, Industrial Technologies and Next Generation Automotive will serve as a sound basis for our organic growth execution. We continue to invest actively in both advancing the technology within our existing product portfolio And also introducing new products around the pillars highlighted here with an overall R and D investment rate of around 4% of total sales In line with best in class peers.

Speaker 2

This investment is coupled with substantial application engineering focus, where our technical personnel have a at our customers' table in the design phases of their products. This past quarter, we had a number of highlights, which We note on the slide, but I'd emphasize that we are proud to have won 4 Edison Awards across different technology platforms, And we continue to make progress in introducing new technologies such as applications in EV batteries, Which has strong growth potential. With that, let me turn it to Lori to discuss the details of the quarter as well as our financial outlook.

Speaker 3

Thanks, Ed, and good morning, everyone. As Ed mentioned, we saw continued strong demand during the quarter in key end markets The volume is higher than our expectations coming into the quarter. Cost inflation intensified further compared to previous estimates, but additional pricing actions are anticipated to fully offset these higher costs. These factors, along with our team's continued strong execution focus, Contributed to those top and bottom line results well above expectations for the quarter. We also delivered a consistent operating EBITDA margin on both a year over year and a sequential basis.

Speaker 3

Focusing on financial highlights for the quarter on Slide 6. Net sales of $3,300,000,000 increased 7% As reported versus the Q2 of 2021, it increased 9% on an organic basis. The acquisition of Laird, partially FI non core divestitures provided a 1% net tailwind to net sales, while currency was a 3% headwind during the quarter As the U. S. Dollar strengthened against key currencies, including the euro and the yen.

Speaker 3

Organic sales growth included 8% pricing gains And 1% higher volume. Volume growth reflects continued strong demand in key end markets, mainly semiconductor, General Industrial, Water and Construction muted primarily by lower volumes for protective garments within Safety Solutions. These factors resulted in organic sales growth during the quarter of 9% for W and P, 8% for E and I And 15% for the retained businesses of the former M and M segment they will report in corporate, which predominantly reflects our Adhesives portfolio tied to next Generation Auto. On a regional basis, we delivered organic sales growth in all four regions globally, including volume increases in Asia Pacific, North America and Latin America. In China, organic sales growth was up slightly versus the year ago period And volumes in China were up low single digits sequentially from Q1 despite government mandated lockdowns in parts of the country into early June.

Speaker 3

From an earnings perspective, operating EBITDA of $829,000,000 was up 6% versus the year ago period And adjusted EPS of $0.88 per share increased 11%. The increase in operating EBITDA was driven by pricing actions, Stronger earnings contribution from the Laird acquisition and volume gains, which more than offset higher inflationary cost pressures. Operating EBITDA margin of 25% was slightly better than our expectations set earlier this quarter and flat on both a year over year and sequential basis. Our pricing actions have fully offset cost inflation on a dollar basis, but have impacted EBITDA margins. Our operating EBITDA margin adjusted to exclude price cost was 26.6 percent or 150 basis points higher than the year ago, driven by productivity and higher volume.

Speaker 3

Our incremental margin was 22% on an as reported Excluding the impact of price costs, incremental margin for our core businesses was almost 60%, demonstrating strong cost discipline and operational productivity. From a cash perspective, cash flow from operations during the quarter of 86,000,000 And capital expenditures of $135,000,000 resulted in a free cash outflow of $49,000,000 Working capital was an additional headwind during the quarter as we continue to secure inventory given tight supply chains and incur higher inventory costs related to inflation. We expect improvement in free cash flow during the second half of the year, consistent with our typical pattern and factoring in a reduction of working capital level. As we separate the M and M business, we continue to encourage transaction related expenses with over $100,000,000 of transaction costs incurred during the Q2 and about $700,000,000 in costs related to the M and M separations expected in full year 2022. These costs combined with higher working capital related to the M and M business that we are divesting or significant headwinds to our 2022 cash flow.

Speaker 3

Turning to Slide 7. Adjusted EPS of $0.88 per share Increased 11% compared to $0.79 per share in the year ago period. Higher volumes and earnings from Laird provided a benefit to adjusted EPS in the quarter of $0.11 per share. These gains were partially offset by weaker mix in W and P related to lower garment Production and Kapton plant startup costs totaling $0.03 per share. A lower share count from ongoing share It provided a $0.04 benefit to adjusted EPS, while other below the line items, including a higher tax rate and exchange gain, netted to a $0.03 headwind.

Speaker 3

Our base tax rate for the quarter was 22.6%, up slightly from 21.8% in the 1st quarter and up notably from the year ago period given certain discrete tax benefits reported in the prior year resulting from tax law changes. We are maintaining an expected base tax rate range for the full year 2022 of 21% to 23%. Turning to segment results, beginning with ENI on Slide 8. ENI delivered net sales growth 16%, including 8% organic growth and 11% portfolio benefit from Laird and a 3% headwind from currency. Organic growth for ENI included a 6% increase in volume and a 2% increase in freight.

