DuPont de Nemours Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 15 speakers on the call.

Operator

Good day, and welcome to the DuPont Specialty Products USA LLC Third Quarter 2023 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. In the interest of time, please keep to one question and one follow-up question per person. And finally, I would like to advise all participants that this call is being recorded.

Operator

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

Speaker 1

Good morning, and thank you for joining us for DuPont's Q3 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 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, Actual performance and results may differ materially from our forward looking statements. Our Form 10 ks, as updated by our current and periodic reports, Includes detailed discussion of principal risks and uncertainties, which may cause such differences.

Speaker 1

Unless otherwise specified, all historical financial measures presented today are on is included in our press release and presentation materials and have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

Speaker 2

Good morning and thank you for joining our Q3 2023 financial review. This morning, we announced 3rd quarter results And delivered solid earnings accomplished through strong operating execution by our teams despite ongoing volume headwinds, including channel inventory destocking and continued weak demand in China. We reported sequential operating EBITDA growth of 5% And margin improvement of 140 basis points in the 3rd quarter. We also produced strong cash flow during the quarter With adjusted free cash flow almost 50% higher than the year ago period, highlighting our efforts to prioritize working capital improvement In a challenging global business environment and normalizing after last year's global supply chain difficulties. Compared to Q3 2022, organic revenue declined 10% due primarily to the impact of incremental channel inventory along with lower volumes from semiconductor and construction end markets.

Speaker 2

Within our electronics portfolio, Our Interconnect Solutions business recorded a 2nd straight quarter of sequential sales lift as underlying demand improvement And normal seasonality contributed to an 8% sales increase. We also saw signs of stabilization with the semiconductor markets and expect some sequential sales improvement from Semiconductor Technologies in the 4th quarter. 3rd quarter volume is lower than expected, primarily due to incremental channel inventory destocking, including with our distributor customers, which was evident in the Water Solutions and Safety Solutions lines of business. In this environment, we remain focused on controlling discretionary spending And we're also planning additional restructuring actions to continue to ensure we can drive sound operational and financial performance, Targeting at least $150,000,000 in annualized run rate cost savings, which we expect to be seeing later in the Q1 of 2024. It's always difficult to precisely time market inflections, but current industry forecast within electronics submarkets Call for recovery during 2024.

Speaker 2

This includes forecast for PC shipments to grow mid single digits, Driven by replacement demand, smartphone shipment growth in the mid single digits also driven by replacement demand And new product launches and for server demand to gradually improve next year. This growth is supported by the rapid surge in demand for AI servers as well as replacement for traditional servers. In general, demand for high performance and high density memory chips is accelerating, supported by AI growth as well as overall growth for new mobile product launches. This directly correlates with DuPont's product strengths within the semiconductor and consumer electronics markets. Despite the near term headwinds we are experiencing, We are confident that our key end markets are well positioned for long term growth and we expect these structurally attractive markets We'll provide the foundation for DuPont's value creation looking ahead.

Speaker 2

Turning to Slide 4, We significantly advanced our strategic and capital allocation priorities during the quarter to drive shareholder value. First, we closed the acquisition of Spectrum on August 1, which fits nicely alongside our Libio Healthcare related product line within our Industrial Solutions line of business within E and I. We are pleased with Spectrum's operating results to date, which are aligned with our modeled estimates. We are excited to welcome the Spectrum team, which is currently focused on executing new revenue growth opportunities stemming from significant customer wins earlier in the year. 2nd, I am pleased to announce that we are in the process of closing today The previously announced sale of our roughly 80 percent ownership interest in the Delrin business, the remaining piece of the former M and M segment held for sale to the private equity firm TJC and a transaction value in the business at 1,800,000,000 This deal was structured to maximize value for our shareholders.

Speaker 2

It provides significant upfront cash proceeds with minimal expected tax impact, which can then be deployed in line with our strategic priorities. It also provides an opportunity for us to participate in future upside returns upon the exit of our retained interest in Delrin. TJC has an excellent track record of creating value and we look forward to leveraging their talent and focus to continue to grow the high quality Delrayne business. Regarding share repurchases, in September, we completed the $3,250,000,000 accelerated share repurchase transaction launched last November. We then launched the new $2,000,000,000 ASR, which we expect to complete during the Q1 of 2024.

Speaker 2

Combining these two ASR transactions, we have repurchased approximately 15% of our outstanding shares when complete, reflecting our continued commitment to returning capital to shareholders as part of our balanced financial policy. Including these ASRs and the proceeds from the Delaware sale, we anticipate finishing the year Close to our target net leverage ratio of about 2.1 times. Further, we anticipate using a significant portion of excess Cash during 2024 for incremental share repurchases once the ASR is complete. With that, I'll turn it over to Lori.

Speaker 3

Thanks, Ed, and good morning. Our teams continue to execute well in a softer volume backdrop, driven by broad based inventory destocking, demonstrating strong financial discipline and focus on operational excellence. I am most pleased with the sequential margin improvement registered by each of our segments in the Q3 as well as our strong cash performance in the period. Given volume headwinds, those delivery of stronger margins and better cash flow are attributed to execution around lowering our input costs, Coordination with the operating teams to right size our inventory position as well as overall progress with productivity via operational excellence initiatives. We are very focused on operating discipline and pleased that site level operating execution is positively positioning us for solid margin upside as volumes recover.

