DuPont de Nemours, Inc.

Good day, and thank you for standing by. Welcome to the fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. I would now like to hand the conference over to your speaker today, Pat Fitzgerald. from Investor Relations.

Good morning, and thank you for joining us for DuPont's fourth quarter 2021 earnings conference call. We are making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this conference call. These slides are posted on the Investor Relations section of DuPont's website and through the link to our webcast. Joining me on the call today are Ed Breen, Chief Executive Officer, and Lori Koch, Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the slides. During our 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 risk and uncertainty, our actual performance and results may differ materially from our forward-looking statements. Our 2020 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 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 posted to the investor page of our website. I'll now turn the call over to Ed.

Thanks, Pat, and good morning, everyone. Thank you for joining our fourth quarter earnings call. In addition to discussing our fourth quarter results and outlook for 2022, this morning I will also comment on the progress of both our intended acquisition of Rogers and our process for divesting a majority of the M&M segment. Our fourth quarter results were highlighted by 6% volume gains, including a 9% increase in the E&I segment and a 12% increase in W&P. M&M delivered top-line results ahead of expectations, including volumes well ahead of global auto builds in the quarter. Customer demand was broad-based across the portfolio, led by greater than 20% volume growth in semiconductor technologies and high teens volume growth in water. Our top-line performance also reflects significant pricing actions we took, to offset $250 million of raw material inflation in the quarter. We are seeing increases in all businesses with about three-fourths of the impact in M&M. Our teams have done an outstanding job monitoring our input costs and quickly translating that into price increases to remain price-cost neutral for the year. We are taking additional action to as we worked to offset logistics costs, which during the fourth quarter were a $50 million headwind, mostly in W&P. I want to recognize and thank our employees who show up every day in our factories to keep our lines running and supplying the necessary products and solutions to deliver results like we reported today. Their unwavering commitment in the face of a relentless pandemic, ongoing supply chain disruptions, and logistic challenges deserves our gratitude. Turning to slide three, I will provide an update on our portfolio transformation and will review how our focus on those strategic actions, balanced capital allocation, and innovation-led growth position us extremely well heading into 2022 to continue unlocking value for our shareholders, innovating for our customers, and creating opportunity for our employees. In November, we announced our planned acquisition of Rogers Corporation, as well as our intent to divest a significant portion of our M&M segment. These portfolio actions will position DuPont among the top of the multi-industrial peer set with top quartile revenue growth, EBITDA margins, and low cyclicality, all hallmarks of top performing companies. Going forward, our business will be centered around the secular high-growth pillars of electronics, water, industrial technologies, protection, and next-generation automotive. Our team sees strong customer demand across these pillars, driven by megatrends such as the transition to hybrid and electric vehicles, clean water, sustainability, and the move to 5G. The preparation for the Rogers acquisition is well underway and on track for an end of second quarter closing. Several significant milestones in the path to closing have already been achieved. In mid-December, the waiting period under the HSR expired here in the U.S., and regulatory processes in other parts of the world are underway. Just two weeks ago, on January 25th, Rogers shareholders voted to approve the transaction. Excitement is building for combining this business with our portfolio of electronics offerings, which includes our recent acquisition of Laird Performance Materials. Our teams are anxious to get to the point where we can start working with the application engineers, R&D, and sales teams at Rogers to map out the revenue synergy opportunities in the areas of next-generation auto, 5G infrastructure, defense electronics, and clean energy. Combined with Laird, these acquisitions increase the total addressable market of our E&I business by approximately 50%, and will deepen our penetration into markets such as electric vehicles, consumer electronics, and industrial technologies. A lot of work has been done to plan for the cost synergies associated with the Rogers acquisition, which we expect to be approximately $115 million. We also have line of sight to about 63 million of cost synergies from the layered acquisition from last summer, which is ahead of our target. We are looking across both of the acquisitions, as well as our existing E&I business, to maximize our synergies through G&A and footprint optimization, along with procurement savings. We also announced that we have initiated a process to vest the majority of the M&M segment. Our work here is also on track and progressing well. As I had expected, there is a significant level of interest in this market-leading asset, and I am pleased with how the process is progressing. Our target is to have a signed agreement by the end of the first quarter with a closing in the fourth quarter of this year. In addition to positioning the company as a top-performing multi-industrial company, These transactions enable us to transform the portfolio while maintaining a strong balance sheet and continuing with a balanced financial policy. Today we announce that our Board has approved a 10% per share increase to our dividend, which is consistent with our commitment for a dividend payout in the range of 35 to 45%, and to grow the dividend annually in line with earnings. In addition, our board has also authorized a new $1 billion share repurchase program, which enables us to continue returning value to our shareholders as we expect to complete the remaining $375 million under our existing authorization in the first quarter ahead of the plan's expiration. After paying down the financing associated with the Rogers acquisition, we expect to deploy a significant portion of the remaining M&M proceeds to do further M&A to build on our core areas of strength, as well as additional share repurchases. We will also generate strong cash flow this year in addition to the 240 million gross proceeds from the biomaterials divestiture, which is the last of our non-core divestitures. Our strong balance sheet positions us well to deliver for all stakeholders through investment in our business, dividends, share repurchases, and additional M&A. Finally, we will deliver shareholder value through staying focused on innovation, which is at the core of DuPont. The 6% volume growth we delivered in the quarter and 10% volume growth for the year benchmarks well against our top peers. For the quarter, our volume gains, excluding M&M segment, were up 10%. These results are a proof point that the work of our R&D teams and application engineers who spend countless hours working alongside our customers solving their most complex challenges is at an advantage in the marketplace. Our focus on innovation is also at the core of our ESG strategy through both innovation in our own processes to reduce greenhouse gas emissions at our factories, as well as new product innovations that support and advance our customer sustainability goals in areas such as clean water, clean energy, electric vehicles, and connectivity. The levers of portfolio transformation, balanced capital allocation, and innovation-led growth is a powerful combination to create long-term shareholder value at DuPont. With that, let me turn it over to Lori to discuss the details of the quarter as well as our financial outlook.