Speaker 3

From a line of business Organic sales growth was led by Semiconductor Technologies, which increased mid teens as strong demand continued, led by the ongoing addition to more advanced node technologies and ongoing high semiconductor fab utilization along with growth in 5 gs communications and data centers. Within Industrial Solutions, organic sales growth was up high single digits, led by continued demand for OLED materials for displays, Ongoing strength for Calibrate semi CapEx related product offerings, best cell products serving recovering aerospace markets And for healthcare applications such as biopharmatuthing. Interconnect Solutions sales decreased low single digits On an organic basis, as expected due to a slight volume decline, volume gains for films and laminates in certain industrial end markets We're more than offset by lower smartphone volume due to the anticipated return to more normal seasonal order patterns compared to last year and the including softness in China smartphones. The business was also impacted somewhat by lower global PC and tablet demand and continued constraints in automotive production. Looking forward, we expect similar growth patterns for Semiconductor Technologies Industrial Solutions to continue into the second half of twenty twenty two.

Speaker 3

Within interconnect, we expect to return to positive organic growth in the second half given seasonal strength and added capacity from our Kapton expansion. For the full year, we expect interconnect solutions to be up low to mid single digits on an organic basis. This reflects a slight decline from our previous expectations as supply chain constraints and softer consumer demand are expected to mute volumes for smartphones, PCs and tablets. Operating EBITDA for ENI of $480,000,000 Increased 13% as strong earnings from Baird, volume gains and pricing actions were partially offset by higher raw material and logistics costs. Operating EBITDA margin of 31.4 percent reflects sequential improvement of 40 basis points.

Speaker 3

On a year over year basis, operating EBITDA margin was down 70 basis points due primarily to a 100 basis point headwind from pricecost. Turning to Slide 9. W and P delivered net sales growth of 6% as organic sales growth of 9% was partially offset by a 3% headwind from currency. Organic growth for W and P reflects a 12% increase in price and a 3% volume headwind. Pricing gains reflects broad based actions across the segment, most notably in shelter and safety solutions.

Speaker 3

Volume declines were driven by safety solutions. From a line of business view, organic sales growth was led by Shelter Solutions, which increased high teens driven by pricing actions and continued robust demand In North America Residential Construction, as well as ongoing growth in commercial construction and strength in repair and remodel related demand during the quarter. Within Safety Solutions, sales were up mid single digits on an organic basis as pricing actions were partially offset by lower tieback volumes Given the shift from garments to other end market applications and the resulting negative impact of increased manufacturing line changeovers on overall production. Sales for water solutions were up mid single digits on an organic basis on pricing gains and continued steady demand for water filtration technologies, Muted by supply chain constraints in Asia Pacific due to COVID lockdowns in China and an earthquake in Japan impacting our production. Operating EBITDA for W and P of $348,000,000 declined 1% versus last year as pricing actions taken to offset higher costs were more than offset by volume declines.

Speaker 3

Operating EBITDA margin of 23.2% It was 170 basis points below the year ago period as the impact of price cost was an approximate 200 basis point headwind to margin. Excluding the price cost impact, operating EBITDA margin was over 25%. I'll close with a few comments on our financial outlook on Slide 10. We are still seeing solid demand and our order book is sound in most of our end markets. However, future uncertainties continue to exist in the macro environment, driven by inflationary pressure, challenging supply chains and U.

Speaker 3

S. Dollar strength. Our teams remain focused keenly on execution and we are concentrated on a leverage within our control in order to continue to drive value for our shareholders. For the full year 2022, we are narrowing our adjusted EPS range while maintaining the midpoint of our previous range. We now expect full year adjusted EPS in the range of $3.27 to $3.43 per share versus our previous range of $3.20 to $3.50 per share.

Speaker 3

We are updating our full year 2022 net sales guidance range to be between $13,000,000,000 $13,400,000,000 reflecting a $200,000,000 of incremental foreign currency headwinds, along with the removal of about 100 and $20,000,000 in net sales related to the Biomaterials business given its divestiture at the end of May. We continue to expect organic sales growth for the year After adjusting the high end of our operating EBITDA guidance, primarily for incremental currency headwinds and $3,350,000,000 For Q3 2022, we expect net sales to be between $3,170,000,000 and 3 $370,000,000 and operating EBITDA to be about $810,000,000 We expect 3rd quarter net sales and operating EBITDA We will now begin the Q2 as sequential volume increases are expected to be offset by further foreign currency headwinds and the actions of the Biomaterials business. We are also expecting impact during the Q3 on operating EBITDA of approximately $15,000,000 From unplanned downtime at our W and P Spruance site in Virginia associated with an unforeseen utility disruption from a third party supplier. On a year over year basis, we expect 3rd quarter net sales to be up 2% at the midpoint and up high single digits on an organic basis. We expect Q3 2022 adjusted EPS of approximately $0.81 per share.