Speaker 3

We expect to see evidence of this in 2024 given expected recovery in key end markets, including electronics. Turning to our financial highlights on Slide 5. 3rd quarter net sales of $3,100,000,000 decreased 8% versus the year ago period, A 10% organic sales decline was slightly offset by a 2% portfolio benefit due primarily to revenue contribution from Spectrum Acquisition. The organic sales decline reflects a 10% decrease in volume, resulting primarily from semiconductor and construction end markets, as well as the impact of channel inventory destocking. D and I and W and P organic sales declined 13% and 8%, respectively, While the retained businesses and corporate reported 1% organic sales growth, including mid single digit growth in the Adhesives portfolio.

Speaker 3

From a regional perspective, consolidated DuPont sales decreased on an organic basis globally versus the year ago period with Asia Pacific, North America and Europe down 12%, 10% and 2%, respectively. China sales were down 16% on an organic basis versus the Q3 of 2022, though E and I sales in China increased sequentially in the quarter We saw smaller year over year declines in each of the last three quarters. 3rd quarter operating EBITDA of 775,000,000 decreased 9% versus the year ago period, driven by lower volumes and the impact of reduced production rates, primarily within E and I We align inventory with demand, partially offset by lower endpoint costs related to raw materials, logistics and energy, along with the portfolio benefits in Spectrum. Operating EBITDA margin during the quarter of 25.3% was down 50 basis points versus the year ago period, driven by volume pressure in the high margin semi business and reduced production rates, primarily within the E and I segment, offset partially by cost deflation benefits, which increased somewhat from 2nd quarter levels. On a sequential basis, operating EBITDA was up 5% and operating EBITDA margin improved 140 basis points.

Speaker 3

Decremental margin for the quarter was 31%, enabled by cost deflation and aggressive actions taken year to date to reduce spending. As I mentioned earlier, I am pleased with our cash flow improvement during the quarter. Optimizing working capital performance continues to be a top priority for us. On a continued operations basis, cash flow from operations of $740,000,000 less capital expenditures of $119,000,000 resulted in adjusted free cash flow of $621,000,000 in the 3rd quarter, a 40 7% increase versus the year ago period. Adjusted free cash flow conversion during the quarter was 151%, an increase versus last year and much improved compared to the first half of this year.

Speaker 3

We currently expect to finish the year with conversion around our targeted level of 90%. Turning to Slide 6. Adjusted EPS for the quarter of $0.92 a share increased 12% compared to $0.82 in the year ago period. Below the line benefits, including a combined $0.16 benefit related to a lower share count and lower net interest expense, more than offset lower segment earnings. Other below the line benefits, including a lower tax rate and lower foreign exchange losses contributed $0.06 to adjusted EPS improvement versus the year ago period.

Speaker 3

Our tax rate for the quarter was 24.6%, down from 26.2% in the year ago period, driven by the impact of a rate true up in the year ago period and lower than our previously communicated modeling guidance as discrete tax headwinds were lower than expected. Our expectation of a full year 2023 base tax rate of 24% remains unchanged. Turning to segment results, beginning with E and I on Slide 7. D and I 3rd quarter net sales of $1,400,000,000 decreased 9% as organic sales declined 13%, offset partially by a portfolio benefit of 4% from the Spectrum acquisition. The organic sales decline reflected 12% decrease in volume and a 1% decrease in price.

Speaker 3

At the line of business level, organic sales For Semiconductor Technologies, we're down high teens versus the year ago period, resulting from a continuation of inventory destocking across the channel And to a lesser extent, ongoing weak end market demand and the impact of China trade restrictions. On a reported basis, Semiconductor Technologies sales were flat sequentially in the 3rd quarter. Within interconnect solutions, organic sales declined 11% Year over year due to both volume and price declines, driven by the pass through of lower metal pricing. Volume continued to be impacted weak smartphone, PC and tablet demand, particularly in China, along with more moderate inventory destocking, which we believe is largely complete. On a sequential basis, the interconnect business reported a 2nd straight quarter of sales improvement with sales up 8% driven by seasonality as well as some underlying demand improvement within PCB markets.

Speaker 3

Organic sales for Industrial Solutions were down high single digits 1st of the year ago period due primarily to destocking within biopharma applications for our Libya product line and continued lower demand in electronics related end markets. These declines were partially offset by increased demand for OLED display materials. Operating EBITDA for ENI of $383,000,000 was down versus the year ago period, primarily due to volume declines and lower operating rates to better align inventory with demand, slightly offset by a portfolio benefit related to Spectrum. Operating EBITDA margin increased 140 basis points sequentially during the 3rd quarter. Turning to Slide 8.

Speaker 3

W and P 3rd quarter net sales of $1,400,000,000 declined 8% versus last year As volume decline of 9% was slightly offset by a 1% increase in price due to the carryover impact of actions taken last year. Within Safety Solutions, organic sales were down high single digits due primarily to channel inventory destocking. Shelter Solutions sales were down high single digits on an organic basis, driven by continued demand softness in construction markets and ongoing channel inventory destocking. On a sequential basis from the Q2, shelter sales increased slightly and we expect narrower Year over year declines in 4th quarter. Organic sales for Water Solutions were down mid single digits versus the year ago period, due primarily to inventory destocking, including with distributor customers and lower industrial project demand in China, mainly impacting reverse osmosis.

