DuPont de Nemours Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by. My name is Sydney, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DuPont's Second Quarter 2023 Earnings Call. [Operator Instructions] Thank you.

Chris Mecray, you may now begin your conference.

[Christopher Mecray, Vice President, Investor Relations at DuPont de Nemours]

Good morning, and thank you for joining us for DuPont's second quarter 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer.

We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab, and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements.

Our Form 10-K as updated by our current and periodic reports includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures, a reconciliation to the most directly-comparable GAAP financial measure is included in our press release and presentation materials that's been posted to DuPont's Investor Relations website.

I'll now turn the call over to Ed.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning, and thank you for joining our second quarter 2023 financial review. This morning we announced quarterly results with revenue and operating EBITDA better than our previously communicated guidance. This performance reflects our team's ongoing strong execution, while facing continued volume pressure and consumer-driven end-markets, mainly electronics. In the second quarter, organic revenue declined 4% versus the year-ago period despite mid-teens organic declines from the interconnect solutions and semiconductor lines of business within E&I.

We continue to see broad demand streams in industrial end-markets, including water, automotive, aerospace, as well as healthcare, along with continued carryover benefit of pricing actions taken last year to offset inflationary pressure. Notably, operating EBITDA, operating EBITDA margin and adjusted EPS were all up sequentially from the first quarter. After nearly a year along downturn, we also saw a sequential sales lift in interconnect solutions of 7%. We also continue to be proactive in taking additional actions within our control to minimize the impact of volume declines, given near turn slowdown in select end-markets, while also focusing on optimizing cash generation.

Turning to Slide 4, we continue to advance a number of strategic priorities, accretive and value-added capital deployment. Yesterday, we announced completion of the Spectrum acquisition, a leader in critical specialty devices for healthcare end-markets. This acquisition fully aligned with our strategic objectives of increasing top-line growth with customer-driven innovation and expanding our industrial technologies growth pillar, while adding to our current offerings in the high-growth healthcare market.

Spectrum is being integrated into our industrial solutions line of business, where it fits nicely with our existing Liveo franchise. With annual sales of about $500 million, Spectrum together with Liveo and our Tyvek healthcare packaging business, increases our total revenue in healthcare markets to about 10% of our portfolio, with expected growth rates above the company average. Spectrum's year-to-date performance has been solid and we are pleased that operating results are in line with our deal model estimates, which included an estimated upgrading EBITDA margin of approximately 22%. We are excited by Spectrum's complementary fit, and specifically our ability to leverage incremental growth opportunities, including synergies from cross-selling and the complementary accounts, new and faster product development, and deeper design and co-development partnerships with OEMs.

Further on M&A, we continue to make progress with our Delrin business divestiture and our expectation of closing this planned transaction around year end 2023 remains unchanged. There has been good interest in the asset to date.

Regarding share repurchases, we expect we will complete the $3.25 billion accelerated share repurchase transaction launched last November within a month. We also intend to complete our remaining authorization through a new $2 billion ASR to be executed shortly thereafter.

Regarding the water districts settlement that was announced in June jointly with Chemours and Corteva, that settlement comprehensively covers PFAS-related claims of public water systems serving the vast majority of the US population. Our portion of the settlement is about $400 million and we expect final approval in about six months following preliminary approval, which we expect to receive shortly.

Regarding broader capital allocation goals, yesterday's closing of the Spectrum deal and the new $2 billion ASR essentially completes the deployment of excess cash remaining from the M&A divestiture last November. Our current capitalization remains very sound. And as a reminder, we have no significant debt maturities until November 2025. We are comfortable with the net leverage point around 2 times as an equilibrium target going forward.

Before I turn it over to Lori to review our financial performance, let me add that we remain excited about visible growth drivers, enabled by our technical innovation teams and application engineers who are squarely focused on helping customers solve their most complex challenges. To name just a few, strong growth is expected in the semiconductor industry with the ongoing global investment in new fabs. Overall growth of the semiconductor industry is anticipated to be high-single digits over the coming five-year period. We are the leading materials that enable the next-generation of advanced chip manufacturing and packaging, which includes significant technology and support for the emerging channel in AI revolution.