Speaker 3

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

Operator

Thank you. Your first question comes from Jeff Sprague from Vertical Research.

Speaker 1

Ed or Laurie, could you just comment on kind of the visibility on the top line in the back half kind of around Some of the economic worry points, right, U. S. Resi, some of the consumer electronic, cell phone and the like, Just what you're seeing from your customer and channel partners there and your comfort level that that's all dialed now properly relative to the guide?

Speaker 2

Yes, Jeff. So we looked over the weekend at our order rates as of the end of last week. And across the board, our order rates are hanging right in there where we would expect them to be. The only softness we've seen, which we've mentioned For smartphones in China demand is down and I don't know how much of that is because of the lockdowns versus just True demand now. And we're seeing some lightness on the PCB board side, which is really for PC, tablets, Some things like that, not significant, but a little bit of a downdraft there.

Speaker 2

And besides that, everything, at least in our order rate is holding in. And now remember, we have a really solid look, I would say, on our orders out about 30 days In the bulk of the businesses, some of them longer than that like the water businesses, actually some months. So we're a little bit shorter cycle on the order rate. But as we sit today, it looks like things are hanging in there. We have seen no downdraft.

Speaker 2

Just to your specific point on the construction side, Both the resi was order rates are good ending last week. The commercial was good and the do it yourself Piece of that business was still good. Having said that, Jeff, we're not naive. We see data points out there. And obviously, we're doing recession planning just Be ready if things do soften up, but at this point in time, not seeing it.

Speaker 1

Great. Thanks for that color. And then just Wondering back to the ultimate deployment of cash, particularly as it comes to the M and M proceeds. Is it still your bias to wait until that cash is in the door? Or now that Celanese has Secured funding and maybe we're a little bit further down the kind of regulatory path.

Speaker 1

Perhaps there's some comfort to get a running start on some of that.

Speaker 2

Yes, Jeff, so we're talking to the Board about it. And just to reiterate the prepared comments we made, we're clearly thinking Heavy on a share repurchase here with the amount of cash available. But and I wouldn't say the cash has to be in the door. I just want to Kind of like I used the term green lights through town, that the timing is what we think. We're going to be ready to do this By November 1, with all the internal work, both we're doing and Celanese is doing, but my gut is by the time you get through regulatory, we know our comment was Kind of end of the year, right at the 1st of the year, 2023.

Speaker 2

So but you never know with regulatory and if there's COVID lockdowns, you just You don't know for sure. So I just want to get closer and then we'll make a final decision. Great.

Speaker 1

Thanks for the color.

Speaker 4

Yes.

Operator

Your next question comes from Scott Davis from Melius Research. Please go ahead.

Speaker 1

Hey, good morning, everybody. Good morning, Chip. Good morning. Ed, you mentioned in your remarks, Roger is having kind of a Challenging price cost, I think you said, GAAP. Is it off the deal model then for 2022?

Speaker 1

Is it materially off or it impacts Your 2023 look at it?

Speaker 2

Yes. So the night there's a good and a bad, I guess, I'll Just put it that way, the good is the revenue line is right on what the planning assumptions were, and the win rate is Looking really, really nice. The EBITDA is off the planning model. And by the way, I'd say it's 4 or putting price cost aside, which you can catch up on, which will happen, there were 4 or 5 Operational issues that have been hitting them that are really impacting the EBITDA percent, by the way, all fixable, all within the Control of the gene to fix those. So we expect improvement to come.

Speaker 2

By the way, I'll just give you 2. One of them is not really even something they can control. They're being shorted as the whole industry is on the silicone side and it's a very high margin application for them. So obviously, we're trying to they're trying to secure more silicone supply and at some point here that will even out, but that's off. And then just to give you one other example, they used more contract manufacturing because they're bringing up a facility that they had a fire in it that They're bringing that back up online.

Speaker 2

But in the meantime, to satisfy the customers, they're using contract manufacturing, which is really eating into the margin of that business. So that's two examples, but there's 3 other ones. So those things that's being worked on and they're getting ready To launch that facility again and bring the production back in house. So it's items like that, we'll work through that. My hope and gut is we'll be in good shape going into 2023, as we get these operational issues fixed.

Speaker 3

Helpful. And just a Yes, I think I'd point to on the top line. One of the areas that we're really impressed with is their Nitration in EV, and so they've seen really nice growth there. We'll continue to take advantage of the opportunity, especially the combined and DuPont, when we put it together with our EV applications, I think we've mentioned in the past, the 2 portfolios generate about $400,000,000 of revenue today. So, we're excited to get those 2 together and see what we can do.

Speaker 1

Okay. And then just on the on Layered, I assume based on what I see on the

Speaker 2

I mean, we got good synergies out of that. We're getting we're probably about 80% through that. We've identified real solidly $63,000,000 in synergies, but what I'm more excited about on Laird and I think the same is going to play out with Rogers is Really the revenue opportunities between the 2, as Laurie was sort of just alluding to, we just had another one in European Auto Customer who Laird had a direct relationship with and we were able to use some of our existing DuPont Technology and an application resolving issue for them and it seems like a nice new revenue stream with that customer. So that's really exciting with the kind of putting these This tool kicked together.