Speaker 3

We expect generally flat sequential volumes in the 4th quarter versus the 3rd quarter. Operating EBITDA W and P during the Q3 of $362,000,000 decreased versus the year ago period due to lower volume, partially offset by the impact of net pricing benefit. Operating EBITDA margin of 25.6 percent increased 70 basis points year over year and 100 basis points sequentially from the Q2. Turning to Slide 9, I will close with a few comments on what we are seeing in the 4th to be generally similar to the Q3 with some sequential sales much expected in Semiconductor Technologies. As mentioned earlier, we saw additional channel inventory destocking and slower industrial demand in China, mainly impacting water solutions compared to prior And we assume these same trends will continue through the end of the year.

Speaker 3

As a result of this incremental volume softness, We are adjusting our net sales and operating EBITDA guidance and now expect full year net sales to be about $12,170,000,000 and operating EBITDA to be at about $2,970,000,000 which is at the low end of our prior range. For the Q4, we expect net sales of approximately $3,000,000,000 with a sequential decline versus 3rd quarter driven predominantly by additional We expect full year 2023 adjusted EPS to be approximately $3.45 per share, which is the midpoint of our prior guidance range. With that, we are pleased to take your questions. And let me turn it back to the operator to open the

Operator

Your first question comes from the line of Jeff Berg of Vertical Research Partners. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 2

Good morning,

Speaker 4

Ed. A lot going on in these channels, obviously. Do you have any kind of sense or how do you measure kind of your sell in versus sell through? Trying to kind of understand kind of what that incremental headwind is from inventory versus just kind of general demand trends. And maybe just a little bit of color on how much more you might have to do on inventory or production to kind of get things where you need them to be balanced out?

Speaker 2

Yes, Jeff. So we did a pretty detailed analysis of it. And I think a good way to look at it What is our distributor customers doing versus our direct end customers? So maybe just to give you a couple of numbers on the W and P side of our business, about 50% of Our volume goes through distribution and the other 50% we sell direct to customers. And so we did a whole analysis Because the distributors, you can see quick what's going on with them and almost across the board, the distributor network It's destocking pretty broadly and it's on a percentage basis down significantly more than Our direct customers, so probably just won because it hit us this quarter, our water business in China, which is mostly reverse osmosis, Was down at 36% of it goes through distribution, the rest we sell direct to customers.

Speaker 2

But the 36 percent the third of our sales that go through distributors in China, it was down 36%. Through distribution was down about 12% direct to the customer base. So if you do that analysis in our safety business, you get very similar trends Going on, so clearly the distributors are going through a destock and I'm sure as we're approaching year end everyone's trying to get their inventories kind of where they want them. Now by the way, having said that, my take is that the destock obviously goes into the Q1 if we just started to see it in some of these W and P businesses. But I would think the distributors work it down fairly quickly after we're kind of exiting the Q1.

Speaker 2

But that same trend applies almost across the board when you do that analysis. It's the distributors are way down visavis the direct customer channel.

Speaker 3

Yes. And on the absorption question, we're still in the same general ballpark in the second half as where we were in the first half. There's a little bit of a mix and we'll be Taking a little less absorption headwinds in E and I and a little more in W and P as we see the GSOC continue as we head into the Q4. But in total, the number is about Equal to the first half.

Speaker 4

Great. I was wondering if you could give us a little color on restructuring also. Ed, I think you mentioned $150,000,000 run rate. I wasn't sure if that was full year 2024, but maybe just give us a sense of how much restructuring tail you have in 'twenty three, the incremental And I think you're expecting 2024 and as volumes kind of hopefully improve into 2024, Some of that just kind of discretionary temporary stuff that kind of comes back into the P and L?

Speaker 2

Yes. So on an annual basis, Jeff, will be About $150,000,000 of savings kind of spread between plant fixed costs and functional costs are mostly G and A Expense, not touching R and D and all. But and by the way, just to back up on that, Laurie and I have been looking at this kind of how we can do some restructuring for over a For over a year, so we're not doing it just in response to what's going on. I think I would said on other earnings calls, we started looking at it actually a summer ago. How could we streamline a little bit more?

Speaker 2

So we're ready with that. We'll start seeing the benefits Of the restructuring, in the towards the tail end of Q1, we'll get going on it by the middle of December. So by time it hits, we get things going. You'll start to see the benefit then. So you'll kind of get 3 quarters of the benefit For a big chunk of that in 2024, a little bit of that would potentially come back on the fixed costs, The plant fixed cost side is volumes pick up, but not all of it.

Speaker 2

So you get a little bit of it coming back in as we see the volumes lift. That's basically the program.

Speaker 5

Great. Thank you. Thanks, Joe.

Operator

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

Speaker 6

Hey, good morning everybody. Ed and Laurie.

Speaker 2

Hey, Scott.

Speaker 6

Chris? Good morning. Good morning. Couple of things, I mean, just to follow-up on Jeff's question, because it just seems like it's so important and topical for you guys. I mean, there's Two reasons why people destock inventory, right?

Speaker 6

I mean, one is maybe the lead times come down and they feel like they can get it fast. And 2 is they're really worried about their customers not wanting Product, and I'm talking about the distribution level, not your direct. What do you think are the main drivers of this kind of incremental because we've been talking about the inventory destock for several quarters now and this Quarter seemed like it almost got a little bit worse, particularly in Water and Protection.

Speaker 2

Yes. Scott, I'll just give you a ballpark of my thinking. I think 2 thirds of it 75%, something like that is really that the supply chain healed itself. It's pretty darn normal for everybody again. So everyone sat on excess inventory.