Within water, we continue to drive growth in desalination and wastewater markets and then helping customers achieve their sustainability goals. Finally, our auto adhesives business is well-positioned to continue to capture growth with its product offerings and electric vehicles.

With that, I'll turn it over to Lori.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Thanks, Ed, and good morning. Our focus remains on operational excellence and strong execution, and we are pleased to have delivered financial reports, ahead of expectations despite volume pressure in some of our most profitable lines of business and electronics.

Turning to our financial highlights on Slide 5five. Second quarter net sales of $3.1 billion decreased 7% as-reported and 4% on an organic basis versus the year-ago period. Currency results in a 1% headwind from dollar strength against key currencies, most notably the Yuan and Yen. And we also a 2% headwind related to portfolio changes.

Breaking down the 4% organic sales decline, FX percent volume declined, partially offset by a 2% pricing gain, reflecting continued carryover benefit of actions taken last year to offset broad-based inflation. Volume decline primarily reflects continued demand weakness in consumer electronics, coupled with inventory destocking across the channel and some softness, including destocking in North American construction-related market. Lower volume in consumer driven end-market was partially mitigated by continued strength in water, automotive, aerospace, and healthcare markets.

Volume within electronics and construction end-markets during the quarter was down mid-teens versus a year-ago period, while our remaining industrial base businesses were up about 4%. From a regional perspective, Europe sales in the quarter were up 4% on an organic basis, while North America and Asia Pacific were down 3% and 8% respectively versus the year-ago period. China sales were down 14% on an organic basis, driven mainly by electronic demand weakness, but increased sequentially versus the first quarter revenue.

Second quarter operating EBITDA of $738 million decreased 11% versus the year-ago period, driven by lower volumes and the impact of reduced production rates in electronics, as we align inventory with demand. Operating EBITDA margin during the quarter of 23.9% was down 110 basis points versus the year-ago period, driven by volume pressure, reduced production rates and mixed headwinds in high margin semi business. On a sequential basis, operating EBITDA and operating EBITDA margin were up from the first quarter.

Decremental margins for the for the quarter was 40%, excluding the impact of the production headwind related to reduce production rates within electronics, decremental margin was below 20%, enabled by aggressive actions taken year-to-date to reduced discretionary spend. Adjusted EPS in the quarter at $0.85 per share, but down 3% versus last year, which I will detail shortly.

Looking at cash performance, I would first like to highlight that we have made a reporting change effective with today's second quarter results, and are now providing cash flow disclosure separated between continuing and discontinued operations. This change is being made to improve visibility into cash flow generation and cash flow comparison of the ongoing.

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

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

Turning to segment results, beginning with E&I on Slide 7. E&I second quarter net sales at $1.3 billion decreased 14% as organic sales declined 12% due to lower-volume along with currency headwinds and unfavorable portfolio impact of 1% each. At the line of business level, volumes for semiconductor technologies decreased 19%, while interconnect solutions volume decreased 18% versus the the year-ago period. The decline in semi tech resulted from a continuation of lower semiconductor fab utilization rate, to weakened market demand as well as inventory destocking across the channel.

Chip fab utilization rate in the second quarter averaged in the low 70s on a percentage basis. The decline in interconnect was driven by continued weak smartphone, PC and tablet demand, along with channel inventory stocking. Our PCB customers in China operate in the second quarter with utilization rates slightly improved from the mid-40s during the first-quarter, which was a cycle now. The PCB market has been in slow down for a year now, and we are beginning to see signs of improvement within our interconnect business, illustrated by first and second quarter sequential growth of about 7%, with further expected sequential growth in the third quarter.

Sales for industrial solutions were flat on an organic basis as pricing and ongoing strength and broad-based industrial markets were offset by lower demand in largely consumer-driven areas, such as advanced printing application and those tied to electronic market, including OLED display. Operating EBITDA for E&I at $349 million was down versus a year-ago period, primarily due to volume decline and lower operating rates, to better align inventory with demand, partially offset by reduced discretionary spend.

Turning to Slide 8. W&P second quarter net sales of $1.5 billion were flat versus last year as organic sales growth of 1% was offset by a 1% currency headwinds. Organic growth of 1% reflects a 5% increase in price resulting from the carryover impact of pricing actions taken last year, mostly offset by a 4% decrease in segment volumes, this declined in shelter solutions. At the line of of business level, organic sales growth was led by water solution, which was up mid-teens. Our continued demand growth for water filtration led by reverse osmosis and [Indecipherable] along with benefits from carryover pricing.