Thanks, Ed, and good morning, everyone. As Ed mentioned, customer demand in our key end markets remain strong in the fourth quarter. We continue to face unprecedented global supply chain challenges and rising inflation. However, the swift pricing actions that we continue to implement are benefiting top-line performance and maintaining earnings on a dollar basis. These factors, along with our intense focus on execution, contributed to net sales, operating EBITDA, and adjusted EPS results above our guidance. In addition, we had solid cash flow generation and returned over $650 million in capital to shareholders during the quarter through $500 million in share repurchases and over $150 million in dividends. For the year, we returned more than $2.7 billion in capital to shareholders through $2.1 billion in share repurchases and $600 million in dividends. Turning to slide four, net sales of $4.3 billion were up 14% versus the fourth quarter of 2020, up 13% on an organic basis. Organic sales growth consists of 7% price gains, reflecting the continued actions we are taking to address inflationary pressure and 6% volume growth. A 2% portfolio tailwind reflects the net impact of strong top-line results related to our acquisition of Laird and headwinds from non-core divestitures. Currency was a 1% headwind in the quarter. Overall sales growth was broad-based and reflects double-digit organic growth in all four regions and high single-digit to double-digit organic growth in all three reporting segments. From an earnings perspective, we reported fourth quarter operating EBITDA of $973 million and adjusted EPS of $1.08 per share, up 5% and 54%, respectively, from the year-ago period. Our incremental margin in the quarter was pressured by price, cost, and logistics. Net of these impacts, our incremental margin was about 33% in 4Q. Ed mentioned earlier the pricing actions that we took throughout the year, resulting in us offsetting about $250 million of raw material inflation in the quarter. And we also ended the year price-cost neutral. The raw material inflation, coupled with about $50 million of higher logistics costs in the quarter, were headwinds to our margins. I will provide more detail of the margin compression we saw in the quarter in a few minutes. From a segment perspective, E&I delivered 10% operating EBITDA growth on volume gains and earnings uplift from Laird, which more than offset raw material and logistic segments, as well as startup costs associated with our capstone capacity expansion. In W&P, operating EBITDA increased 7% as pricing gains and volume growth more than offset higher raw material and logistics costs. We will remain disciplined in our pricing approach as we move into 2022 to address continued inflation. M&M operating EBITDA declined 3% as net pricing gains were more than offset by lower equity earnings due to higher natural gas costs in Europe. In the quarter, cash flow from operating activities was $621 million and CapEx was $184 million, resulting in free cash flow of $437 million. Free cash flow conversion was 100%. In addition, we received gross proceeds of about $500 million during the quarter from our clean technologies divestiture, which was closed at the end of December. Before we go to the next slide, I would also like to make a few comments on our full-year performance. Full-year net sales of $16.7 billion grew 16%, and were up 14% on an organic basis. The organic growth consists of a 10% increase in volume and a 4% increase in price. Organic sales growth reflects double digit growth in all four regions and in all three reporting segments. Further, all nine of our business lines had organic growth in 2021 and seven of the nine business lines grew double digits. The 10% increase in volume for the year consists of gains in all three reporting segments, and within all nine business lines, reflecting robust global customer demand in secular growth areas, such as electronics and water, along with recovery in end markets negatively impacted by the pandemic and prior year, such as automotive, commercial construction, and select industrial markets. Full-year operating EBITDA of $4.2 billion increased 21%, reflecting 1.3 times operating leverage operating EBITDA margin expansion of about 100 basis points and incremental margin of 32%. Operating EBITDA increased for all three reporting segments during the year. Full-year adjusted EPS of $4.30 per share was up about 95% from prior year on higher segment earnings, a lower share count, and lower interest expense. Slide 5 shows the impact that price-cost inflation had on our operating EBITDA margin in the fourth quarter. As costs continued to rise throughout 2021, our fourth quarter results reflects the largest headwind to quarterly margins for the year. In total, pricing actions fully offset about $250 million of raw material inflation, which was higher than our expectations for input costs coming into the quarter, and mainly in the M&M segment. While our pricing actions have enabled us to maintain earnings, the price-cost inflation resulted in a significant headwind of about 150 basis points to operating EBITDA margins versus the year-ago period. Additionally, higher logistics costs of about $50 million in the quarter resulted in a margin headwind of about 120 basis points. Offsetting the headwinds from RODS and logistics was a 70 basis point improvement in operating EBITDA margin, which includes volume growth in E&I and W&P and the benefit associated with the Laird acquisition. If you exclude the price cost and logistic headwinds in the quarter on an ex-M&M segment basis, our operating EBITDA margin was above 26.5% in the fourth quarter. further illustrating our strong performance and putting an emphasis on our planned portfolio actions. Turning to slide six, which provides more detail on the year-over-year changes in the net sales for the quarter. As I mentioned earlier, organic sales growth of 13% during the quarter consists of 7% pricing gains and 6% volume growth. In E&I, volume gains delivered 9% organic sales growth for the segment, led by higher volumes in semiconductor technologies of more than 20%. Semiconductor technologies demand was driven by the ongoing transition to more advanced node technologies, resulting from growth in electronics megatrends. Semi-tech was up mid-teens for the full