Speaker 2

I mean, look, we're doing the same thing. We had 151% cash conversion. We're lowering our inventory levels because we have built up more than we normally would during COVID. And every other CEO I talk to is doing the same thing. So And by the way, I think it's the pressure you're getting near the end of your year.

Speaker 2

You're really trying to get things in line for 2024. So I think a big part of it is that, but There certainly is a percent of people just more worried is there a recession coming. You got to infer a yield curve for 18 months, People start getting nervous. There's always been a recession. So I can't say that's not it, if that's in there.

Speaker 2

But I think the bigger part of it is we just all build Inventory, we got what we could get during COVID. And by the way, I'll give you one example because we're seeing some destocking on the metal packaging side. A year ago, I had most of the CEOs of the medical device companies personally call me Pleading that we could ship more Tyvek material for packaging so they could ship their products out. And I remember telling them, in fact, I sent a letter to the trade industry. I said, Our shipments to you were up 18% so far this year.

Speaker 2

I mean, I can't do much more. And that was everyone scrambling to get it and then they overshot. And now I probably shouldn't be surprised we're seeing some destocking on the medical packaging side. So I think that's just a great example. That has nothing to do with the recession.

Speaker 2

That's just everyone had too much.

Speaker 6

Yes. That's great color and makes a lot of sense. I want to ask about price. And I know the 2 segments are just way different. E and I kind of manage price versus cost and W and P, maybe there's a little bit of a different price strategy.

Speaker 6

But when you think about like this new normal of higher Inflation, wages, other costs, not explicitly material costs, but other costs. How do you think about price in kind of a future construct, meaning kind of maybe entering into 2024? It's probably more of a valid question for W and P, but maybe you can address for both segments and give us a little bit sense of what you think there. Yes, I don't

Speaker 2

think Yes, Scott. I don't think 2024 will be what you'd consider a normal year. In a normal environment, a few years in a row of just normal things, which we haven't 4 years for anybody. I would we would always get like 1.5% to 2% price lift in the W and P business. Our goal in 2024 is to hold on to as much pricing as we can and you obviously see us and others we're getting benefit from Price cost spread, we saw it in the Q3, which helped us out.

Speaker 2

We'll obviously see it in the Q4. So our goal is to really Manage that well for 2024 because there's still quite a bit there. Now we're not going to get all the costs back By renegotiating contracts, everyone's trying to hold price of our vendors or trying to hold it too. But we're still up to about 225,000,000 That we've gotten back, that we so I mean, that's pretty significant for us. And so we're hoping to hold that for next year.

Speaker 2

My gut is we're going to give Some pricing in the shelter business because we don't want to lose market share, but a lot of the other businesses will really be managing that tightly. But then if we ever get back to normal times, hopefully 2025, we would look at that 1.5% to 2% price increase. And then electronics, we just try to hold up about flat. Usually, we're flat to down 1%, but you get nice volume lift.

Speaker 6

Good color. Thank you. I'll pass it on. Appreciate it.

Speaker 5

Yes, so much.

Speaker 2

Good talking to you. Thank you.

Operator

Your next question comes from the line of Steve Tusa of JPMorgan. Your line is open.

Speaker 5

Hi, good morning. Good morning.

Speaker 7

Can you just update us on what you actually expect for what was the price cost spread this quarter and what you expect now for the year?

Speaker 3

Yes. So our full year number, we ticked up to $225,000,000 versus the last We had expected about $140,000,000 So we're seeing that deflation benefit come through in the back half. So in the Q3, we saw net About $75,000,000 benefit. We'll see that tick up to around $100,000,000 in the 4th quarter.

Speaker 7

And so does some of that carry into next year?

Speaker 5

Yes. Okay.

Speaker 7

And then I guess With

Speaker 3

the caveat of yes, the spread will continue into next year with the caveat that we don't I'd note to Ed's earlier comment what the price is going to do, but we do expect the deflation benefit to continue because it took its time to get through inventory This year.

Speaker 7

Got it. And then just kind of a philosophical question on how you think about next year. I mean your exit Great. Now on some of these businesses just from a revenue perspective is more negative. You're taking revenue down.

Speaker 7

You talked about some of it being destock, which is effectively an easier comp next year in the second half of the year. I mean, Do you think with this profile that you guys can still grow revenues next year?

Speaker 2

Yes. I think the Q1, Steve, to your comment will be light, more similar to the Q4 because I don't think the destock will end that quick, but the distributors will move very fast. They just stop ordering for a while. Literally, we've talked directly to them and they're like, Just don't ship me something for a few months and then we'll be back on track. So, yes, I think Q1 will be on the light side, but I think after that We'll see some nice lift.

Speaker 2

I would certainly by then the electronics part of our business, which you know is highly profitable, I think we'll be back to a really nice lift. Just on the semi side, the fabs are running a little below 70% utilization. I think if you do the math on what the industry is thinking, they're going to Trying to get up as the year goes more to 80% utilization, the following year more like the 90% where you would run on that. So you'll start to see some on a percentage basis, some pretty nice lift and we've had 2 quarters in a row of ICS lifting. So it's clearly off the bottom.

Speaker 2

That will, I think, continue to grow as we go through next year. So I think you're kind of through the electronics one, Although we're kind of now doing a destock on the WMP side. And remember, we're mostly short cycle. So we'll see it first and I think by the Q2, you'll see a lot of that destock over with and you'll see the volume lift.