Safety solutions sales were up mid single-digits on an organic basis, driven by carryover pricing and volume strength in Kevlar and Nomex within aerospace and automotive markets, especially for EVs, coupled with Tyvek strength in healthcare. Shelter solutions were down 12% on an organic basis, driven by demand softness in construction market as well as destocking, although we do expect a reduced impact from destocking in the second half. Operating EBITDA for W&P during the quarter was $368 million, up 6%, for operating EBITDA margin of 24.6%, increase of 140 basis points versus the year-ago period. The improvement resulted primarily from net pricing gain and disciplined cost-control, which more than offset volume decline.

Turning to Slide 9, I will close with a few comments on our outlook and guidance for the third quarter and full-year 2023. Regarding the demand environment, we continue to expect fairly steady demand in most of our industrial end-markets within E&I and W&P, although we expect sales moderation in our water business due to lower demand in China.

Within electronics, we saw stabilization and some [Indecipherable] in our interconnect solutions business with 7% sequential improvement in sale0 during the second quarter and we expect mid-single digit sequential growth to follow in the third quarter. We semi markets slightly bottomed during the second quarter, and we assume that net sales in the second half will improve slightly on a sequential basis. And then ongoing consumer electronics demand has been notably in China. We had tempered the rate of second half growth from prior assumption.

We are adjusting our full-year 2023 guidance to account for the slower cadence of recovery in electronics, including our assets to continue to reduce production to align inventory with demand. In addition, our third quarter and full-year guidance now includes the estimated contribution for Spectrum beginning August 1. For the full-year, we now expect net sales to be between $12.45 billion and $12.55 billion, operating EBITDA to be between $2.75 billion and $3.025 billion, and adjusted EPS to be between $3.40 and $3.50 per share. For the third quarter 2023, we expect revenue of approximately $3.15 billion, operating EBITDA of approximately $755 million, and adjusted EPS of approximately $0.84 per share.

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

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from the line of John McNulty from BMO Capital Markets. Your line is open.

[Bhavesh Lodaya, Analyst at BMO Capital Markets]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, we think on the next couple of quarters are just a little bit lighter because in China its really slowness in the industrial economy in China right now, which obviously should rebound here at some point, but we're expecting that to be a little softer in the second half of the year that I will -- that's growth we've had in our businesses of double-digit growth. So we're just saying it's going to moderate some, still will -- just slower growth on the second-half of the year. But the healthcare [Phonetic] business has done, quarter in-quarter out it growth at a pretty nice clip, and I expect as China improve, that growth rate will pick up also. Remember, 70% of that business is renewable business that's steady. So, I think a couple of quarters, maybe a little later on China is what we're seeing.

[Bhavesh Lodaya, Analyst at BMO Capital Markets]

Got it. And then in electronics, great to see the inflection coming in the interconnect solutions. We have also seen some positive MSI data points. What are you hearing in semi's technologies? Like, when do you expect an inflection there? And maybe any color on your order books for electronics that you are seeing this quarter so far?

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah. So just probably, just back to the ICS1, that started to decline and destocking started about the middle of 2022, so it's almost been kind of 10 months that been in a downturn in the first-quarter, it was [Technical Issues] and then we did see 7% sequential pickup and we're expecting mid-single-digit pickup by the forecast we had for the third quarter. So obviously that's starting to come up nicely off the bottom. The semi one is the one we tempered a little more in the second half. We look like we hit the bottom in the second quarter. We are not gauging much upturn in the third quarter, instead we were assuming we have a duller quarter kind of near the bottom or just very slightly up from that. And then we think somewhere the inflection point is more in the fourth quarter, but it's hard to tell what month we actually see it. So we didn't pick it up a little bit the forecast in the fourth quarter, but not significantly. So that's the thing we kind of tapped down when we gave you the guidance here today, but I think we've seen the bottom in semi and we're seeing that lift begin and ICF. Now remember, ICF is still negative, it has the ways to come back still, but it was down over 20% and we're starting to ride it back, but will still be negative in the third and fourth quarter on a year-over-year compare.

