DuPont de Nemours, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the DuPont first quarter 2023 earnings call. I would now like to turn the call over to Chris McCrae, head of investor relations.

Please go ahead.

Good morning and thank you for joining us for DuPont's first quarter 2023 financial results conference call. Joining me today are Ed Breen, chief executive officer, and Lori Koch, chief financial officer. We've prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

Good morning and thank you for joining our first quarter 2023 financial review. This morning we announced quarterly results with operating EBITDA inline and revenue and adjusted EPS slightly better than our previously communicated guidance. This performance reflects our team's continued strong execution while facing short-term volume pressure in select consumer-driven short cycle end markets, including electronics and construction. First quarter organic revenue declined 3% versus the year-ago period, despite double-digit declines from our electronics lines of business of interconnect solutions and semiconductor technologies. Mitigating the weakness in electronics and construction markets was ongoing broad demand strength in areas including water, automotive, aerospace, and healthcare, along with the carryover benefit of pricing actions taken last year. to offset inflationary pressure. Adjusted EPS was up 2% as we continue to realize benefits from our ongoing capital allocation strategy. As expected, operating EBITDA declined versus the year-ago period driven by lower volumes. Given the near-term slowdown in short-cycle end markets, we continue to be proactive in taking actions within our control to minimize volume pressure while also focusing on optimizing cash flow generation. As a result, we expect to continue to show the resiliency of the new DuPont portfolio and expect that our financial results will generate returns commensurate with top tier multi-industrial assets. In addition to our commitment to generating value through delivery of consistent operating performance, we also continue to focus on a creative and value added capital deployment. This morning, we announced a definitive agreement to acquire Spectrum, a leading manufacturer of critical components and devices for medical end markets for $1.75 billion or $1.72 billion after certain tax attributes. This deal fits with our strategy to focus on the industrial technologies growth pillar, expanding our offerings into the fast-growing healthcare market. Turning to slide four, We have had our eye on Spectrum, which is a current DuPont customer, for a long time, and our team is extremely excited for this opportunity. Spectrum is a recognized leader in advanced manufacturing of specialty medical devices and components, serving 22 of the top 26 medical device OEMs with relationships that date back decades and a strategic focus on fast-growing therapeutic devices and components. Their business is predominantly North American focused and has demonstrated consistent growth over many years. We expect them to generate revenues of about $500 million in 2023. As you can see on slide five, DuPont's existing healthcare portfolio is quite strong today. As a reminder, our current healthcare portfolio is comprised of the Livio, medical device, and biopharma consumables business. which is a key part of the industrial solutions line of business, and our Tyvek healthcare packaging business, reported through Safety Solutions. Together, these businesses represent $800 million of total revenue and grow at rates exceeding the company average and well above GDP at solid rates of profitability. The Spectrum business fits nicely with our existing Livio franchise, and will complement our established position in biopharma consumables, bringing world-class manufacturing capabilities and deep OEM customer relationships. On slide six, you can see the addition of Spectrum to our portfolio is impactful, and the combined presence in healthcare will now represent approximately 10% of DuPont's total sales. The transaction adds higher growth while further reducing cyclicality in the portfolio. Also worth noting, the transaction significantly increases the total addressable market we serve within healthcare devices. These businesses are expected to grow at high single-digit rates over time and even faster in 2023 due to specific business wins in place. This transaction has compelling strategic rationale, as you can see on slide seven. The Spectrum business expands DuPont's growth strategy of customer-centered innovation and strengthen our existing stable position in fast-growing healthcare and markets. We are excited by the complementary fit and specifically our ability to leverage the strengths from each side to generate incremental growth opportunities on top of already growing core markets. As an example of this, on the biopharma side, DuPont Livio has extensive direct relationships with leading OEMs in the biopharma space and has a proven design and build co-development model. The added advanced manufacturing capabilities enabled by Spectrum will expand its product and capability set to meet stringent customer specifications, essentially adding a new pipeline for the Spectrum side by adding new customer relationships. On the medical device side, as an example, Spectrum has extensive direct relationships with leading OEMs, including with 22 of the top 26 players. Adding Livio's silicon offerings and DuPont's material science technology will enhance Spectrum's depth of cooperation with customers and expand its product offerings. Spectrum is expected to accelerate top-line growth for industrial solutions and DuPont as a whole. Regarding deal terms, the net purchase price of $1.72 billion after certain tax adjustments represents a 15.6 EBITDA multiple based on 2023 estimates, or 13.2 times after moderate expected cost synergies of $20 million. In line with our return hurdles for capital deployment, the acquisition is expected to deliver high single-digit ROIC by year five, excluding revenue synergies that we described. We believe the combined growth opportunities I just mentioned can add incremental value to the business combination. We expect this transaction will close by the end of the third quarter this year, and we do not anticipate significant regulatory hurdles. we plan to finance the transaction with cash on hand. Given a lot of moving parts on our capital allocation over the last six months, let's briefly review our status on slide eight. From closing of the M&M sale in November through today, we have deployment actions and plans in place to account for the full $11 billion of gross cash received from the sale through a disciplined capital allocation process. In the fourth quarter of last year, we announced a $5 billion share repurchase authorization and took actions to deleverage our balance sheet by paying down $2.5 billion in senior notes and reducing commercial paper from $1.3 billion to zero at year end and remaining undrawn through the first quarter. Regarding share repurchases, We still expect to complete the $3.25 billion accelerated share repurchase program launched last November in the third quarter of this year and remain committed to completing the remaining $2 billion of authorization as an ASR shortly thereafter. Today's announcement to acquire Spectrum with cash on hand essentially completes the deployment of any remaining excess cash from the M&M transaction. In terms of additional cash sources, I will note that we are progressing with our plans to sell the Delrin business and continue to expect the planned transaction to close by year end 2023. Our current capitalization remains very sound with no significant debt maturities until November 2025. Looking through all currently communicated deployment actions inclusive of the Delrin sale, we expect net leverage to finish the year around 2x. We are comfortable with that leverage point, which is more in line with our multi-industrial peers, and we expect to remain at that level as an equilibrium target going forward. With that, let me turn it over to Lori to review our financial performance and outlook.