Speaker 7

And one last one for you. I mean, Yes, you've been through a few cycles. DuPont having, I guess, high single digit to even double digit organic volume declines. I mean, Are we already in a recession here in your mind?

Speaker 2

I'm kind of 1 foot in, yes. I've been there for a while, by the way. I track a lot of economic indicators. And I said earlier, when you see the yield curve where it's been and all, there's always been a Session. So I like the management, I guess conservatively.

Speaker 2

So I've been telling the team for a long time, just Prepare for a softer environment and if we're wrong, great. We'll have done all the right actions to position ourselves. Yes, I think there was this quarter just reading all the results from companies I saw, they were pretty mixed.

Speaker 7

Right. Great. Thanks a lot.

Speaker 2

And people were mostly missing on the volume and not on their EBITDA.

Speaker 7

Right. Yes. Thanks a lot.

Speaker 6

Okay, Steve.

Operator

Your next question comes from the line of Michael Leit of Barclays. Your line is open.

Speaker 6

Great. Thanks. Good morning, guys. Ed, just

Speaker 5

on the Delrin sale, can you maybe speak to why this Monetization structure was sort of the best ultimate outcome. And then relatedly maybe for Laurie, When should we expect the note receivable to accrue or I guess when do you get that $350,000,000 in cash?

Speaker 2

Yes. So we like that look, we sold Delrin in a tougher environment than when we sold the rest of M and M. So this optimized what we could get for the asset over a few year period. We're getting $1,200,000,000 Upfront, we're riding 20% equity in it. TJC has a phenomenal track record.

Speaker 2

So my gut is we have some nice upside coming from the retained interest that we have in the business that's to be proved out, but I'm highly confident in It is a good business. It should do well over the next few years. So we think that optimizes our position. So we sold it at $1,800,000,000 in value. My gut is we can end up nicely above that with the equity that we have.

Speaker 2

So and by the way, it just goes to our whole capital allocation Strategy, it was not a business we wanted to be in long term even though it's a good business. We're taking the volatility out of the portfolio And we'll redeploy that cash. And as we said in our prepared remarks, we will actually do more share repurchase after the ASR ends next Because we're in a great balance sheet position and we'll have good free cash flow and we plan on buying back more shares.

Speaker 3

Yes. And Michael, on the debt, so, we gave them a $350,000,000 loan. It's an 8 year loan if the Ensure were to go that long. So like normally they would monetize quicker than that and then we would get the repayment of the loan. So if it went to the longest So it would be 8 years, but that's most likely not the reality.

Speaker 5

Great. That's super helpful. And then second, I was Hoping maybe you could give us a bit more color on the moving pieces within the Corporate and Other segment. I assume the retained businesses are doing fairly well in the auto backdrop. So Can you speak to what's kind of the moving pieces there?

Speaker 5

And should we expect that business to continue to deliver some level of double digit millions of EBITDA?

Speaker 3

Yes. So, the businesses, just for refresher, that are in corporate are primarily the auto adhesives business, And then we have Tedlar and multi base, but the largest end market served is automotive and there's a large EV exposure there. So we saw nice Mid single digit volume growth again, we expect for a full year from a volume growth perspective that the auto adhesives to grow up in the high single digits, And we continue to expect really great things from that business with the EV penetration that we've seen. So from an earnings perspective, they were up very nicely as We saw nice earnings growth and margin appreciation in the Q3. In the Q4, we have a little bit of a Deceleration, just a lot of their exposures in the U.

Speaker 3

S. With automotive. So there's some headwind from the strike that fortunately is now over, but there will be a little bit of a headwind from the October impact. And then the U. S.

Speaker 3

Car builds right now from IHS are expected to be down. But overall, the trajectory of this business is really strong. They had a great 2023 and we expect to release a strong 2024 again.

Speaker 5

Great. Thank you. Thank you.

Operator

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

Speaker 5

Yes. Thanks for taking my question. So it looks like the electronics end market seem like they're starting to stabilize a little bit. You expect semi technologies To be up quarter over quarter, can you add some color on what you expect from the other 2 subsectors in the E and I division? Do you see Normal 4Q seasonality, is there maybe a little bit of destock in the Industrial Solutions side?

Speaker 5

I guess, can you help us to think about the trends there?

Speaker 2

Yes. So semi will lift a little bit. So I would still say bouncing along the bottom, but getting through the destocking. When I say a little bit, Few percentage points sequentially up in the business. The ICS business will be down Some, but that's all seasonality.

Speaker 2

If you look at it, just the normal drop you see in seasonality, it's less. So The business continues maybe a few more points to improve after the last two quarters of improvement. So kind of less Seasonality because the business is recovering. And then on the industrial part of E and I, we'll definitely I see a little bit of destocking there. The biopharma destocking, which is in that business, picked up some during the quarter.

Speaker 2

So I Expect that to continue into the Q4 and hopefully be kind of done by then with that. And there's just a little bit of other destocking going on with some of our distributors in that business. So nothing significant, but I think that will see a little bit of softness.

Speaker 5

Got it. Okay, thanks. And then maybe just as a follow-up, I think as we get to kind of mid December, the opt out period should be kind of done on the PFOS side. I guess can you give us any Update on the Water District settlement, is there anything that you can speak to at this point? It seems like that should put a A lot of kind of the pressure is behind you, but I guess any update there would be helpful.