[Bhavesh Lodaya, Analyst at BMO Capital Markets]

Appreciate the time. Thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thank you.

[Operator]

Your next question comes from Christopher Parkinson from Mizuho Securities.

[Christopher Parkinson, Analyst at Mizuho Securities]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, let me comment, and I'll turn it to Lori. But I would just add. I don't want to say customer names, but we're in good shape this year on the new models being introduced by a couple of the large cell phone players. So from a market-share standpoint, we know which films were in and we're in a better position than we were last year. Not that we were in a bad position at all last year, but we feel like we're in a good position with the launch of the new models coming in. We know what we're in those phones and probably clearly one of the things I think you all know we're in Kapton technology the 5G antenna is a key component for us along with some other components, but that's a key one. Lori, you want to just talk about the timing of?

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah, on the smartphone I expect broadly that consumer electronics are covered. That was part of the revision that we had in the second half, our original expectation on a full-year basis. For smartphone must down about 1% and PCs down about 7%. We provide expectations on initiatives and we'll get some on with industry forecasts, but smartphones down to be more in the 5% range and PCs for low-double-digit. But that does embed year-over-year growth in the fourth quarter. So it sounds like one more quarter of year-over-year down in the third quarter and then recovery in the fourth into a more normal market and looks we are setting up for a strong 2024 as this market [Indecipherable] maybe through the destock and returning to more of a normal demand atmosphere.

[Christopher Parkinson, Analyst at Mizuho Securities]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah. I think look -- when you look at that business consistent, it is choppy some quarters just because we have a big installation we're doing and all that. So it's not to be every single quarter, but generally that business grows kind of mid-to-high single digits pretty consistently. Now this past quarter we had even a better quarter than that on the growth rates, but again can be lumpy. But when you kind of smooth out the whole year, I think that's the way to look at it, he kind of net 6% to 8% growth range when you smooth out the year. And look, I expect showing that activity will pick-up again. It's hard to tell if there's a little bit of excess inventory also, that is part of it. But we are again expecting a couple of just lighter quarter, slightly quarters with growth in the third quarter, but just lighter than we had in the second quarter. And I think again its a consistent business, and it has been since we had it, so are expected to continue to grow in that range.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

And to add comment on the lumpiness. If you put it to your stack on the volume were up high-single digits at the quarter. So there is lumpiness [Indecipherable] and project work on, but in general it's fairly sharp as perhaps and there is no change in our sales forecast estimate. The requirements are going are sustainability [Indecipherable] I think key growth drivers.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

And the key here is its -- there is replacement business that's 70% of the business. So, it adds to the consistency of it.

[Operator]

Your next question comes from John Roberts from Credit Suisse.

[John Roberts, Analyst at Credit Suisse Group]

Thank you. Is it fair to say that Delrin will be a private-equity transaction? It would seem to be hard for a strategic to do a closing by year end at this point.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah. We're pretty confident we'll close it by year end. And I would just say private equity has been interested along with strategic. But I don't want to get into any more than that at this point in time, but I think, we're highly confident why the deal there has been nice interest in it.

[John Roberts, Analyst at Credit Suisse Group]

And then secondly, there's been some challenges to the 3M P5 settlement. Are you anticipating having to go through a similar process with your settlement?

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

You know, John, what happened here was very typical of these bigger playbooks settlements that these class actions. If you go back and look at any of the other big one, you know what we did that. I think what you're referring to is the challenge from state AGs and all that. I don't think by what we're hearing that there's going to be a problem here, we're thinking in the very near-future we get preliminary approval from the judge. And as we said in our prepared remarks, it will be about six months after that preliminary approval from the judge, where we would then be finished with that and make the payment.

[John Roberts, Analyst at Credit Suisse Group]

Thank you. Your next question comes from Steve Tusa from J.P. Morgan.

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

Hi, good morning.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Hi, good morning, Steve.