Speaker 1

Sounds good. Best of luck. Thank you. Thank you.

Operator

Your next question comes from Steve Tusa from JPMorgan. Please go ahead.

Speaker 1

Hi, good morning.

Speaker 3

Hey, Steve.

Speaker 5

Hey, on this the price cost side, what's your estimate for the year now? I think you had $350,000,000 in raw headwind prior, this quarter, obviously inflation is tough, but this quarter seemed a little bit higher, than I was expecting. And then also, Are you including logistics in that? And if not, I think you had given like a $225,000,000 headwind prior, maybe just an update on those 2?

Speaker 3

Yes. So we're now expecting between raw material logistics and higher energy costs about $700,000,000 So it's about $100,000,000 increase from where we were sitting when we did The prior earnings call, but we still expect to fully cover that with price increases. So we'll be net neutral on the bottom line. It just creates the headwinds on the margin profile. As we have telegraphed, it was about 150 basis points in total this quarter.

Speaker 3

So underlying, we held flat on margins year over year, but if you take out that delta, we were actually up about 140 basis points, 150 basis Thanks. Nice leverage through the P and L.

Speaker 1

Steve, that's a great question.

Speaker 2

Yes, sorry. Yes, sorry. Steve, for you because I think you were just using rolls, the breakdown of the inflation is about 60% is the rolls, 20% is logistics and 20% is energy, just to give you kind of a feel for it. And by about 70% of our Inflation is in the W and P segment, where you can see we got phenomenal pricing.

Speaker 5

Yes. That energy Cost, was that previously recorded through the raw materials line? I don't recall you guys kind of breaking that out explicitly. Had that been running through that raw materials number in prior quarters?

Speaker 1

Was that a new line item?

Speaker 3

Yes. It wouldn't have been in the RAS, but it would have been in the total 600. So it's not new in total. But the increase from the prior 100 to the current 700 is really primarily the increase in energy costs and then the knock on effect to logistics as we see higher fuel costs.

Speaker 5

Yes. Okay. That makes a lot of sense. And then just one last one on the W and P business, I guess, How do you see that performing through let's say you have kind of a consumer Recession warehousing takes a bit of a hit. I mean, can that business grow through that on a volume basis?

Speaker 5

Or is there kind of too much cyclical exposure in that business. How do you look at that business through that type of recession?

Speaker 2

Well, remember, Steve, one of the first of all, it Depends how deep your session is so far, it's a hard one to answer. But remember that the, the Tyvek product line, which is one of the biggest segments in there, That's a sold out asset. So we can divert product to other end markets. For instance, we are shorting right now, unfortunately, the medical market, medical packaging market, We're trying to work through that backlog as we speak. So we have other applications for it in a sold out asset.

Speaker 2

And finally, I think the water business, just to use W and P, I think the water business would hold in there pretty well in a recession. So yes, we'll see some effect of it. NOMEX would probably go down a little bit. Kevlar might go down a little bit. But I think we can hang in there pretty well.

Speaker 3

And I think you've noticed that just to be sure, so the residential piece of construction is about 40%, the rest is 40% commercial and then about 20% repair and remodel. In the commercial, the largest end markets underneath there are more on the health care side and the restaurant So those are they make up the bulk of the commercial opportunity for

Speaker 1

us. Excellent. Thanks guys. Appreciate the color.

Operator

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

Speaker 6

Hi, good morning.

Speaker 2

Good morning, John.

Speaker 6

Just following up to Steve's question there, maybe we could talk a little bit on the pricing side. You highlighted strong pricing there in WNP, but as you look forward, where do you think you have the most structural pricing? And then where might you have to give back as potentially we see some material deflation in the future?

Speaker 2

Yes. Well, John, that is a great question. We talk about it all the time. So we made a, I'd say, strategic decision That all the price increases we did were all baked into the product price. So we did not do surcharges that are tied to some index Or something like that.

Speaker 2

So I feel good about the approach that we took. And obviously, our goal if a recession hits and commodity costs Come down would be to then get a GAAP, maintain a GAAP going forward. We're obviously, we're maintaining more price And the decrease on the commodity, and we're by the way, we've been working on these scenarios for the last month with our Teams like where do we feel and how much can we hold in each of our end markets, but our goal is going to clearly be to hold a gap So that we can help our EBITDA margin percent, which is that Laurie just mentioned, obviously, has been hit the other way with the price cost thing, but where we can benefit from it. So I won't get into each end market, but I think we have the opportunity to do what I just said to what extent we'll see as it plays out. But that by the way, that's interesting.

Speaker 2

If a recession hits, that's the one thing that Very, very different for companies like ours and many others, where in the past, you didn't have this dynamic. You had a recession, you were cutting your costs or whatever You did. And this time, you have this is probably the single biggest dynamic to improve financial performance That clearly we have and many, many global companies have.

