DuPont de Nemours, Inc.

Q2 2022 Earnings Conference Call

8/2/2022

spk12: Good morning and welcome to DuPont 2Q 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. Chris McCray, you may begin your conference.
spk22: Good morning, everyone. Thank you for joining us for a review of DuPont's second quarter 2022 financial results. Joining me today are Ed Breen, Chief Executive Officer, and Laurie Koch, Chief Financial Officer. We've prepared slides to supplement our comments during this review, which are posted on the investor relations section of DuPont's website and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this financial review, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from a form of statements. Our 2021 Form 10-K, as updated by 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'll also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP measures are included in our press release and posted to the investor page of our website. I'll now turn the call over to Ed.
spk20: Good morning, and thank you for joining our second quarter financial review. We posted strong quarterly results above expectations in a difficult environment. Our top-line revenue growth of 7% versus the year-ago period included solid organic growth of 9%. Overall, customer demand remains strong across our key end markets, as E&I delivered a 6% volume increase driven by ongoing strength in semiconductor technologies and industrial solutions. In terms of inflation, our pricing actions continue to fully offset higher costs associated with raw materials, logistics, and energy. Early in the quarter, our expectation for full year 2022 was about $600 million of increased costs, and that number has now risen to over $700 million. mainly due to higher energy and logistics costs. We still expect to remain price-cost neutral in the second half and for the full year based on pricing actions we have taken. Overall, our second quarter results reflect year-over-year and sequential earnings growth. These results highlight the strength of our end markets and our team's efforts to successfully navigate the challenging macro environments. which was further complicated by China's COVID lockdowns during the quarter. We were very pleased that the lockdowns alleviated by mid-June and that our China-based colleagues, who operated diligently under difficult circumstances, have been able to return to some form of normalcy. More broadly, our focus on execution continues to drive results as we increase our use of digital tools and other plant site investments to drive additional productivity and capacity release. Finally, with regards to sustainability, I am pleased to highlight that last month we announced our commitment to setting targets to reduce greenhouse gas emissions in line with the Paris Accord Science-Based Targets Initiative, or SBTI. This is an important step toward reducing our overall climate impact, and it builds on our existing commitment to protect the planet by reducing the carbon footprint across our value chains in partnership with customers and suppliers. Turning to slide four, I'd like to update you on key initiatives for 2022 stakeholder value creation, namely our portfolio transformation and our balanced approach to capital allocation. In addition, I will highlight our continued focus on growth execution on the following slide. First, as it relates to the Rogers acquisition, progress is being made on the required regulatory reviews, with China being the last jurisdiction outstanding. We expect a deal to close during the third quarter. Regarding Rogers' first quarter 2022 performance, we were satisfied with top-line progress for the business, with growth in the high single digits, and we are especially pleased to see new wins and ongoing growth in the electric vehicle space. Rogers' business in the period was impacted by a price-cost gap and several operational challenges that held back full earnings potential, but we remain confident in the actions that the Rogers team is taking, and we expect improvement as we move forward. For the M&M transactions, we are on track regarding timing associated with the M&M divestiture to sell on ease. with a completion anticipated around year-end. We continue to make the necessary progress to separate the business, and we were pleased to see Selenese secure permanent financing in the last few weeks. We also continue to move forward with plans to divest the Dell Rent business and affirm our expectation for completion around mid-year 2023. This past July 1st marked the one-year anniversary of our acquisition of Laird Performance Materials. I've commented previously on how successful this acquisition has been for us, including overall financial performance ahead of plan on both the top and bottom lines. We also continue to advance commercial synergy opportunities on top of cost synergies previously noted. Finally, we complete the sale of the biomaterials business at the end of May which was the last of our previously announced non-core business divestitures. Since 2019, we generated gross proceeds of over $2.2 billion by divesting eight non-core businesses, which collectively produced lower growth, lower margins, and overall higher volatility in earnings. We received solid value for these divestitures, selling them at a low double-digit EBITDA multiple. Shifting the capital allocation, we continue to pursue a balanced strategy that includes prioritizing the return of excess capital to shareholders as well as both on M&A. During the second quarter, we repurchased $500 million of shares, bringing our year-to-date total to $875 million, which represents 2.5% of total shares outstanding. We anticipate completing the $500 million of authorization remaining on our existing share repurchase program during the remainder of this year. As I noted during our last earnings call, given the magnitude of anticipated proceeds from the M&M divestitures, we expect there will be room to execute substantial incremental share buybacks, while disciplined M&A will also remain a key deployment priority over time. as we continue to seek accretive and opportunistic transactions that can leverage our existing growth even further. Finally, our balance sheet remains strong, and this remains a key priority, particularly in uncertain, volatile macro environments. Turning to slide five, another key value driver for us is innovation-led growth. Greater focus on secular, high-growth end markets in electronics, water, protection, industrial technologies, and next-generation automotive will serve as a sound basis for our organic growth execution. We continue to invest actively in both advancing the technology within our existing product portfolio and also introducing new products around the pillars highlighted here. With an overall R&D investment rate of around 4% of total sales in line with best-in-class peers, This investment is coupled with substantial application engineering focus, where our technical personnel have a seat at our customers' table in the design phases of their products. This past quarter, we had a number of highlights, which we note on the slide, but I'd emphasize that we are proud to have won four Edison Awards across different technology platforms, and we continue to make progress in introducing new technologies, such as applications in EV batteries, which has strong growth potential. With that, let me turn it to Lori to discuss the details of the quarter as well as our financial outlook.