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

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah, so that was a net headwind between price and raws, and so we did increase that to about $140 million from our view of a $100 million. So we have seen a step-up and we expect to benefit from deflation. To remind you of is roundly $800 million last year, the headwind and [Indecipherable] that we got [Indecipherable] to get all of that money back up, but we're making really nice progress. Initially, a lot of the deflation is coming from the energy and logistics side. And you can see what natural gas prices have done from the peaks that we saw in the third quarter of last year and the stabilization in that supply chains, we are seeing nice improvement in logistics. So the one-piece that we're working through is just the timing of when that falls through the P&L. So we actually in the first quarter, predominantly a little bit in second quarter actually saw some headwind from the carryover from the escalation in 2022 for our P&L was expected. And as we head into the back-half of the year, we'll -- its hard to see those benefits that we've been getting from a procurement perspective drop into the P&L.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, Steve, it kind of takes four to five months on the raws to work its way through into our system and we bill a customer. So some of this we are obviously going to see now in 2024, but the procurement team has been working very aggressively and Lori and I meet with them on a pretty consistent basis because it's a big part of seeing up from 2024, of course. And by the way, just as a side note on the margins on the E&I. Remember, that much of the walls were in E&I, we only raised prices 2% there. But the predominant part of it is going to be come in W&P. And the thing that affected the margins in E&I is really the absorption charge that we've taken. By way, we're going to take it again in the third quarter, we're probably going to take it in the fourth quarter. Just to make sure everything is teed-up for 2024, and that's affected our --like in the 3rd -- in the second quarter that affected our margins in the eye by about 400 basis points. So, without the absorption, we know we're running that business north of 30 even in a reduced volume environment. So I feel very confident. You all watched us run that in that's 32% to 33% EBITDA range. I'm very confident why I look at that, that we're in good shape. It was a big rebound.

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

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

So very small. The one area we're going to give up some price that we forecasted in the second-half of the year is in the construction-related markets. We also had to raise very significantly in those markets because what the roles did last year. So we've made an assumption in this forecast that we will give up some of the pricing there, otherwise we feel pretty solid across the rest of the portfolio.

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

Okay, great. Thanks a lot.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks, Steve.

[Operator]

Your next question comes from David Begleiter from Deutsche Bank.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. Ed and Lori, how much did Spectrum add to Q3 and '23 guidance?

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. So in total it will give you about a little north of $200 million in payout, that is 22% margin. It's pretty consistent across the months, that you'll take two months of it in the third quarter and then the full three months in the fourth quarter. And from an EPS perspective, it's really only about a penny on a full-year basis, once you factor in the loss of the income from the cash that we paid for the deal. So, its more of an EBITDA function versus an EPS [Technical Issues]

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

I think it's mostly done with destocking by the end of this third quarter. And and that's talking to a couple of our key distributors and customers. One of the big box guys, by way was to do have rebalancing of all their inventory by moving around to different stores in regions. That's how they were dong it, and they were pretty much through that process. So I think [Technical Issues] and the third quarter were kind of they are.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, thanks.

[Operator]

Your next question comes from Mike Leithead from Barclays.

[Mike Leithead, Analyst at Barclays]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. So we had a really strong growth within the corporate M&M. It was driven by the [Indecipherable] piece, which is the the largest segment of it, and it's really from the EV [Technical Issues] were up about 16% in the second quarter, we [Indecipherable] a similar in EV. Really nice performance in the EV piece. So that's what drove the improvement year-over-year primarily.

[Mike Leithead, Analyst at Barclays]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah. No, we're definitely going to take the absorption this quarter, we're in now third quarter, about $40 million and same in the fourth quarter is our plan. So we'll really get inventory aligned up very well with demand. So we just feel it's a prudent thing to do right now. So that's what's baked into the plan that we hear today.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

And we say nice nice improvement inventory in the second quarter, about $80 million of a reduction. We look to continue to drive than and we get into the end of year. We had an improvement sequentially in both cash generation and cash conversion on the [Indecipherable] into the back-half of the year. Our third quarter is typically our strongest quarter for cash generation. We have an interest payment, which we have in the second and the fourth quarter and we pay our annual bonus in the first quarter, so that third quarter is between it from that perspective. And just to note that I had mentioned on this subject to make sure that you caught it and will do so and continuing ops piece as presentation in the cash. So it will take out all the noise from the [Technical Issues] component, which are primarily in this year the funding of the [Indecipherable] account, which will take place at some point in the second half and then the funding of the other MOUs IM that we pulled that out, just to kind of focus on continue on operations and [Technical Issues]

[Mike Leithead, Analyst at Barclays]

Great. Tank you.