Thanks, Ed, and good morning. Our first quarter financial results reflect our team's ongoing strong focus on execution and operational excellence as we began 2023. In a pressured volume environment within consumer electronics and construction, we are focused on the operational levers within our control to drive solid operating EBITDA and minimize margin impact despite volume decrements in some of our most profitable lines of business. Turning to our financial highlights on slide five. First quarter net sales of $3 billion decreased 8% as reported and 3% on an organic basis versus the year-ago period. Currency resulted in a 3% headwind from dollar strength against key currencies, most notably the yen, yuan, and euro. And we also saw a 2% headwind related to portfolio changes. Breaking down the 3% organic sales decline, 4% pricing gains were more than offset by a 7% volume decline. Pricing reflects the carryover impact of actions taken during 2022 to offset broad-based inflation related to raw materials, logistics, and energy. Volume decline reflects weakness in consumer electronics, resulting from decreased consumer spending, channel inventory destocking, and softness in construction. Lower volume in these consumer-driven short-cycle end markets was partially mitigated by ongoing strength in water, automotive, aerospace, and healthcare markets. Taken in combination, volume within electronics and construction end markets during the quarter was down high teens in the aggregate versus the year-ago period, while our remaining businesses were up low single digits. From a regional perspective, Europe and North America sales in the quarter were up 5% and 1% respectively on an organic basis, while Asia Pacific was down 10% versus the year-ago period. China sales were down nearly 20%, driven principally by the electronics weakness. First quarter operating EBITDA of $714 million decreased 13% versus the year-ago period, driven by lower volumes and the impact of reduced production rates in electronics as we scaled back production to better align with demand. Currency was also a headwind. Operating EBITDA margin during the quarter of 23.7% was down 130 basis points, driven by volume pressure and inclusive of mixed headwinds related to lower volumes within the high margin semi-business. Decremental margin for the quarter was 41%. Given the high teams volume declines in our electronics portfolio, our overall decrementals were disproportionately impacted as these businesses are some of the most profitable within the DuPont portfolio. Adjusted EPS in the quarter of $0.84 per share increased 2% versus last year, which I will detail shortly. Looking at cash performance, cash flow from operations during the quarter of $343 million, less cash paid for CapEx of $241 million resulted in adjusted free cash flow of $102 million. Included within free cash flow are transaction cost headwinds of about $75 million. related to both cash payments associated with the M&M deal closing and ongoing Delaware and divestiture costs. Turning to slide 10, adjusted EPS for the quarter of $0.84 per share increased 2% compared to $0.82 in the year-ago period. Headwinds related to overall volume declines were more than offset by below-the-line benefits, including an $0.11 benefit related to lower net interest expense and a $0.09 benefit due to share repurchases. including the upfront benefit of our ongoing ASR program initiated last November. Our tax rate for the quarter was 23.4%, up from 21.8% in the year-ago period, resulting in a two-step headwind to adjusted EPS, driven primarily by geographic mix of earnings. Turning to segment results, beginning with E&I on slide 11. ENI first quarter net sales of $1.3 billion decreased 16% as organic sales declined 13%, along with currency headwinds of 2% and unfavorable portfolio impact of 1%. The organic sales declines reflect a 15% decrease in volume, partially offset by a 2% increase in price. The organic sales decrease for ENI was driven by InterConnect Solutions, which was down 21%, and semiconductor technologies, which was down mid-teens. The decline in interconnect was driven by weak smartphone, PC, and tablet demand, along with channel inventory destocking. Our PCB customers in China operate in the first quarter with utilization rates in the mid-40s, which is an expected cycle low. The decline in semi-tech resulted from reduced semiconductor fab utilization rates due to weekend market demand as well as downstream destocking of finished chip inventories. Semi-chip fab utilization rates in the first quarter averaged around 80%, which we expect to dip somewhat in the second quarter as these customers work down inventories. We expect recovery in fab rates to begin during the third quarter. Sales for industrial solutions were up low single digits on an organic basis as pricing and ongoing strength in Best Bell Aerospace products and in healthcare for applications such as biopharma consumables are partially offset by lower demand in largely consumer-driven areas such as advanced printing and lighting applications. Operating EBITDA for E&I of $362 million was down versus the year-ago period, primarily due to the drop-through impact of volume declines, which correspond to the lower customer utilization rates just referenced and our lower operating rates, as also mentioned. Turning to slide 12, W&P first quarter net sales of $1.45 billion increased 1% as organic sales growth of 4% was mostly offset by a 3% currency headwind. Organic growth reflects a 6% increase in price resulting from the carryover impact of pricing actions taken last year, partially offset by a 2% decrease in segment volumes. Organic sales growth was led by water solutions, which was up low double digits on strong pricing and continued demand growth for water filtration, led by reverse osmosis product lines. Safety solution sales were up mid-single digits on an organic basis on pricing and volume gains. Volume growth was driven by Kevlar and Nomex demand in aerospace and automotive markets, especially for EVs, coupled with Tyvek strength in healthcare. Shelter solution was down mid-single digits on an organic basis on greater than 10% volume declines due to softness in construction markets, partially offset by pricing. Operating EBITDA for W&P of $344 million increased 1% as pricing and discipline cost control were largely offset by inflationary cost pressure, primarily related to higher raw material and energy costs, currency headwinds, and lower volumes. Before I turn it back to Ed, I'll close with a few comments on our financial outlook and guidance for second quarter and full year 2023 on slide 13. As we look at the current demand environment, we continue to expect ongoing strength throughout the year in areas such as water, automotive, aerospace, and healthcare. Within electronics markets, we continue to see weakness in channel inventory destocking in the near term. Based on recent customer feedback echoed by their public commentary and third-party market forecasts, we expect customer utilization rates to bottom relatively near-term and to improve during the third quarter, which is about a quarter later than previously expected. To highlight these assumptions, we've included current market forecasts for both semiconductor and smartphone markets on slide 14. For semiconductors, Third-party research now suggests MSI will be down 13% for the full year 2023 compared to estimates last quarter indicating down mid-single digits, with FAB utilization expected to ramp back up above 80% beginning in the fourth quarter. For both of these end markets, you can see the expected improvement beginning during the third quarter, which reflects a later and somewhat more gradual pace than the assumptions last quarter. Due to the delay in the near-term recovery, we are adjusting the high end of our four-year guidance ranges for net sales, operating EBITDA, and adjusted EPS. We now expect four-year net sales to be between $12.3 and $12.5 billion, operating EBITDA to be between $3 billion and $3.1 billion, and adjusted EPS to be between $3.55 and $3.70 per share. For the second quarter 2023, we expect similar results for the first quarter as overall market conditions are anticipated to be generally consistent. On a longer-term view, historical data suggests downturns in these markets are short, lasting about three to four quarters, which gives us confidence in the longer-term growth for electronics as we get through this year. With that, I'll turn it back to Ed.