spk16: Thanks, Ed, and good morning, everyone. As Ed mentioned, we saw continued strong demand during the quarter in key end markets with volumes higher than our expectations coming into the quarter. Cost inflation intensified further compared to previous estimates, but additional pricing actions are anticipated to fully offset these higher costs. These factors, along with our team's continued strong execution focus, contributed to those top and bottom line results well above expectations for the quarter. We also delivered a consistent operating EBITDA margin on both a year-over-year and sequential basis. Focusing on financial highlights for the quarter on slide six, net sales of $3.3 billion increased 7% as reported versus the second quarter of 2021 and increased 9% on an organic basis. The acquisition of Laird, partially offset by non-core divestitures, provided a 1% net tailwind to net sales, while currency was a 3% headwind during the quarter, as the U.S. dollar strengthened against key currencies, including the euro and the yen. Organic sales growth included 8% pricing gains and 1% higher volumes. Volume growth reflects continued strong demand in key end markets, namely semiconductor, general industrial, water, and construction. muted primarily by lower volumes for protective garments within safety solutions. These factors resulted in organic sales growth during the quarter of 9% for W&P, 8% for E&I, and 15% for the retained businesses of the former M&M segment they would report in corporate, which predominantly reflects our HESIS portfolio tied to Next Generation Auto. On a regional basis, we delivered organic sales growth in all four regions globally, including volume increases in Asia Pacific, North America, and Latin America. In China, organic sales growth was up slightly versus the year-ago period, and volumes in China were up low single digits sequentially from first quarter, despite government-mandated lockdowns in parts of the country into early June. From an earnings perspective, operating EBITDA of $829 million was up 6% versus the year-ago period, and adjusted EPS of $0.88 per share increased 11%. The increase in operating EBITDA was driven by pricing actions, stronger earnings contributions from the layered acquisition, and volume gains, which more than offset higher inflationary cost pressures. Operating EBITDA margin of 25% was slightly better than our expectations set earlier this quarter and flat on both a year-over-year and sequential basis. Our pricing actions have fully offset cost inflation on a dollar basis, but have impacted EBITDA margins. Our operating EBITDA margins adjusted to exclude price costs with 26.6% or 150 basis points higher than the year ago, driven by productivity and higher volume. Our incremental margin was 22% on an ad reported basis, excluding the impact of price costs Incremental margin for our core businesses was almost 60%, demonstrating strong cost discipline and operational productivity. From a cash perspective, cash flow from operations during the quarter of $86 million and capital expenditures of $135 million resulted in a free cash outflow of $49 million. Working capital was an additional headwind during the quarter as we continued to secure inventory given tight supply chains. and incur higher inventory costs related to inflation. We expect improvement in free cash flow during the second half of the year, consistent with our typical pattern, and factoring in a reduction of working capital levels. As we separate the M&M business, we continue to incur transaction-related expenses, with over $100 million of transaction costs incurred during the second quarter and about $700 million in costs related to the M&M separations expected in full year 2022. These costs, combined with higher working capital related to the M&M business that we are divesting, are significant headwinds to our 2022 cash flow. Turning to slide seven, adjusted EPS of 88 cents per share increased 11% compared to 79 cents per share in the year-ago period. Higher volumes and earnings from Laird provided a benefit to adjusted EPS in the quarter of 11 cents per share. These gains were partially offset by weaker mixed-in W&P related to lower garment production and caps on plant startup costs totaling $0.03 per share. A lower share count from ongoing share repurchases provided a $0.04 benefit to adjusted EPS, while other below-the-line items, including a higher tax rate and exchange gains, netted to a $0.03 headwind. Our base tax rate for the quarter was 22.6%, up slightly from 21.8% in the first quarter, and up notably from the year-ago period, given certain discrete tax benefits reported in the prior year, resulting from tax law changes. We are maintaining an expected base tax rate range for the full year 2022 of 21 to 23%. Turning to segment results, beginning with T&I on slide 8. E&I delivered net sales growth at 16%, including 8% organic growth, an 11% portfolio benefit from Laird, and a 3% Hedwig from Currency. Organic growth for E&I included a 6% increase in volume and a 2% increase in price. From a line of business view, organic sales growth was led by semiconductor technologies, which increased mid-teens, and strong demand continued, led by the ongoing transition to more advanced node technologies and ongoing high semiconductor fab utilization, along with growth in 5G communications and data centers. Within industrial solutions, organic sales growth was up high single digits, led by continued demand for OLED materials for displays, ongoing strength for Calvert SemicapEx-related product offerings, best-sell products serving recovering aerospace markets, and for healthcare applications such as biopharma tubing. Interconnect solution sales decreased low single digits on an organic basis, as expected due to a slight volume decline. Volume gains for films and laminates in certain industrial end markets were more than offset by lower smartphone volumes due to the anticipated return to more normal seasonal order patterns compared to last year, and the including softness in China smartphones. The business was also impacted somewhat by lower global PC and tablet demand and continued constraints in automotive production. Looking forward, we expect similar growth patterns for semiconductor technologies and industrial solutions to continue into the second half of 2022. With an interconnect, we expect to return to positive organic growth in the second half given seasonal strength and added capacity from our capstone expansion. For the full year, we expect interconnect solutions to be up low to mid-single digits on an organic basis. This reflects a slight decline from our previous expectations as supply chain constraints and softer consumer demand are expected to mute volumes for smartphones, PCs, and tablets. Operating EBITDA for E&I of $480 million increased 13% at strong earnings from Laird volume gains, and pricing actions were partially offset by higher raw material and logistics costs. Operating EBITDA margin of 31.4% reflects sequential improvement of 40 basis points. On a year-over-year basis, operating EBITDA