[Operator]

Your next question comes from Josh Spector from UBS.

[Josh Spector, Analyst at UBS Group]

Yeah, hi. Thanks for taking my question. I guess first, I wanted to ask on the 3Q guidance. So if we look organic sales and EBITDA, you're kind of guiding flat sequentially, but you're talking about ICF as up mid single-digits. Sounds like raw materials could be a little bit better and help typically with ICFs up, you get a mix benefit there. So what drives that flat EBITDA? What are some of the offsetting items that will keep EBITDA flat versus having it up sequentially on a organic basis?

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. So, the three biggest items that we had mentioned, first being a wider deceleration that we see some moderation in water as we get into the back-half of the year coming off a really strong quarter in the second quarter. We had also mentioned that you'd expect to have to get back some price primarily in the shelter business as in water. And then the third probably smallest piece that's something worth breathing will be -- we do see some small destocking within biopharma, so its been pretty well-telegraphed across some of the other players and we are starting to see that a little bit in our Liveo business in the industrial [Technical Issues]

[Josh Spector, Analyst at UBS Group]

Okay, that's helpful. And I guess when I think about ICFs and look into 2024, so I haven't done the full math, but maybe organic you're down something like 10% this year. I guess when we look at smartphone growth, PC growth, there is not a massive inflection next year, there is better growth forecasted maybe low single-digits. I guess, how do you think about that ICF business performing relative to that? Do we over overbuild some inventory so we don't get the full bounce-back or do you expect it stronger? If you could frame that, that'd be helpful. Thanks.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. I mean, it's kind of hard to say at this point how the restocking potentially could happen in those two spaces. We would expect it to perform nicely alongside and market. The one tailwind that will happen for us in a year-over-year perspective on EBITDA moving, we won't have those absorption headwind that we had in 2022. So the predominance of this absorption happens [Technical Issues] tailwind for us as we head into 2023.

[Josh Spector, Analyst at UBS Group]

Okay, thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thank you.

[Operator]

Your next question comes from Vincent Andrews from Morgan Stanley.

[Vincent Andrews, Analyst at Morgan Stanley]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. The predominance of sundry is [Indecipherable] in the main operating EBITDA. So its where our interest income comes in. Its also where some gains on asset sales that don't get it recorded in operating EBITDA or adjusted adjusted EPS come it. So it's not really premium related to our operating business [Technical Issues] when that comes out tomorrow about what all the other specifics, but that's not really a reflection at all with any of our efforts to control discretionary spend.

From that perspective, we have very aggressive on controlling discretionary spending to minimize the decrementals that these employees [Technical Issues] and we've done a nice job doing that. I mean that is our task. Our decrementals as reported were 40%, but if you take out the headwind from the absorption that we then drive in to reduce inventory were more down in the mid-20s, and so that's really reflection of the aggressive actions we've taken from both. We did a small restructuring to be able to reduce some headcount, primarily in the G&A space and really trying to keep R&D and marketing and sales pretty clean. And then we have been taking some reduction to our annual discretionary compensation [Technical Issues] more so coming into the R&D [Technical Issues] That would be a piece of that. And then on the SG&A line will be a small action that we took to reduce headcount across the discretionary spending.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

[Indecipherable] as our travel and entertainment budgets, we're trying to keep them. The sales people are traveling, the application engineers, but we're really being careful on people holding management meeting all over the [Indecipherable] We've really put the word out of our TV while were intougher environment here, we will come out with a nice but just watch anything on the discretionary side.

[Vincent Andrews, Analyst at Morgan Stanley]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

No, I don't think you'll see anything, obviously, the rest of this year and aAt least well into next year. I think I said on the last call, a goodyear for us. We love where we've got the balance sheet at is. I think what we mentioned on the call, we're going to have leverage Xfinity somewhere around 2 times. That's where we want to be and we're in a great spot. I don't feel like we need to do anything. We got to where we need to be.

[Vincent Andrews, Analyst at Morgan Stanley]

Great. Excellent. Thanks very much.

[Christopher Mecray, Vice President, Investor Relations at DuPont de Nemours]

Thanks.

[Operator]

Your next question comes from Frank Mitsch from Fermium Research.