Speaker 6

No, that's very interesting perspective. Thank you. And The $15,000,000 headwind that you're going to see in W and P in Q3, does that fully reverse out In Q4 and kind of what's the confidence level that, that third party can get beyond their disruption?

Speaker 2

So we're already getting past the disruption. We've been bringing lines up this week. This problem hit a week, week and a half ago. And it's just it's a safety issue by the way we have to methodically go through, look at all the lines, what ended up being caught, just called stuck in them When it went down, so it's a little bit of a process, but we're bringing some lines up a day ago and later today, we bring a line up again. So We know we're out of the problem here over the next few days, but we don't make that up because for instance, Tyvek is one of the products, Big products there.

Speaker 2

It's a sold out asset. So we it only makes so much and we're sold out. But by the way, just to Give you a sequence from the 3rd to the 4th quarter, you see a little bit of a lift, which is not necessarily the seasonal Pattern, but what's happening there is we have the spruent is not being down, so we don't have that Q3 to Q4 Problem will be running full tilt there. We have a new water line that we've been telling you about that's coming up at Edina, which will give us incremental volume on a sold out Business also our reverse osmosis product line. And then remember, we have the Kapton line coming up in our electronics business in our Circleville facility, And they all hit in the Q4, and give us the incremental volume and Kapton is also a sold out asset.

Speaker 2

So we're not expecting a sequential 3rd to 4th necessarily a change in demand in the marketplace. They just happen to be the sold out assets where we start getting some Production out of them.

Speaker 6

Great. Thanks for taking the questions. I'll pass it on. Thanks.

Operator

Your next question comes from John McNulty from BMO Capital Markets. Please go ahead.

Speaker 4

Yes. Thanks for taking my question.

Speaker 7

I believe about 20% of your sales come from the EMEA region. Can you give us a little bit of color as to your exposure to Germany And any precautions that you're taking or any levers that you can pull if there are any issues with regard to gas and power as we kind of progress through the rest of the season?

Speaker 3

Yes. Right now, we're not expecting any material impact as they start to ration energy in Germany. There's One plant site in our existing go forward portfolio that doesn't use it, so we don't see an impact there. It's in the businesses that we retained from M and M. M and M does have a plant in Germany, so that they could be impacted minimally if there were some, rationing going on there.

Speaker 3

But as we see it right now, we don't see A headwind from a utilization perspective. We'll obviously continue to watch the European natural gas prices, which Have an impact on primarily W and P and the RemainCo portfolio. They've got a few plant sites in Europe. So they're up again. I think they were 210 or so, as of the last couple of days.

Speaker 3

So we'll continue to keep an eye on those to see where that moves.

Speaker 7

Got it. Okay. Thanks for the color. And then just in the tieback garment business, I guess, how far back To normal or reversing kind of that big surge would you say we are? And it sounds like you had some incremental headwinds that aren't just on the mix shift, but also on the line shifting.

Speaker 7

I guess, can you break that out in terms of how much of a hit that might have been on the margin and how we should be thinking about that going forward through the rest of the year?

Speaker 3

Yes. So in the Q2, garment volumes were down about $40,000,000 So we were able to make up a little bit of that with increasing sales in Medical and other end markets, but in total garments were down $40,000,000 We expect that to be a hit again in 3Q on a year over year basis and then the Q4 we start to get out of that year over year comp headwind. The piece 2 on the production side is not so much a demand because you can shift the demand to other end markets from the garment. More around the product produced that you net out to a headwind. And so when we were making garments, we were able to just run garments the entire time and Minimize the changeovers on the lines.

Speaker 3

Now that we're back to a more normal product mix, we're having to have more changeovers than we had last year. So therefore, translating to Lower pounds produced.

Speaker 7

Got it. Okay. Thanks very much for the color.

Operator

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

Speaker 8

Great. Thanks for taking my question. Just Pretty much a corollary of the last two and a half questions or so. Can you just give us your updated thoughts in the intermediate to long Term margin outlook for W and P, just given the question about structural price increases, improving reliability across the asset base, Yes, product mix and so on and so forth. Just any updated color there and your confidence in those numbers would be very helpful.

Speaker 8

Thank you.

Speaker 2

Yes. I'll give you really both of the bigger businesses here. I think, E and I and You've seen us do this ex the price cost. We should be able to run that 32%, 33% EBITDA margins in this quarter, we weren't far off of that. And then a little bit of price cost there, and I think that's about where that will run And pretty consistently have been there.

Speaker 2

In the W and P business, we really think we can get that over time to kind of more of a 27%, 28 Percent EBITDA business, now by the way, we're planning on getting some of that as commodities At some point here, drift down and we maintain, as I mentioned a minute ago, some incremental pricing above that. But then internally in our own Troll is really capacity released at our facilities and that would be specifically on Tyvek, Our water assets and our Nomex product line would be the big ones for continued capacity releasing. In our prepared remarks, Chris, one of the things you see we've been working heavily on is working on a lot of digital tools that we're implementing on our Facilities that are helping us on the reliability side. These are big heavy assets on the WP side, so you get a 1% improvement. You get quite a bit of throughput.