margin was down 70 basis points due primarily to a 100 basis point headwind from price costs. Turning to slide 9, W&P delivered net sales growth of 6%, as organic sales growth of 9% was partially offset by a 3% headwind from currency. Organic growth for W&P reflects a 12% increase in price and a 3% volume headwind. Pricing gains reflects broad-based actions across the segment, most notably in shelter and safety solutions. Volume declines were driven by safety solutions. From a line of business view, organic sales growth was led by shelter solutions, which increased high teams driven by pricing actions and continued robust demand in North America residential construction, as well as ongoing growth in commercial construction and strength in repair and remodel-related demand during the quarter. Within safety solutions, sales were up mid-single digits on an organic basis, as pricing actions were partially offset by lower tie-back volumes given the shift from garments to other end-market applications, and the resulting negative impact of increased manufacturing line changeovers on overall production. Sales for water solutions were up mid-single digits on an organic basis on pricing gains and continued steady demand for water filtration technologies, muted by supply chain constraints in Asia Pacific due to COVID lockdowns in China and an earthquake in Japan impacting our production. Operating EBITDA for W&P of $348 million declined 1% versus last year as pricing actions taken to offset higher costs were more than offset by volume declines. Operating EBITDA margin of 23.2% was 170 basis points below the year-ago period as the impact of price cost was an approximate 200 basis point headwind to margin. Excluding the price cost impact, operating EBITDA margin was over 25%. I'll close with a few comments on our financial outlook on slide 10. We are still seeing solid demand, and our order book is down in most of our end markets. However, future uncertainties continue to exist in the macro environment, driven by inflationary pressure, challenging supply chains, and U.S. dollar strength. Our teams remain focused keenly on execution, and we are concentrated on a leverage within our control in order to continue to drive value for our shareholders. For the full year 2022, we are narrowing our adjusted EPS range while maintaining the midpoint of our previous range. We now expect full year adjusted EPS in the range of $3.27 to $3.43 per share versus our previous range of $3.20 to $3.50 per share. We are updating our full year 2022 net sales guidance range to be between $13 billion and $13.4 billion, reflecting a $200 million of incremental foreign currency headwinds, along with the removal of about $120 million in net sales related to the biomaterials business, given its divestiture at the end of May. We continue to expect organic sales for the year to be up high single digits. After adjusting the high end of our operating EBITDA guidance primarily for incremental currency headwinds and the removal of the biomaterials business, We now expect full year 2022 operating EBITDA to be between 3.25 billion and 3.35 billion. For third quarter 2022, we expect net sales to be between 3.17 and 3.37 billion and operating EBITDA to be about 810 million. We expect third quarter net sales and operating EBITDA to be slightly weaker than the second quarter as sequential volume increases are expected to be offset by further foreign currency headwinds and the absence of the biomaterials business. We are also expecting impact during the third quarter on operating EBITDA of approximately $15 million from unplanned downtime at our W&P Scruin site in Virginia associated with an unforeseen utility disruption from a third-party supplier. On a year-over-year basis, we expect third-quarter net sales to be up 2% at the midpoint and up high single digits on an organic basis. We expect third quarter 2022 adjusted EPS of approximately 81 cents 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.
spk12: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. We will allow one question and one follow-up only. Your first question comes from Jeff Sprague from Vertical Research. Please go ahead.
spk03: Thank you. Good morning, everyone. Good morning, Jeff. Hey, good morning. Ed or Lori, could you just comment on kind of the visibility on the top line in the back half kind of around, you know, some of the economic worry points, right? U.S. resi, you know, some of the consumer electronic, you know, cell phone and the like. Just what you're seeing from your customer and channel partners there and your comfort level that that's all dialed now properly relative to the guide.
spk20: Yeah, Jeff. So we looked over the weekend at our order rates as of the end of last week. And across the board, our order rates are hanging right in there where we would expect them to be. The only softness we've seen, which we've mentioned before, As smartphones in China, demand is down, and I don't know how much of that is because of the lockdowns versus just true demand down. And we're seeing some lightness on the PCB board side, which is really for PCs, tablets, things like that. Not significant, but a little bit of a downdraft there. And besides that, everything... At least our order rate is holding in. And now remember, we have a really solid look, I would say, on our orders out about 30 days. And the bulk of the businesses, some of them longer than that, like the water businesses, actually some months. So we're a little bit shorter cycle on the order rate. But as we sit today, it looks like things are hanging in there. We have seen no downdrafts, just to your specific point, on the construction side. um both the resi was order rates are good ending last week the commercial was good and the do-it-yourself piece of that business was still good having said that jeff we're not naive we see data points out there and obviously we're doing recession planning you know just to be ready if things do soften up but at this point i'm not seeing it great thanks for that color and then just uh
spk03: Wondering back to the the ultimate deployment of cash particularly as it comes to the M&M proceeds Is it still your bias to wait until that cash is in the door? or you know now that Selenese has secured funding and maybe a little bit further down the kind of regulatory path You know, perhaps there's some comfort to get a running start on some of that
spk20: Yeah, Jeff, so we're talking to the board about it. And just to reiterate the prepared comments we made, we're clearly thinking heavy on a share repurchase here with the amount of cash available. And I wouldn't say the cash has to be in the door. I just want to use the term green lights through town, that the timing is what we think. We're going to be ready to do this by November 1 with all the internal It was kind of end of the year, you know, right at the first of the year, 2023. But you never know with regulatory and, you know, if there's COVID lockdowns, you know, you just don't know for sure. So I just want to get closer, and then we'll make a final decision.