[Frank Mitsch, Analyst at Fermium Research]

Hey, good morning. Ed, I had the river house benedick that our debts on Sunday, it was very nice. So congrats on that [Speech Overlap] you haven't had it yet. I highly recommend it. I highly recommend it. Hey, following-up on the M&A question, auto adhesives is still in your corporate line item. When might we expect that to be folded back into the one of the businesses, and-or is that a candidate for divestiture?

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

No, it's not a candidate for divestiture, it's very core to us. We like the position we have, especially with the EV opportunity we have and we're already obviously seeing a lot of wins there. The growth rates been phenomenal. So we like that business. And by the way, we -- I don't think we're going to make any new short-term on pulling it out of their reporting at this point in time, we just -- we've got it rather the the way we want. so you won't see anything in the next couple of quarters.

[Frank Mitsch, Analyst at Fermium Research]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. So volume growth in general in Europe is about flat. I would have expected similar performance as we get into the back-half of the year. And it's really the region has been the topic for us, its been region specific [Technical Issues] is China. The price piece though, it will start to wane as we get into the back-half of the year. So we saw it kind of cut in half as it went from Q1 to Q2 and as we get into Q3 and Q4 we really -- it would be flat, slightly negative, given some of the price that we would have to get back primarily in the shelter space that we [Technical Issues].

[Frank Mitsch, Analyst at Fermium Research]

Great, thank you.

[Operator]

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

[Steve Byrne, Analyst at Bank of America]

Yes, thank you. The EPA has estimated several 1,000 water districts that would need to comply with the proposed MCLs. My question for you is that you mentioned you think you can get final approval on the settlement in six months or so. Do you need a certain fraction of those water districts to opt in and can you comment on how how that is going? And do you have a view on how they will comply? Do you expect they will mostly use carbon or do you think some of them might employ RO or in exchange your technologies?

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so look, there is percent that have of course opt in or we can walk away from the settlement. So I mean, that's a very-high percentage and we think just to makes [Indecipherable] that will not be a problem. Remember, a lot of these water districts have been being caught to by the plaintiff side. This hasn't been done in a a vacuum. So, they've been talked too along the way here to get to this preliminary real settlement. So I think shortly, as I said, we will get it approved by the judge on a preliminary basis at then you will full opt-ins to make sure you get that done and then you have final call approval once you hit that threshold. So, it's really up to each of the different -- different water districts, how they're going to handle that to clean-up any [Indecipherable] that's in there. So I don't want to comment on that.

[Steve Byrne, Analyst at Bank of America]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

No, I don't see any change on the market strategy. The predominance of it is direct, because the customers and with the projects in-place and we just replacing this alternatives [Technical Issues] the current revenue that is coming from. As I said that, as. I had mentioned earlier in the call, kind of the mid-to-high \single-digit grower for us, a lot of opportunities as we go forward around sustainability and and the access at great water.

[Steve Byrne, Analyst at Bank of America]

Thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks, Steve.

[Operator]

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

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great. Thanks for taking my question. Just wanted to ask about the electronics market here. Could you just elaborate on the destocking, the volume trajectory, I guess from here? I think previously you had expected this year to be the main volume negative hit, you'll be facing easier comps next year. Do you think you should grow and kind of, say, the mid-single-digit level for next year, where do you expect electronics volumes to be next year? Thanks.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah, so we -- as we have mentioned, we believe within ICF that will continue to see sequential improvement as we head into Q3, and then any little bit of improvement as we head into Q4. In the semi, we don't see a material bump in conventional sales until we get into the fourth quarter. But definitely the year-over-year volumes and headwinds will start to easy and we see full-year overall organic growth at about 10%, and as primarily [Technical Issues] So, it's probably a little early to call that 2024 looks like -- I think there is a pretty good sense that it will be positive just given that you won't have destock or not and [Technical Issues] which would be hard to see, you don't have that headwind from the destock here for years, and we're really encouraged as we head into 2024 from the tailwind that we'll see from not only market recovery in electronics, but also the lapping of the absorption FX headwind that we've taken this years to control the inventory. And then the further benefit from deflation as it fully runs through our P&L are kind of the key components [Technical Issues]

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great, thanks. And just real quickly on the share buyback plans. So you'll be completing the 3.25 [Phonetic] very soon. Could you just describe how we should think about the the other $2 billion that you commence shortly thereafter. Would that be done ratably or who should we think about that flows in. Thanks.