Speaker 2

So we're really spending our time working kind of our operational excellence playbook and it's that's What will really help us on the WMP and keep incrementing that up?

Speaker 3

Yes. And I think as we look towards the second half, we don't see any material margin movement In the second half versus the first half, we were around 23%, more like 25%, 26% when you take away the cost headwinds in the first half. And so As we look to the second half, we would expect that same 23% roughly underlying, and then 25 ish, 26% when you take away the price cost headwind.

Speaker 8

That's very helpful. And just as a very quick follow-up, to the extent you can, Can you just give us a little bit more color on the expectations for Delrin versus your commentary over the past few quarters in terms of price, number of suitors and so on

Speaker 1

and so forth. Thank you.

Speaker 2

Yes, Chris. So what we've been doing on Delrin is we've been working on Standing it up. It was a division in a division. So it was a little extra upfront work for us. We finished up the data room.

Speaker 2

We're going to actually really launch the process here in the early fall. We're just waiting to get through the summer. So I can't give you any color commentary on detailed number of people, but I would think it's more strategics That are going to be interested in this asset. By the way, it's a business that has 30% EBITDA margins. It's Doing very well still in this environment.

Speaker 2

So that's probably the timing of it and that's why we said so fast the timing by the time you get To close the deal, you're probably about the middle of 2023, and that would really be the end of The kind of the divestiture in getting the portfolio where we want it. And now remember that asset is already in discontinued operations.

Speaker 1

Yes. So very helpful. Thank you so much. Thanks.

Operator

Your next question comes from Steve Byrne from Bank of America. Please go ahead. Steve, your line is open.

Speaker 9

Sorry about that. I wanted to ask you a little bit about your semiconductor business and a couple of potential Longer term drivers, one being whether the product mix is potentially shifting with any of The semiconductor fabs that you support where they are shifting to other products, Is that possible? Is that a way for those businesses to remain pretty robust? And then the other driver being The new semiconductor fabs under construction, do you have already some awarded business Or fabs that are coming online in the intermediate term.

Speaker 3

Yes. I think it's to your first part of your question. I don't see them changing the product mix that they make on the fabs, but they can kind of shift around the end markets. And so we've seen them move away as there's been Some weakness in the consumer electronics space to more of the data center applications where the demand remains very, very robust, which is favorable to our portfolio, just given the higher advanced technologies associated with those end market data center applications. And so you can see in our results in the Q2, we continue to post Very strong results.

Speaker 3

And we're well positioned as we go forward to take advantage of the increase in the fabs through the construction that's taking place. And so right now, I believe over the next few years, they'll bring on an incremental about 7 capacity when it comes to wafer starts and we're very well positioned. We've got great relationships with the majority of those staffs that are putting in capacity. And While it's hard to say if you want any new capacity from those new lines coming on, I don't know if they actually have had all that in But we'll continue to maintain very strong relationships with those large players that are putting in capacity. We've said in the past that we'll be about 200 to 300 basis points Ahead of MSI growth, we're posting those results this year.

Speaker 3

So I don't see any reason why we wouldn't continue to do that. And I think it's important to The semi market and the revenue that's posted is a function of both price and volume and our exposure is to the volume piece. And so Price can be volatile in the semi markets. That doesn't impact our results. It's really a focus on the wafer starts and the MSI, The millions of square inches of wafers produced.

Speaker 9

Thank you, Laurie. And Ed, just curious if you can comment on Any update on PFAS litigation settlement discussions?

Speaker 2

Yes, it's ongoing conversations. And as you know, the judge has Encourage that to go on, but I don't have anything new to say. We continue to have pretty consistent Conversations to try to resolve the issues and I'm still optimistic, but nothing has nothing new to say.

Speaker 1

Thank you. Yes. Thanks.

Operator

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

Speaker 10

Thank you. Good morning. Good morning. Ed, just on your EV exposure with Rogers, how large will it be and what type of

Speaker 1

growth are you looking Forward to going forward.

Speaker 3

Yes. So we see the opportunity in Easy between our portfolio and Rogers' portfolio To be about $2.50 a car, so really nice content number. As I had mentioned earlier, today we had about $400,000,000 of revenue So about 200 coming in from Rogers and about 200 in our existing portfolio, which is predominantly made up of adhesives. And then we have a Nomex paper application for the e motor piece. So it's a very nice opportunity, as I had mentioned, for the 2 companies to come Together to continue to drive opportunities in the space, it's a really high growth rate as we've mentioned before too.

Speaker 3

EV applications are overall growing in the mid teens, ADAS applications even higher than that. We've got a nice ADAS Portfolio today with the incoming Laird acquisition, so lots of opportunities for growth.