spk03: Great. Thanks for the call. Yep.
spk12: Your next question comes from Scott Davis from Milius Research. Please go ahead.
spk09: Hey, good morning, everybody. Good morning, Scott. Good morning. Ed, you mentioned in your remarks Rogers having kind of a challenging price-cost, I think you said, gap. Is it off the deal model then for 22? Is it materially off where it impacts kind of your 23 look at it?
spk20: Yeah, so there's a good and a bad. I guess I'll just put it that way. The good is the revenue line is right on what the planning assumptions were. rate is looking really, really nice. The EBITDA is off the planning model. And by the way, I'd say it's for putting price costs aside, which you can catch up on, which will happen. There were four or five operational issues that have been hitting them that are really impacting the EBITDA percent. By the way, all fixable, all within the control of the team to fix those. So we expect improvement to come. By the way, I'll just give you two. One of them is not really even something they can control. You know, they're being shorted as the whole industry is on the silicone side, and it's a very high margin application for them. So obviously, they're trying to secure more silicone supply. And at some point here, that'll even out. But that's off. And then just to give you one other example, they used more contract manufacturing because they're bringing up a facility that had a fire in it. They're bringing that back up online. But in the meantime, to satisfy the customers, they're using contract manufacturing, which is really eating into the margin of that business. So that's two examples, but there's three other ones. So that's being worked on, and they're getting ready to launch that facility. We'll work through that. My hope and gut is we'll be in good shape going into 2023 as we get these operational issues fixed.
spk16: On the top line, one of the areas that we're really impressed with is their penetration in EV. And so they've seen really nice growth there. We'll continue to take advantage of the opportunity, especially the combined opportunity in DuPont when we put it together with our With our EV applications, I think we've mentioned in the past, the two portfolios generate about $400 million of revenue today. So we're excited to get those two together and see what we can do.
spk09: And then just on Laird, I assume based on what I see on the slides here that Laird is a little ahead of its deal model?
spk20: Yeah, both revenue and earnings are ahead. And we got good synergies out of that. We're probably about 80% through that. $3 million in synergies. But what I'm more excited about on Laird, and I think the same is going to play out with Rogers, is really the revenue opportunities between the two. As Lori was sort of just alluding to, we just had another one in European Auto customer who Laird had a direct relationship with and revenue stream with that customer. So that's the really exciting with the kind of putting these, this toolkit together.
spk09: Sounds good. Best of luck. Thank you. Thank you.
spk12: Your next question comes from Steve Tusa from JP Morgan. Please go ahead.
spk19: Hi, good morning. Hey, on this, uh, the price cost side, um, What's your estimate for the year now? I think you had $350 million in raw material headwind prior. This quarter, obviously inflation is tough, but this quarter seemed a little bit higher than I was expecting. And then also, are you including logistics in that? And if not, I think you would give in like a $225 million headwind prior, maybe just an update on those two.
spk16: Yeah, so we're now expecting between raw materials, logistics, and higher energy costs about $700 million. So it's about a $100 million increase from where we were sitting when we did the prior earnings call. But we still expect to fully cover that with price increases. So we'll be net neutral on the bottom line. It just creates the headwinds on the margin profile. As we have telegraphed, it was about 150 basis points in total. this quarter. So underlying, we held flat on margins year over year, but if you take out that delta, we were actually up about 140, 150 basis points, so nice leverage through the P&L. Steve, I think you were just using Rawls.
spk20: The breakdown of the inflation is about 60% is Rawls, 20% is logistics, and 20% You can see we got phenomenal pricing.
spk19: Yeah, that energy cost, was that previously recorded through the raw materials line? I don't recall you guys kind of breaking that out explicitly. Had that been running through that raw materials number in prior quarters? Or is that a new line item?
spk16: Yeah, it wouldn't have been in the raws, but it would have been in the total $600,000. So it's not new in total. But the increase from the prior 600 to the current 700 is really primarily the increase in energy costs and then the knock-on effect to logistics as we see higher fuel costs.
spk19: Yeah, okay, that makes a lot of sense. And then just one last one on the W&P business, I guess. How do you see that performing through – you know, let's say you have kind of a consumer recession where housing takes a bit of a hit. I mean, can that business grow through that on a volume basis? Or is there, you know, kind of too much cyclical exposure in that business? How do you look at that business through that type of recession?