Speaker 2

Yes. So we the date That's coming up here is the deadline for the opt out is December 4th and then we will see a list of Who the opt outs are on December 6th? And then there's a final fairness Hearing in South Carolina on December 14. So it's all kind of happening in that 1st 2 weeks of December. And I really can't add any other color.

Speaker 2

I just don't have any other facts in front of me. We're feeling obviously very good about it, highly confident That this will get signed off and get done. And Brian, I'll just add, obviously, people are talking to the key water districts around the country. So we're feeling good and hopefully we're close to getting that cemented.

Speaker 5

Great. Thanks very much for the color. Yes. Thanks.

Operator

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

Speaker 8

Thank you. Good morning. Ed Lars, just on restructuring, do you have any more color you can provide some more concrete examples Where that $150,000,000 is going to come from?

Speaker 3

Yes. So we had mentioned that it will primarily come from plant fixed costs And then the G and A or the functional cost of the overhead structure of the company. So the plant fixed cost is really a function of the destocking and what we can do From a volume perspective, so looking hard at contractors, looking hard at the plant fixed costs and looking hard at making sure that we can Temporarily adjust our cost structure to align with the volume environment that we're seeing. And then on the kind of the SARS side or the functional cost, General administrative, that shift continued cleaning out. So as Ed had mentioned, we're confident looking to make sure that we're running as lead and efficient organization Possible, so that's where the focus will be.

Speaker 3

We really won't be touching R and D and marketing and sales. So we believe this This destocking period is temporary and so we really need to be prepared when it comes back on the other side to be able to take advantage of the upside. So that really won't be the focus. It would be more On the plant costs and the functional spend.

Speaker 8

Understood. And then just on interconnects and semis, did you gain any share this Or is there any new technology products kind of pipeline that you think can grow share this year or next year?

Speaker 3

Yes. So there's examples in both. So within semi, really around the packaging side, we've seen some nice share gains. And also just in general, we've seen an uptick on the advanced node components. And so if you actually look at our performance in the quarter, we had nice Growth with TSMC as they continue to expand their advanced nodes and take advantage of the AI revolution.

Speaker 3

So we saw a nice growth on the semi side. And then within ICS, we had a new application with 1 of the large smartphone producers, Which took advantage of a material that crossed over our metallization business, to be able to have, a key win there. So that was Part of the sequential growth that we saw in the quarter and we continue to see it's on every single model of the phone For the 1 producer, so it was a nice win for

Speaker 8

us. Thank you.

Operator

Your next question comes from the line of Alexis Guimara of KeyBanc Capital Markets. Your line is open.

Speaker 9

Thanks and good morning everyone. This is Ryan in

Speaker 2

for Alexey.

Speaker 9

My first question comes around the Shelter Solutions Business, just in terms of where do you think we are in the destocking cycle there and demand? And then how good is your visibility into 2024 here?

Speaker 3

Yes. So we saw less of a year over year headwind in shelter in the Q3 versus what we saw in the first We feel like things are starting to normalize a little bit and then our expectations for the Q4 are to see less volume declines that we're The year to date. So it feels like things are normalizing a little bit. Obviously, there's a little bit of disparity from a market perspective between The resi and the commercial side, a lot of the growth that was on the commercial side is more in commercial applications where we don't A big footprint like for example around the data centers. Our exposure in commercial was more around education and healthcare and government where there hasn't been That change growth has really been more on the data center side.

Speaker 3

But in general, it feels like we're nearing the end of the significant downturns. We expect the Volumes in the Q4 should be more down in the mid single digits versus the double digits that we've seen all year. So it feels like it's starting To normalize and we do believe that destock is now behind us. So now it's just a function of when the demand returns.

Speaker 9

Okay. Very helpful. Thank you. And then just a question from me. You mentioned China trade and the impact it had on the Semiconductor Technologies business.

Speaker 9

Wondering if you might be able to quantify that impact there and then just Any updated view on the recently announced restrictions there? Thank you.

Speaker 3

Yes. So no change to our current view of about $60,000,000 of a revenue headwind from The exposure. So a lot of our For

Speaker 5

the year. For the year.

Speaker 3

For the year, yes. So it's about $15,000,000 a quarter. So, a lot of the restrictions have More than in the advanced node spaces that we don't have a huge footprint with the Chinese players from that perspective. So it's only about $60,000,000 for us.

Operator

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

Speaker 10

Yes. Hi. Thanks for taking my question. So I just wanted to ask on Q4. I mean, it kind of seems like the puck is moving around in different areas But if I heard you right, your sales guidance is kind of flattish in the different segments sequentially.

Speaker 10

Demi is just picking up, which has the highest drop through and you're expecting some higher raw material benefits. So what would drive EBITDA down sequentially, dollars $25,000,000 versus flat to up?

Speaker 3

Yes. So we see the underlying revenue down about $100,000,000 once you on an organic basis. So we will get another quarter of the Spectrum business for Q3. If you take that out, we see underlying organic revenue down about $100,000,000 So it's about split between seasonality and currency being about Half of the headwinds with the seasonality being within the primarily the smartphone and consumer electronics business in ICS and shelter as As strength throughout the summer months. And then currency, we do see as a bit of a headwind sequentially.

Speaker 3

And then the other half of it is from the medical packaging piece that Ed had mentioned earlier, so we do see some medical packaging pullback in the Q4 as those device makers destock From the overbuy that happened over the recent quarters. So it's really just and then the EBITDA, You have a net benefit from additional spreads. We have mentioned there's about $25,000,000 of additional benefit from spread, but that $100,000,000 impact from the volume decline Kind of net you out to the rounding the $50,000,000 that we guided to for the Q4 versus the $775,000,000 that we posted in the Q3.