Speaker 10

Great. Thank you. And just on tieback between now and when Line 8 In this business to keep on growing earnings until the new capacity is on stream?

Speaker 3

Yes, that's a key opportunity for us is to We need to get capacity to release off those sold out assets. And so during the pandemic, recall that we brought Line 1 back up, so we were able to bring on a little bit of incremental capacity. Line 1 is the oldest line in the portfolio, so it doesn't have as much Production is the newer lines, but it was incremental capacity for us. And we'll continue to try to get more pounds off of all the lines between both As we await the new tieback asset, which we expect sometime around the end of 2023.

Speaker 10

Thank you very much.

Operator

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

Speaker 4

Thanks and good morning everyone. Ed, well articulated that your preference is for share buybacks with the proceeds, but You still mentioned bolt ons. So if

Speaker 11

you could just give us

Speaker 4

an update on what's out there and then maybe give us an update on I think in the past you've sort of sized bolt ons. So maybe you just want to redefine what a bolt on could look like on a go forward basis?

Speaker 2

Yes. Thanks for the question, Vincent. So any bolt on that we would do, 1st of all, would be on one of the 5 pillars that we talk about. And we've been looking at things that are let me see what bolt on would be more like Laird, not as big as Rogers. That $1,000,000,000 $2,000,000,000 type range and it would be something that would bring additional technology The play in one of those pillars that was back to the electronics example, just give us more tools in the toolkit to resolve issues for our customers because we So strong in application engineering and we're really seeing the benefit of that with Lair tied together with the DuPont Electronics portfolio, I know we're going to see it with the Rogers one.

Speaker 2

So it would be something like that, in one of those pillars That we would look

Speaker 3

at. Okay.

Speaker 4

And then, this may be less of an issue for the refined DuPont portfolio now. But in the past, when we've been in these Tricky macro outlooks. We'd get into 4Q and customers could destock more than they Typically do seasonally just sort of to manage uncertainty going into year end. Are you picking up any widths of that in your sort of Sea level to sea level conversations or anything that we should be thinking about?

Speaker 2

No, we're not. Trust me, we're watching it closely. But no, we're not seeing that.

Speaker 4

Okay. Thanks very much everyone.

Speaker 1

Thanks, Jason.

Operator

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

Speaker 1

Thanks and good morning everyone. In your E and I segment overall and in semis in particular, Is your outlook for Q3 kind of better or worse or about in line with normal seasonality?

Speaker 3

I would say it's in line with normal seasonality. So with the one exception of we will start to return to posting growth within the interconnect Solutions business on a year over year basis, just given that last year was a little odd with respect to the smartphone shipments of what they normally do. This year, it's more on a normal So you saw the headwind in the first half as we posted volume declines. We expect to have volume increases in the second half within the Interconnect Solutions Not a year over year basis, but sequentially, no, no material change to our usual pattern. With the one exception, as Ed had mentioned, that the Kapton line coming on, which will provide some incremental revenue in the back half of the year.

Speaker 1

Makes sense. Thanks, Laurie. And to follow-up on W and Keith, your margin comments that margins would be similar in the back half compared to the first half. Is this also a function Of the outage that you see, because I seem to remember you were expecting higher margins in the back half. Is this still an expectation maybe Just delayed into Q4 or Q1 of 2023?

Speaker 3

Yes. I mean, I think maybe coming into the year, we had I did some margin improvement as we went into the back half, but the last quarter and this quarter, we've seen those more flatten out. It's a function of 1, incremental price headwinds that we've seen, so a lot of it is that. So recall back when we originally gave guidance for the full year, we thought Overall, raw materials, logistics and energy would only be $350,000,000 That number has now went to $700,000,000 as we have mentioned and the majority of that increase is in W and P. So that creates as reported margin headwinds for us.

Speaker 1

Thanks, Laurie.

Operator

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

Speaker 12

Yes. Hi. Thanks for taking my question. I guess within Safety Solutions, can you comment on how the business excluding Tyvek is running? I guess, is there anything materially different there we should be thinking about from a volume perspective that might be better or worse relative to industrial production or any other metrics we should be looking out for.

Speaker 12

Thanks.

Speaker 3

Yes. No, those are generally performing well. We had a little bit of a short Well, in the Q2 with access to raw materials within our Nomex line, so it really wasn't a structural demand issue or an operational We couldn't get access to some of the key inputs to make the Nomex product, but nothing to work through on the Aramid side as far as Asset utilization like we're seeing on the Tyvek side with the increased changeovers as we ride through the garment change.

Speaker 12

I guess just on the demand side as well, anything changing through the quarter? Are you seeing any weakening with customers maybe pulling back on spending? Or is demand Still relatively steady.

Speaker 3

No, demand is still steady in the end market.

Speaker 1

Okay. Thank you.