Thanks, Lori. Before we take your questions, I'd like to highlight that we published our annual sustainability report yesterday, highlighting the ongoing work of our employees across the globe to meet our commitments across all aspects of ESG. As a reminder, our sustainability strategy is grounded in three pillars, innovation, protecting people on the planet, and empowering employees and customers. I continue to be proud of the progress we're making on our 2030 goals and remain impressed at the speed in which we are advancing. On climate change, we exceeded our 2030 acting on climate goal to reduce scope one and two greenhouse gas emissions by 30% well ahead of schedule. And we have set a new goal, which has been validated by SBTI to reach a 50% reduction in emissions by 2030. Regarding innovation, 80% of our top innovation programs deliver sustainability value for customers. Within water, we've helped to enable seawater to be used as a source of potable drinking water with our reverse osmosis technology. We're also helping reduce carbon emissions through building materials innovation and protection. In auto markets, we're making electric vehicle batteries safer with our materials for thermal management. And within electronics, we've directly enabled increased performance requirements in semiconductor manufacturing. In our community, we engaged over 500 community projects with over 300 nonprofit partners across 30 countries focused on STEM education. From a DE&I standpoint, many aspects of our inclusive culture continue to be recognized. 2022 marked our second year on Forbes magazine's world's top female-friendly companies list as one example. There are many great examples and stories in the report of how our teams are delivering on our purpose and driving sustainability. Overall, our teams have done a tremendous job. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad. If at any point you'd like to withdraw from the queue, please press star 1 again. You'll be provided the opportunity to ask one question and one further follow-up question. Well, now I'll take a moment to compile our roster. Our first question comes from Steve Tulsa from JP Morgan. Please proceed.