spk20: Well, remember, Steve, one of the, first of all, it just depends how deep the recession is. It's a hard one to answer, but Remember that the Tyvek product line, which is one of the biggest segments in there, that's a sold-out asset. So we can divert product to other end markets. For instance, we are shorting right now, unfortunately, the medical packaging market. We're trying to work through that backlog as we speak. So we have other applications for it in a sold-out asset. And, Byrie, I think the water business, just to use WMP, I think the water business would hold in there pretty well in a recession. So, yeah, we'll see some effect of it. Nomex would probably go down a little bit. Kevlar might go down a little bit. But I think we can hang in there pretty well.
spk16: I think you've noticed, but just to be sure, so the residential piece of construction is about 40%. The rest is 40% commercial and then about 20% repair and remodel. In the commercial, the largest end markets underneath there are more on the healthcare side and the restaurant side. So they make up the bulk of the commercial opportunity for us.
spk19: Excellent. Thanks, guys. Appreciate the color. Thank you.
spk12: Your next question comes from John Walsh from Credit Suisse. Please go ahead.
spk13: Hi. Good morning. Good morning, John.
spk11: Just following up to Steve's question there, maybe we could talk a little bit on the pricing side. You highlighted strong pricing there in WNP. But, you know, as you look forward, where do you think you have the most structural pricing? And then where might, you know, you have to give back as, you know, potentially we see some material deflation in the future?
spk20: Yeah, well, John, that is a great question. We talk about it all the time. So we made a strategic decision that all the price increases we did were all baked into the product price. So we did not do surcharges that are tied to some index or something like that. So I feel good about the approach that we took. And obviously our goal if a recession hits and commodity costs come down would be to then get a gap, maintain a gap going forward where obviously we're maintaining more price than the decrease on the commodity. And by the way, we've been working on these scenarios for the last month with our teams, like where do we feel and how much can we hold in each of our end markets. where we can benefit from it so um yeah you know i i won't get into each end market but i think we have the opportunity to do what i just said to what extent we'll see as it plays out but that by the way that's interesting in this if a recession hits that's the one thing that is very very different for companies like ours and many others where in the past you didn't have this dynamic you And this time you have, this is probably the single biggest dynamic to improve financial performance that clearly we have and many, many global companies have.
spk11: No, that's very interesting perspective. Thank you. And then, you know, the 15 million headwind that you're going to see in W&P in Q3, does that fully reverse out in Q4 and kind of what's the confidence level there? you know, that that third party can get, um, beyond their disruption.
spk20: So we're, we're already getting past the disruption. We've been bringing lines up this week. This problem hit a week, week and a half ago. It's a safety issue, by the way. We have to methodically go through, look at all the lines, what ended up being caught, just called stuck in them when it went down. It's a little bit of a process, but we're bringing some lines up a day ago. Later today, we bring a line up again. We know we're out of the problem here over the next few days. But we don't make that up because, for instance, Tyvek is one of the big products there. It's a sold-out asset. So, you know, it only makes so much and we're sold out. But, by the way, just to give you a sequence from the third to the fourth quarter, you see a little bit of a lift, which is not necessarily the seasonal pattern. But what's happening there is we have – you know, the spruance not being down so we don't have that third quarter to fourth quarter problem. We'll be running full tilt there. We have a new water line that we've been telling you about that's coming up at Edina, which will give us incremental volume on a sold-out business, also our reverse osmosis product line. And then remember, we have the... Circleville facility and they all hit in the fourth quarter and give us the incremental volume and Capcom's also a sold out asset. So we're not expecting a sequential third to fourth necessary exchange in demand in the marketplace. They just happen to be the sold out assets where we start getting some production out of them.
spk13: Great. Thanks for taking the questions. I'll pass it on. Thanks.
spk12: Your next question comes from John McNulty from BMO Capital Markets. Please go ahead.
spk05: Thanks for taking my question. I believe about 20% of your sales come from the EMEA region. Can you give us a little bit of color as to your exposure to Germany and any precautions that you're taking or any levers that you can pull if there are any issues with regard to gas and power as we progress through the rest of the season?
spk16: Yeah, right now we're not expecting any material impact if they start to ration energy in Germany. There's one plant site in our existing go-forward portfolio that doesn't use it, so we don't see an impact there. It's in the businesses that we retained from M&M. M&M does have a plant in Germany so that they could be impacted minimally if there were some rationing going on there, but as we see it right now, we don't see a headwind from a utilization perspective, you know, we'll obviously continue to watch the European natural gas prices, which, you know, have an impact on primarily W&P and the Remainco portfolios. They've got a few plant sites in Europe. So they're up again. I think they were, you know, 210 or so as of the last couple of days. So we'll continue to keep an eye on those to see where that moves.
spk05: Got it. Okay. Thanks for the color. And then just in the Tyvek garment business area, How far back to normal or reversing that big surge would you say we are? It sounds like you had some incremental headwinds that aren't just on the mix shift, but also on the line shifting. Can you break that out in terms of how much of a hit that might have been on the margin and how we should be thinking about that going forward through the rest of the year?