Operator

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

Speaker 13

Hey, good morning. Nice quarter. In terms of Rogers, could you remind us what type of sales growth you expect in 2022? It sounds like it's Coming on plan and looks pretty good. And then if there is a shortfall versus the $270,000,000 in EBITDA, it sounds like As you head into 2023, the bulk of the shortfall will be somewhat within their control to close the gap?

Speaker 2

Yes. The items they're having operationally, all are in their control, I would say, except For the silicone supply, which obviously we're having the same issues here, so we understand it. But yes, the others are in their control, so they can work through those. As you said, it hopefully tee up well for 2023. The bottling, by the way, for them was For growth in the high single digits in 2022 and they hit that Actually, in the Q1, I can't say anything about the Q2, not allowed to, but we would expect them to perform high single digits this year On top line, so that's nice.

Speaker 2

And to Lori's point, a few minutes ago, they're really seeing nice opportunities as we are on the EV side. So feeling good about that work through the operational issues.

Speaker 13

Got it. And as a quick follow-up, at the midpoint For your 2022 guidance, it would imply that the Q4 could be up sequentially versus the Q3. That's seasonally Difficult, I guess, when you look back historically. So any thoughts on why it could be better Q4 versus 3rd if you were to hit the midpoint?

Speaker 3

Yes. So the math you're getting to is about, a $30,000,000 sequential increase from 3Q at 810 and then you back into about 840. So it's really coming from 3 primary drivers. One is you don't have the headwinds from the outage at Spruillins. And so we have sized that at $15,000,000 So you're able to get that volume back in the 4th quarter.

Speaker 3

And then the other two key drivers, are the capacity additions that we have from the water asset that we spoke about earlier and then Kapton getting production off that Kapton Online. So no underlying change in market, just those three items.

Speaker 13

Great. Thank you.

Operator

Your next question comes from P. J. Juvekar from Citi. Please go ahead.

Speaker 11

Yes, good morning. Good morning. Thank you. What do you see in terms of semiconductor shortages And how quickly can automotive production come back? Do you think it's a snapback next year?

Speaker 11

Or is it more of an extended recovery in 23 24.

Speaker 3

Yes. I mean, I think the expectations right now are for 86 1,000,000 cars produced next year, that's off of 80 this year. So still well below the high 90s where we used to be. So still some opportunity to The continued strength and growth heading into 2024. Obviously, it will all depend on the semiconductor chip shortage Resolving itself.

Speaker 3

But even beyond that, I mean, the 3rd quarter is expected to be up 22% and 7% sequentially. So it feels like things are getting a little bit better there as we resolve some of the supply chain issues.

Speaker 2

P. J. Had also mentioned back to points Laurie was talking about earlier too. We very much care About production on the EV side of things, the new portfolio, new DuPont portfolio is very much weighted towards that and not The ICE engine, we are more ICE engine related, I'll say, because of the M and M portfolio, Which by the way M and M will also sell nice into EVs, but this new portfolio was very EV driven. So the growth rate of that It comes way more important.

Speaker 2

Obviously, we'd like the overall growth rate of autos to go up, but it's even very weighted towards that piece.

Speaker 11

Great. And quickly, one other question on China. You talked about slowdown in smartphones, But what about the property market there, which has been under pressure? And I know the government is trying to revive it. What are you seeing there?

Speaker 11

And what's your exposure To the property market in China. Thank you.

Speaker 3

Yes. We actually saw sequential improvement in China, Yes, 2Q over 1Q and that was on top of that extended lockdown. So we were pleased with the results there. To your specific question on the construction market, we don't really have a Construction footprint in China, so it wouldn't impact our overall business. The majority of our construction is in the U.

Speaker 3

S. And in Japan within Asia.

Speaker 4

Thank you.

Operator

Your next question comes from our last caller for today, Frank Mitsch from Fermium Research. Please go ahead.

Speaker 7

Hey, good morning and thanks for squeezing me in. Gina, just a follow-up On China actually, you did 6% organic growth in Asia. Obviously, the data on PMI that just came out Was somewhat concerning, what are you actually seeing right now in the Q3 as you progress in that part of the world?

Speaker 3

Yes. We expect to see improvement in China again into the Q3. And so, while we still year over year probably feel about flat, we see sequential improvement as you go from 2Q to 3Q.

Speaker 7

Great. And then overall, you would expect volumes to be up 3Q versus 2Q. Is most of that is Kapton the big driver there or are there other businesses that you're seeing volumes Materially pick up sequentially in 3Q.

Speaker 3

No, I mean, Kapton is a piece of that The smartphone seasonality as well. So usually we see very high smartphone sales as we head into the Christmas season within the E and I segment and overall electronics In general, as they prepare for the holidays.

Speaker 1

Fantastic. Thanks so much. Thanks, Frank.

Operator

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

Speaker 1

Okay. Thank you everyone for joining the call today. For your reference, a copy of this transcript That will be posted on DuPont's website. This concludes our call. Thank you.

Operator

This concludes today's conference.

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Earnings Conference Call
DuPont de Nemours Q2 2022
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