year, and we expect to continue to outpace MSI growth as we head into 2022. We are seeing more investments and semiconductor capacity, which we expect to be a positive for us in the long term. Industrial Solutions was up mid-teens during the quarter on volume growth, which was driven by ongoing strength for CalRes and Vespa within electronics and industrial end markets, along with strong demand for medical silicones and biopharma in healthcare applications. Organic growth for Industrial Solutions was up mid-teens for the full year as well. As expected, organic sales growth for InterConnect Solutions was down in the quarter, reflecting the anticipated impact of the shift in demand related to premium next-generation smartphones for the first half of 2021, along with softness in automotive end markets related to the semi-chip shortage. For the full year, organic sales growth for InterConnect Solutions was up mid-single-digit, and we expect a return to a more traditional seasonality in 2022. In addition, we recently completed our cap-town expansion project here in the U.S., which expands our production of polyimide film and flexible circuit board materials. We will begin qualifying materials in the first half of this year for high-value applications, which will start to accelerate in the second half of 2022. For W&P, 17% organic sales growth during the quarter consists of a 12% increase in volume, including volume gains in all three businesses. and 5% pricing gains. Sales gains were led by high-teens organic growth in safety solutions, as continued recovery in industrial end markets resulted in significant volume improvement for Nomex and Kevlar aramid fibers. Within water solutions, high-teens organic sales growth reflects strong global demand for water technologies, primarily in industrial and desalination markets. Shelter solution sales increased on mid-teens organic growth driven by continued strength in North American residential construction and continued recovery in commercial construction led by higher demand for quarrying services. Year-over-year pricing gains of 5% during the quarter relate primarily to actions taken in safety and shelter in response to raw material inflation and also reflect sequential price improvement from all three business lines within W&P, versus the third quarter. For the full year, W&P delivered 10% organic sales growth on 8% volume improvement and 2% pricing gain. Safety and shelter solutions were up low double digits organically, and water solutions was up mid-single digits for the year. The global demand for clean water technologies remains strong, and expanding our capacity remains a priority for us. For M&M, 13% organic sales growth during the quarter, which driven by a 16% increase in price, offset slightly by a 3% decline in volume. M&M has been the segment within our portfolio most significantly impacted by raw material inflation. The 16% local price increase during the quarter reflects continued actions taken to offset high raw material and logistics costs. Volume declines reflect softness and global auto production due to supply constraints, primarily the semiconductor chip shortage. For the year, M&M organic sales growth was 24% on 12% higher volume and 12% pricing gains. All three business lines within M&M delivered organic sales growth of greater than 20% for the full year. Turning to slide seven, adjusted EPS of $1.08 per share was up 54% from $0.70 per share in the year-ago period. Higher volumes and strong results from Laird more than offset higher logistics costs and other operating items, such as cap-time startup costs. The low-aligned items continued to benefit our EPS results compared to the year-ago period, primarily a lower share count. Lower interest expense was mainly offset by a higher tax rate. For full year 2022, we expect our base tax rate to be in the range of 21 to 23%. Let me close with a few comments on our financial outlook on slide eight. We expect continued top line strength across the portfolio in 2022, led by ongoing strength in semiconductors as the industry continues to operate near capacity to meet demand and consistent demand in areas such as industrial technologies, smartphone sales, housing starts, and water filtration. Our plan assumes these market dynamics will lead to solid volume growth in 2022. In 2022, we are planning that raw material and logistics costs will remain at elevated levels with approximately 600 million of year-over-year headwinds versus 2021, primarily in the first half. Once again, the raw material inflation will be predominantly in our M&M segment. In response, we are implementing more price increases in all businesses, which will enable us to offset raw material and logistics costs on a full year basis, but we will lag in the first quarter. We expect our operating EBITDA margins to improve throughout 2022, driven by volume growth, productivity, acquisition synergies, and full implementation of pricing actions. In the first quarter, we expect net sales between $4.2 and $4.3 billion, and operating EBITDA between 940 and 980 million. At the midpoint of our guidance range, we are anticipating first quarter operating EBITDA margins to be about flat sequentially with the fourth quarter of 2021. We expect sequential improvement in E&I and M&M to be offset by W&P as manufacturing cost increases stemming from the Omicron variant and ongoing logistics cost headwinds lead to sequential margin declines. For the full year, net sales of $17.4 to $17.8 billion and operating EBITDA of approximately $4.4 billion at the midpoint reflects volume growth and acceleration of additional pricing gains throughout the year to offset the impact of both raw material and logistics cost increases. we expect operating EBITDA margins in the back half of 2022 to return to more normalized levels, as impacts from the Omicron variant subside, as well as gains from volume improvement, productivity actions, acquisition synergies, and full implementation of price increases. In closing, I want to note that our guidance is based on the current DuPont portfolio today, including the businesses in scope of the planned M&M divestiture. Once we sign the deal, the in-scope M&M businesses will move to discontinued operations, and we will reset the guidance for Remain Co. DuPont. With that, let me turn the call back to Ed.