spk16: Yeah, so in the second quarter, garment volumes were down about $40 million. So we were able to make up a little of that with increasing sales in the medical and other end markets. But in total, garments were down $40 million. We expect that to be a hit again in 3Q on a year-over-year basis. And then in the fourth quarter, we start to get out of that year-over-year comp headwind. The piece, too, on the production side is you – Not so much a demand because you can shift the demand to other end markets from the garments. It's more around the product produced that you net out to a headwind. And so when we were making garments, we were able to just run garments the entire time and minimize the changeovers on the lines. Now that we're back to a more normal product mix, we're having to have more changeovers than we had last year, so therefore translating to lower pounds produced.
spk02: Got it. Okay. Thanks very much for the caller.
spk12: Mm-hmm. Your next question comes from Christopher Parkinson from Missouri. Please go ahead.
spk18: Great. Thanks for taking my question. Just pretty much a corollary of the last two and a half questions or so. Can you just give us your updated thoughts on the intermediate to long-term margin outlook for WMP, just given the question about structural price increases, improving reliability across the asset base? you know, product mix, uh, and so on and so forth. Just any updated color there and your confidence in those numbers would be very helpful. Thank you.
spk20: Yeah. I, you know, I'll give you really both of the, um, the bigger businesses here. I think, you know, he and I, and you've seen us do this X, the price cost, uh, we should be able to run that, you know, 32, 33%, um, even the margins in this quarter, we weren't far off of that. Um, and then a little bit of price cost there, and I think that's about where that will run and pretty consistently have been there. In the W&P business, we really think we can get that over time to kind of more of a 27%, 28% EBITDA business. Now, by the way, we're planning on getting some of that as commodities at some point here drift down, and we maintain, as I mentioned a minute ago, some incremental pricing above and that would be specifically on Tyvek our water assets and our Nomex product line would be the big ones for continued capacity release and in our prepared remarks one of the things you see we've throughput, so we're really spending our time working kind of our operational excellence playbook, and that's what will really help us on the WMP to keep incrementing that up.
spk16: Yeah, and I think as we look towards the second half, we don't see any material margin movement in the second half versus the first half. We were around 23%, you know, more like 25%, 26% when you take away the price-cost headwinds in the first half, and so As we look to the second half, we would expect that same 23% roughly underlying, and then, you know, 25-ish, 26% when you take away the price-cost hedge fund.
spk18: That's very helpful. And just as a very quick follow-up, to the extent you can, can you just give us a little bit more color on the expectations for Dalaran versus your commentary over the past two quarters in terms of price, number of suitors, and so on and so forth? Thank you.
spk20: Yeah, Chris, so what we've been doing on Delaware is we've been working on standing it up. You know, it was a division in a division, so it was a little extra up front work for us. We finished up the data room. We're going to actually really launch the process here in the early fall. We're just waiting to get through the summer, so I can't give you any color commentary on detailed number of people, but I strategics that are going to be interested in this asset. By the way, it's a business that has 30% EBITDA margins. It's doing very well still in this environment. So that's probably the timing of it. And that's why we said so if that's the timing, by the time you get to close the deal, you're probably about the middle of 2023. And that would really be the end of the kind of the divestiture and getting the in discontinued operations.
spk18: Yep, so very helpful. Thank you so much.
spk20: Thanks.
spk12: Your next question comes from Steve Burns from Bank of America.
spk08: Please go ahead. Steve, your line is open.
spk17: Sorry about that. I wanted to ask you a little bit about your semiconductor business and a couple of potential longer-term drivers, one being whether the product mix is potentially shifting with any of the semiconductor fabs that you support, where they are shifting to other products. Is that possible? Is that a way for those businesses to remain Pretty robust. And then the other driver being the new semiconductor fabs under construction. Do you have already some awarded business for fabs that are coming online in the intermediate term?
spk16: Yeah, I think it's to your first part of your question. I don't see them changing the product mix that they make on the fabs, but they can kind of shift around the end markets. And so we've seen them move away as there's been some weakness in the consumer electronics space to more of the data center applications where the demand remains very, very robust, which is favorable to our portfolio, just given the the higher advanced technologies associated with those end market data center applications. And so you can see in our results in the second quarter, we continue to post very strong results. And we're well positioned as we go forward to take advantage of the increase in the FABs through the construction that's taking place. And so right now, I believe over the next few years, we'll bring on an incremental about 7% capacity when it comes to wafer starts, and we're very well positioned. We've got great relationships with the majority of those staffs that are putting in capacity. And so while it's hard to say if you want any new capacity from those new lines coming on, I don't know that they actually have all that in place, but we'll continue to maintain very strong relationships with those large players that are putting in capacity. We've said in the past that we'll be about 200 to 300 basis points ahead of MSI growth. We're posting those results this year, so I don't see any reason why we wouldn't continue to do that. And I think it's important to know You know, the semi-market and the revenue that's posted is a function of both price and volume. And our exposure is to the volume piece. And so price can be volatile in the semi-market. That doesn't impact our results. It's really a focus on the wafer starts and the MSI, so the millions of square inches of wafers produced.
spk17: Thank you, Lori. And Ed, just curious if you can comment on any update on PFAS litigation settlement discussions.
spk20: Yeah, it's ongoing conversations, and as you know, the judge has encouraged that to go on. But I don't have anything new to say. We continue to have pretty consistent conversations to try to resolve the issues, and I'm still optimistic. But nothing has nothing new to say.
spk13: Thank you. Yep, thank you.
spk12: Your next question comes from David Beckletter from Deutsche Bank. Please go ahead.