Speaker 10

Okay. Thanks. No, I appreciate that. And I mean just if you kind of coming back to electronics and semis, I think as you said, utilization rates in the mid-70s, I think we've maybe troughed in the high-60s. You guys haven't really felt as much of that pickup.

Speaker 10

I guess as you look at things improving, how much does semi reconnect in your business year on year just from

Speaker 5

a reconnection to where the rate

Speaker 10

is now? I mean is that mid single digit to where the rate is now? I mean is that mid single digits or higher just on where we're run rating now past inventory or it would be a different math To get to a different level? Thanks.

Speaker 2

Well, the facts have been to your point have been running kind of if you lump them all together. I think you would average out in the high 60s. And I think if you go through all the projections out there and First, that high 60s is going to ramp through 2024 up to by the time you get maybe end of Q3, beginning of Q4 up to Maybe a little over 80%. So you still won't be back according to projections Kind of over 90% till you enter into 2025. But again, going from high 60s to 80% is a nice lift during the year.

Speaker 2

And then more of that Production will be advanced nodes, which back to Lori's point a minute ago, plays to our strength. That's usually why we outgrow 200 to 300 basis Point what the market is doing. But it's also by the way, you also got to look customer by customer on the semi side because some are still ship we're shipping out of inventory. But all the signs I saw from all their reporting publicly, they've seen their bottom, it looks like, pretty much across the board. But I don't think the lift will be dramatic in the at the beginning of the year, but I think as the year sequences, we'll see nice lift Occurring in that business.

Speaker 1

Okay. Thank you.

Speaker 2

Yes. Thanks.

Operator

Your next question comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.

Speaker 11

Thank you. A couple of questions here. First The distributor part of the supply chain, not just for you, but for pretty much everybody seems to have taken it more on the chin with the overstocking And then the destocking, do you have a sense of whether that was just they were a little too overzealous with principal risk loading up? And then on the way back down, is the issue just that they don't have the same access to credit or just the higher rates? And I guess what I'm getting at Do you think over time your terms with distribution and maybe some of your other customers are going to need to change In a way that might require you to hold more working capital or to give them incentives to move it along.

Speaker 11

I guess I'm just sort of asking What's going to ultimately break the log jam of the game of hot potato of nobody wanting to hold inventory?

Speaker 2

Yes, I don't think it's I really think it's just we all overbuild inventory, direct vendors and distributors Through the COVID period, I mean, we all talked about it. And I go back to my example on the Medical Packaging side, customers were just yelling for us to get more to them. And usually when that happens, you see an overshoot happen. Some of them probably even double order. I've been through that before in my career and then you get the snapback.

Speaker 2

I think that's what we're going through is that they're adjusting their inventory back to appropriate levels. They don't have to worry about carrying excess inventory Because supply chains are normalized again. And again, we're doing the same thing. We're feeling confident about being able to get Apply all our different components and so we're working our inventory levels down from what were elevated levels because of the COVID stuff. So I don't think that we'll have to worry about different terms or anything with our distributors.

Speaker 2

Okay, good to hear. Laurie, can

Speaker 11

I just ask you what's the updated Thoughts on minimum cash levels that you want to keep just as we think about next year and your free cash flow generation versus what you might do from a share repurchase perspective?

Speaker 3

Yes. So we'll start still target about $1,500,000,000 of minimum cash levels. As we had mentioned on the call, we'll look to return A significant portion of our cash flow to shareholders next year through share repurchases. So we'll be done with the existing ASR At some point later in the Q1 and then that will give us the ability to get back into the market underneath the new program. As Ed had mentioned, we have the Delrin proceeds coming in at some point today.

Speaker 3

So we'll have that cash come in the door. And then when we're In an open window again, we'll be able to do more share repurchase.

Speaker 11

Okay, great. Thanks so much.

Operator

Your next question comes from the line of Frank Mitsch of Fermium Research. Your line is open.

Speaker 12

Good morning. I wanted to follow-up on Hey, Ed. How are you doing? Wanted to follow-up on Spectrum. You indicated that financially it was performing In line with your projections, I was just curious, I think you indicated that you expected like something like $45,000,000 of EBITDA for the balance of 23 Since you closed on August 1 and also I think you guys indicated you get about 20,000,000 Of synergies, are those numbers still accurate?

Speaker 12

What's your take on Spectrum so far?

Speaker 3

Yes. So Spectrum is performing according to plan. They've got nice growth on a year over year basis, especially within the medical device The majority of the business is medical device, there is a piece that goes into industrial and it's really based on some nice key wins that they've had with some of the large medical device Producers, so we're pleased with the performance that we've seen, the numbers that you had cited earlier, are still on track. And then the synergy delivery It's $60,000,000 in total. It's over a couple of year time frame for us to realize those synergies, but that continues To remain on track as well.

Speaker 3

Obviously, the initial synergy delivery will come from some overhead consolidation that will get after the procurement related

Speaker 12

Very helpful. Thank you, Laurie. And if I could follow-up on Semiconductor Technologies, you indicated that AI growth is Going to help this business in the future. Can you give us an idea of the size that you anticipate AI to grow to over 2020 For 2025 in terms of your semiconductor business?