Thanks, Lori. Let me close by summarizing why I am excited about 2022 at DuPont. Our results demonstrate that our businesses deliver the solutions our customers demand. In a tight supply chain and challenging logistics environment, we deliver 6% volume growth well ahead of our expectations coming into the quarter. Our teams continue to work closely with our customers to understand their complex material challenges and to win business by delivering innovative and sustainable solutions. You can also see our teams are managing every lever within our control. This is evident through our delivery of pricing gains to offset every dollar of raw material inflation in 2021, and these actions continue into 2022. In addition to having our fundamentals in place, we are on track to complete a few substantial steps in the transformation of DuPont in 2022 with the planned Rogers acquisition and the M&M divestiture. These transactions, as well as the potential for additional M&A in strategic areas, position DuPont as the premier multi-industrial company, focus in the areas of electronics, water, industrial technologies, protection, and next-generation auto. And finally, because of our ability to complete this transformation while maintaining a strong balance sheet, we will be in a position to generate value for all stakeholders through organic and inorganic investment in our businesses and by staying committed to our dividend and share repurchases as we announced today. I look forward to providing you updates on each of these areas as we progress through 2022. With that, let me turn it to Pat to open the Q&A.

Thanks, Ed. Before we move to the Q&A portion of our call, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. We will allow for one question and one follow-up question per person. Operator, please provide the Q&A instructions.

Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. We'll pause for just a moment to compile that Q&A roster. Your first question comes from the line of Jeff Sprague with Vertical Research. Jeff Sprague Thank you.

Good morning, everyone. Good morning, Ed and Lori. Good morning. Hey, two questions from me. First, just on M&M, Ed, is the tenor of the discussion around valuation, you know, still in the ballpark of what you were thinking, you know, back in November, kind of given the market turmoil that we're looking at?

Yes, no change to the comment I made last time. Feeling very good about the process. Multiple people very interested in the asset, and we're moving along as quickly as we can here. We'll have a deal to announce before the end of the first quarter.

Great. And then just thinking about the portfolio after this announcement, I've done a lot of the benchmarking work myself and the company does look a lot different when this is behind.

Good day and thank you for standing by. Welcome to the fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star one on your telephone keypad. I would now like to hand the conference over to your speaker today, Pat Fitzgerald from Investor Relations.

Good morning, and thank you for joining us for DuPont's fourth quarter 2021 earnings conference call. We are making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this conference call. These slides are posted on the Investor Relations section of DuPont's website and through the link to our webcast. Joining me on the call today are Ed Breen, Chief Executive Officer, and Laurie Koch, Chief Financial Officer. Please read the forward-looking statement disclaimer contained in the slides. During our 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 risk and uncertainty, our actual performance and results may differ materially from our forward-looking statements. Our 2020 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 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 posted to the investor page of our website. I'll now turn the call over to Ed.

Thanks, Pat, and good morning, everyone. Thank you for joining our fourth quarter earnings call. In addition to discussing our fourth quarter results and outlook for 2022, this morning I'll also comment on the progress of both our intended acquisition of Rogers and our process for divesting a majority of the M&M segment. Our fourth quarter results were highlighted by 6% volume gains, including a 9% increase in the E&I segment, and a 12% increase in WMP. M&M delivered top-line results ahead of expectations, including volumes well ahead of global auto builds in the quarter. Customer demand was broad-based across the portfolio, led by greater than 20% volume growth in semiconductor technology.