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. So it will be similar structure as for the first 3.25 [Phonetic]. We've spoken pretty fast within a month and then shortly thereafter we will execute the $2 billion ASR, so you will get 80% of the shares upfront. And then you get the 20% cleanup up in the back and probably will take us about six months to complete that full program. It's usually about a quarter for every $1 billion of shares that you're taking now.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Thanks.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks.

[Operator]

Your next question comes from Mike Sison from Wells Fargo.

[Mike Sison, Analyst at Wells Fargo & Company]

Hey, good morning. In terms of semi technologies and interconnect solutions, I think historically after destocking event you did see some restocking. But given [Indecipherable] a lot of the destocking to end, how do you think that plays out this time around? Is there any differences between the regions on that?

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Yeah. I mean, it's hard to say what everyone's going do with respect to the restock after coming through such a significant restocking that you might change their normal patterns to get [Technical Issues] So, probably a little too early to say what's going to happen from a restocking perspective [Technical Issues] with the stabilization that's happening in the supply chain [Technical Issues]

[Mike Sison, Analyst at Wells Fargo & Company]

Got it. And then just a quick follow-up. E&I has historically been above 30% EBITDA margins and so to get back there, it t just simply getting all the volume back?

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, it's it's really two things, to get the volumes back. But remember, a point that I made earlier once [Technical Issues] the EBITDA margins, ex the absorption in this second quarter was already over 30%. So the absorption is what pulled it down the charges we took there to sort of expand that the 26-ish number. So we know we can even in a softer volume environment, we're running at a little north of 30. And as you said and I said earlier, we've run this business 30% to 33% EBITDA margins and we will get nice throughput as the volumes continue to come back.

[Mike Sison, Analyst at Wells Fargo & Company]

Got it, thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks.

[Operator]

Your final question comes from Patrick Cunningham from Citibank.

[Patrick Cunningham, Analyst at Citibank]

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

[Lori Koch, Executive Vice President and Chief Financial Officer at DuPont de Nemours]

Know what piece of that, we shall expect $20 million. It probably will take the better part of 12 to 18 months to get that full $20 million out. I mean, obviously, for us, this is more of a revenue synergy opportunity as we bring the two portfolios together merged. Our expertise in biopharma with their expertise in medical device from a revenue synergy perspective.

[Patrick Cunningham, Analyst at Citibank]

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

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so our Liveo business worst hit. I think Lori mentioned this a little while ago on the biopharma side we're seeing some destocking there, and I think I've heard I think six other companies I heard in the last week that the results that they were seeing some destocking in biopharma, and my gut is that lasted a couple of quarters, just to correct that a little bit. And it was another one of those markets just like semi, I remember I was getting calls from CEOs in the healthcare business that we need more, we need more and I think just like semi, everyone overshot. There is a little bit of a correction going on there. But I'd say that's probably the third and fourth quarter a little correction there. As Lori mentioned earlier, the Spectrum numbers are kind of right along where we thought they would be. So they look like they are teed-up for the year. We thought they were going to happen in the second-half of the year here and I I would expect, again, the growth in our healthcare businesses will be above company average, certainly above GDP.

[Patrick Cunningham, Analyst at Citibank]

Great, thank you.

[Edward Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thank you.

[Operator]

I'll now turn the call over to Chris Mecray for concluding remarks.

[Christopher Mecray, Vice President, Investor Relations at DuPont de Nemours]

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

Participants

Corporate Executives

• Christopher Mecray, Vice President, Investor Relations
• Edward Breen, Executive Chairman and Chief Executive Officer
• Lori Koch, Executive Vice President and Chief Financial Officer

Analysts

• Bhavesh Lodaya, BMO Capital Markets
• Christopher Parkinson, Mizuho Securities
• John Roberts, Credit Suisse Group AG
• Steve Tusa, J.P. Morgan
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Mike Leithead, Barclays PLC
• Josh Spector, UBS Group AG
• Vincent Andrews, Morgan Stanley
• Frank Mitsch, Fermium Research
• Steve Byrne, Bank of America Co.
• Arun Viswanathan, RBC Capital Markets
• Mike Sison, Wells Fargo & Company
• Patrick Cunningham, Citibank