Speaker 2

Well, I will go Frank more and more high level. I a lot of the growth we'll get will allow the semiconductor business again once we get through this The downturn here and all that that this business can grow kind of mid to high single digit, which by the way it was doing before all The destock hit, again, if the market grows 5 to 6 to 7 points, we'll grow 200 to 300 basis points above that. And that 200 to 300 basis points is mostly because of that high end chip because of AI enablement and all that and that Plays to our sweet spot, so that's how we get that outsized growth usually over the market and AI plays right into that.

Speaker 3

Yes. Maybe just to help disguise it for you too. So within our semi portfolio, we have about a $700,000,000 business in data centers overall and about a Little more than a third of that is direct to AI. So that's really a nice portion of growth that we can continue to see above the overall MSI projections.

Speaker 12

Very helpful. Thanks so much.

Speaker 2

Thanks, Rick.

Operator

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

Speaker 13

Hi. You have Brock Hoffmann on for Steve Byrne. Just going back to the Spectrum business, now that you've had the business for a couple of months, you see any opportunities for cross selling to these medical device companies?

Speaker 3

Yes, that was one of the large Theses for the revenue synergy outside was that they are very strong and have great relationships on the medical device side and we're very And have great relationships on the biopharma side and how can we bring those 2 pieces together to generate revenue synergies. So it's been A couple of months in that thesis as we've initially seen it continues to play out and we don't have the revenue synergies on the hand right now, but we see nice opportunities as We continue to integrate these 2 businesses

Speaker 5

together. I

Speaker 13

see. That's great. And then, which of your businesses Do you see the most potential for share gains and new product introduction versus volumes that are driven primarily by cyclical recoveries?

Speaker 3

Yes. I mean, I think we see a big ticket by segment. Within E and I, we've mentioned that We should see 200 to 300 basis points of outsized market growth within semi and that's a combination of share gain and just where our exposure is in advanced nodes in the areas that are growing Faster than others. We also see a step changed opportunity within the general consumer electronics space. We have seen some nice Share gain on the metallization side, it will continue to show in the top line as the PCB providers Start to ramp up their utilization rates to more normal levels, but we have seen our performance versus some of the peers in the metallization space be better.

Speaker 3

And then within the WP portfolio, we continue to expect nice growth within water. Obviously, we're in a destock right now, but we'll see nice growth More from a secular basis, so just that water industry is generally growing in mid single digits, which is a nice market for us. And on the safety side, it's really going to be we've added capacity now and we have to we'll get step change growth from utilizing that capacity. So we're nearing the completion of an additional line for Tyvek. We've constrained the Tyvek market for years.

Speaker 3

And so We'll see some nice lift there as we fill up that asset and we've recently expanded some capacity within a new technology in the Kevlar space. It's a new opportunity for us to bring a lighter weight Kevlar to the market, and we look for good things from that business as well. And shelter generally should be more along the GDP type grower.

Speaker 5

Understood. Thank you. Thanks.

Operator

And our final question today comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is open.

Speaker 6

Thanks for taking my question.

Speaker 14

Hey, just wanted to take a Quick try at maybe kind of mid cycle or longer term earnings growth. If you think about volumes kind of maybe double digits below normal in electronics And then some leverage on a recovery there. You're exiting the year at around $3,000,000,000 of annualized EBITDA. Would that imply something in the 3.3 to 3.6 kind of range as far as when you take a look at longer term or mid cycle where you want to get to? Thanks.

Speaker 3

Yes. I mean longer term, you should get back into that we were running the E and I I think it's where your focus was in the more of the 32% margin range and we should see the volume kind of return there over time as the utilization rates The large TCP guys and the semi guys return. But if we look more near term as far as headwinds, tailwinds as we head into 2024, there's definitely Tailwinds from volume growth from the electronics recovery and normalization of the destock. And there's Obviously incremental tailwinds from the deflation we had mentioned as we go forward and then the benefit of the restructuring actions We are now taking and we'll start to see the benefit of it at some point later in the Q1. And then just from an EPS perspective, we do continue to lower our share So we'll see lower 4th quarter share count versus the full year, which will carry us into 2024 and then we'll have the incremental benefit of the $2,000,000,000 program that we'll complete In the Q1 and then advanced new shares, new share takeout as well.

Speaker 3

So we'll see a nice EPS benefit that we've seen As we took shares out throughout 2023. The headwinds though are I think we will continue to see the industrial destock impact the water and safety It's primarily in the Q1, so that will be a headwind to the Q1. We will see most likely some price Modernization or give back primarily in the shelter businesses that I had mentioned. So we'll try and maintain that as long as we can, but we will Be cognizant of potential share loss and potentially have to be giving some back there. And then just we have taken some aggressive actions on the Compensation side in 2023, so we are paying a below target variable compensation Payout this year and so we would most likely see normalization of that as we head into 2024.

Speaker 3

So those are the big puts and takes With the one extra exception from a below the line perspective around interest income, so we did see about $145,000,000 of interest income this year just as we held The proceeds from the Millat from the selling each transaction in the first half before we get deployed them to Spectrum and then the full share repurchase program. So We would see a step down in 2024 from interest income from about $125,000,000 this year to probably $20,000,000 next year. Thanks.

Operator

I would like to hand the call back over to Chris MacRae for closing comments.

Speaker 1

Okay. Thank you all for joining our call this morning. And for your reference, a copy of our transcript will be posted on our website. This concludes our call. Thank you.

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Earnings Conference Call
DuPont de Nemours Q3 2023
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