spk10: Thank you. Good morning. Edmar, just on your EV exposure with Rogers, how large will it be and what type of growth are you looking forward to going forward?
spk16: Yeah, so we see the opportunity in EV between our portfolio and Rogers' portfolio to be about $250 a car, so a really nice content number. As I had mentioned earlier, today we have about $400 million of revenue between the two portfolios, so about $200 coming in from Rogers and about $200 in our existing portfolio, which is predominantly made up of adhesives, And then we have a Nomex paper application for the e-motor piece. So a very nice opportunity, as I had mentioned, for the two companies to come together to continue to drive opportunities in this space. You know, it's a really high growth rate, as we've mentioned before, too. So, you know, EV applications are Overall, growing in the mid-teens, ADAS applications even higher than that. We've got a nice ADAS portfolio today with the incoming layered acquisition, so lots of opportunities for growth.
spk10: Great. Thank you. Just on Tyvek, between now and when Line 8 comes online, is there anything you can do to bring out more capacity or further improve the mix in this business to keep on growing earnings until the new capacity is on stream?
spk16: Yeah, that's a key opportunity for us is to continue to get capacity release off those sold-out assets. And so during the pandemic, recall that we brought Line 1 back up, so we were able to bring on a little bit of incremental capacity. Line 1 is the oldest line in the portfolio, so it doesn't have as much production as the newer lines, but it was incremental capacity for us. So we'll continue to try to get more pounds off of off of all the lines between both Spruance and Luxembourg as we await the new Tyvek asset, which we expect sometime around the end of 2023.
spk10: Thank you very much.
spk12: Your next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.
spk14: Thanks, and good morning, everyone. Ed, you know, well articulated that your preference is for share buybacks with the proceeds, but, you know, you didn't, you still mentioned bolt-on. So if you could just give us an update on what's out there and then maybe give us an update on, you know, I think in the past you've sort of sized bolt-ons. Um, so maybe you just want to redefine, uh, what a bolt-on could look like on a go forward basis.
spk20: Yeah. Thanks for the question, Vincent. Um, so any bolt-on that we would do, first of all, would be on one of the five pillars that we talk about. Um, And, you know, we've been looking at things that are, let me see, bolt-on would be more like Laird, not as big as Rogers. You know, that one, two billion type range. And it would be something that would bring additional technology to play in one of those pillars. Back to the electronics example, just give us more tools in the toolkit to resolve issues for our customers because we're so strong in application engineering and we're really seeing the benefit of that with Laird tied together with the DuPont electronics portfolio. I know we're going to see it with the Rogers one. So it would be something like that in one of those pillars that we would look at. Okay.
spk14: And then this may be less of an issue for the refined DuPont portfolio now, but in the past when we've been in these tricky macro outlooks, we'd get into 4Q and customers could destock more than they typically do seasonally just sort of to manage uncertainty going into year end. Are you picking up any whiffs of that in your sort of, you know, C-level to C-level conversations or anything that we should be thinking about?
spk20: No, we're not. Trust me, we're watching it closely. But no, we're not seeing that.
spk14: Okay. Thanks very much, everyone.
spk20: Thanks, Vincent.
spk12: Your next question. It comes from Alexey Yeframov from KeyBank Capital Market. Please go ahead.
spk21: Thanks and good morning, everyone. In your E&I segment overall and in semis in particular, is your outlook for third quarter kind of better or worse or about in line with normal seasonality?
spk16: I would say it's in line with normal seasonality. So with the one exception of we will start to return to posting growth within the interconnect solutions business on a year-over-year basis, just given that last year was a little odd with respect to the smartphone shipments of what they normally do. This year it's more in a normal pattern. So you saw the headwind in the first half as we posted volume declines. We expect to have volume increases in the second half within the interconnect solutions. Not the year-over-year basis, but sequentially no, no material change to our usual patterns. With the one exception, as Ed had mentioned, of the capped online coming on, which will provide some incremental revenue in the back half of the year.
spk21: Makes sense. Thanks, Lori. And to follow up on W and P, your margin comments, that margins would be similar in the back half compared to the first half. Is this also a function of the outage that you see? Because I seem to remember you were expecting higher margins in the back half. Is this still an expectation, maybe just delayed into fourth quarter or first quarter of 23?
spk16: Yeah, I mean, I think maybe coming into the year, we had expected some margin improvement as we went into the back half. But the last quarter and this quarter, we've seen those more flatten out. It's a function of, one, the incremental price headwinds that we've seen. So a lot of it is that. So recall back when we originally gave guidance for the full year, we thought overall raw materials, logistics, and energy would only be $350 million. That number has now went to $700 million, as we have mentioned, and the majority of that increase is in W&P. So that creates, as reported, margin headwinds for us.
spk21: Thanks, Lori.
spk12: Your next question comes from Josh Spector from UBS. Please go ahead.
spk01: Yeah, hi. Thanks for taking my question. I guess within safety solutions, can you comment on how the business, excluding Tyvek, is running? I guess is there anything materially different there we should be thinking about From a volume perspective, that might be better or worse relative to industrial production or any other metrics we should be looking out for. Thanks.
spk16: Yeah, no, those are generally performing well. We had a little bit of a shortfall in the second quarter with access to raw materials within our Nomex line, so it really wasn't a structural demand issue or an operational issue. We couldn't get access to some of the key inputs to make the Nomex product, but nothing to work through on the aramid side as far as asset utilization like we're seeing on the Tyvek side with the increased changeovers as we ride through the garment change.
spk01: I guess just on the demand side as well, anything changing through the quarter? Are you seeing any weakening with customers maybe pulling back on spending, or is demand still relatively steady?
spk16: No, demand's still steady in those end markets, yeah.
spk08: Okay, thank you.
spk12: Mm-hmm. Your next question comes from Mike Sason from Wells Fargo. Please go ahead.
spk00: Hey, good morning. Nice quarter. In terms of Rogers, can you remind us what type of sales growth you expect in 2022? It sounds like it's coming on plan and looks pretty good. And then if there is a shortfall versus the 270 in EBITDA, it sounds like as you head into 2023, the bulk of the shortfall will be somewhat within their control to close the gap?
spk20: Yeah, the items they're having operationally, all are in their control, I would say, except for the silicone supply, which obviously we're having the same issues here, so we understand it. But yeah, the others are in their control, so they can work through those, as you said, and hopefully tee up well for 2023. The modeling, by the way, for them was for growth in the high single digits in 2022. And they hit that, obviously, in the first quarter. I can't say anything about the second quarter. I'm not allowed to, but we would expect them to perform high single digits this year on top line. So that's nice and to Lori's point. Um, so, you know, feeling good about that work through the operational issues.
spk00: Got it. And it's quick follow-up at the midpoint for your 2022 guidance would imply that the fourth quarter could be up sequentially versus the third quarter. That's, that's easily difficult, I guess, when you look back historically. Um, so, so any thoughts on why it could be better fourth quarter versus third, if you were to hit the midpoint?
spk16: Yeah, so the match we're getting to is about a $30 million sequential increase from 3Q at approximately 810, and then you back into about 840. So it's really coming from three primary drivers. One is you don't have the headwinds from the outage at Spruance, and so we had sized that at 15 million. So you're able to get that volume back in the fourth quarter. And then the other two key drivers are the capacity additions that we have from the water asset that we spoke about earlier and then Kapton getting production off that Kapton line. So no underlying change in market, just those three items.
spk08: Great. Thank you. Mm-hmm.
spk12: Your next question comes from PJ Jivkar from Citi. Please go ahead.
spk15: Yes, good morning.
spk12: Good morning.
spk15: Thank you. What do you see in terms of semiconductor shortages and how quickly can automotive production come back? Do you think it's a snapback next year or is it more of an extended recovery in 23 and 24?
spk16: Yeah, I mean, I think the expectations right now are for 86 million cars produced next year. That's off of 80 this year, so still, you know, well below that the the high 90s where we used to be. So there's still some opportunity to see continued strength and growth heading into 2024. Obviously, it will all depend on just the semiconductor chip shortage resolving itself. But even beyond that, I mean, the third quarter is expected to be up 22% and 7% sequentially. So it feels like things are getting a little bit better there as we resolve some of the supply chain issues.
spk20: PJ had also mentioned back to points Lori was talking about earlier, too, We very much care about production on the EV side of things. The new portfolio, new DuPont portfolio, is very much weighted towards that and not the ICE engine. We're more ICE engine related, I'll say, because of the M&M portfolio, which probably M&M will also sell nice in the EVs. But this new portfolio is very EV driven, so the growth rate of that becomes way more important. Obviously, even very weighted towards that piece.
spk15: Great. And quickly, another question on China. You talked about slowdown in smartphones, but what about the property market there, which has been under pressure? And I know the government is trying to revive it. What are you seeing there and what's your exposure to the property market in China? Thank you.
spk16: Yeah, we actually saw sequential improvement in China, 2Q over 1Q, and that was on top of, you know, that extended lockdown. So we were pleased with the results there. To your specific question on the construction market, we don't really have a construction footprint in China, so it wouldn't impact our overall business. The majority of our construction is in the U.S. and in Japan within Asia.
spk15: Thank you. Thank you.
spk12: Your next question comes from our last caller for today, Frank Mitch from Fermium Research. Please go ahead.
spk04: Hey, good morning and thanks for squeezing me in. Just to follow up on China, actually, you did 6% organic growth in Asia. Obviously, the data on PMI that just came out was somewhat concerning. What are you actually seeing right now in the third quarter as you progress in that part of the world?
spk16: Yeah, we expect to see improvement in China again into the third quarter. And so while we still year over year probably see it about flat, we see sequential improvement as you go from 2Q to 3Q.
spk04: Great. And then overall you would expect volumes to be up 3Q versus 2Q. Is most of that, is Kapton the big driver there or are there other businesses that you're seeing volumes materially pick up sequentially in 3Q?
spk16: No, I mean, Capcom's a piece of it. You've got the smartphone seasonality as well, so usually we see very high smartphone sales as we head into the Christmas season within the E&I segment and overall electronics in general as they prepare for the holidays.
spk04: Fantastic. Thanks so much.
spk16: Thanks, Rick.
spk12: I will turn the call back over to Chris McCray for closing remarks.
spk02: Okay, thank you everyone for joining the call today. For your reference, a copy of this transcript will be posted on DuPont's website. This concludes our call. Thank you.
spk12: This concludes today's conference call. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q2DD 2022

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