Hey, guys. Good morning. Good morning, Steve. Could you just help level set us on where you stand as far as the amount you have left to buy back for the rest of the year and the pace on that? And then when Delrin closes, just remind us of the proceeds you're expecting there and what you'd expect to do with that cash.

Yeah, I'll take the share repurchase. So we still have $2 billion left to complete, which we will do on the back of the completion of the current ASR, which is expected sometime in the August-September timeframe. We'll get started on the second program and be able to take 80% of the shares out up front, and then it usually will take us about six months to complete the full $2 billion authorization. Turn it to Ed for the Delrin comment.

Yeah, so Delrin, we're expecting to close by the end of the year. We've been doing all the carve-out work, so we're very far along on accomplishing all that. I'm not going to talk about what we sell it for, but the EBIT is about $180 million on the business, so you kind of figure out the zip code on that as we move forward. Again, that cash should be somewhere kind of in the beginning of next year.

Got it. And then just lastly on price cost, what's your outlook for pricing for the non-electronics businesses in the second half and any update on the spread for the year, if there's any positive benefit there? I think it was $100 million or something in prior guide.

Yeah, we have not changed that, Steve. Maybe we're being conservative. Obviously, as we've said before, we've worked very hard with our teams on how we're going to handle this As we move forward, the timing is we're seeing a little bit of it, by the way, because of logistics and shipping rates being down. But the big bulk of it will be on the raws. It'll be more on the WMP side. And remember, by the time we renegotiate contracts and then, you know, you've got like a four month window to get it through our supply chain into a finished good that's sold. You know, so you kind of figure out timing of it, but we have not changed the assumption, which is very little of the $800 million that we raised pricing. And, you know, we'll just update everybody as we get to next quarter on that, and we'll have a clearer picture of what that potentially is.

Yeah, and on the pricing side, so we saw 4% total in Q1. It was 6% in W&P. We see that decelerating. as we lap the 2022 benefits. And so, in the second quarter, we expect an overall about 1% price lift, really 2% in W&P and flat B&I.

Great. Thanks a lot. Thanks, Steve.

Our next question comes from the line of Jeff Sprague from Vertical Research Partners. Please proceed.

Thank you. Good morning, everyone. Good morning, Jeff. Good morning. Hey, Ed, maybe a little color on how active you are on the buy side of M&A. The, you know, what the pipeline looks like. I don't think you responded to the potential use of Delrin proceeds, you know, when that happens. Should we expect, you know, kind of more M&A like this or some combination of even additional repo plus M&A?

Yeah, Jeff, our leaning right now is nothing else on the radar screen over the next year. On the M&A side, we want to get the Spectrum deal done, focus on that. By the way, the Laird acquisition we did the other year is going extremely well. So I think there's nothing that we're excited about that we see. out there. This one, by the way, we've had our eyes on for quite a period of time. As I think we said in our comments, they're actually a customer of ours. So this is really where we've been focused for the last kind of year, year and a half with our thinking. If I had to say right now with any extra proceeds, I think we would lean towards additional share repurchase. But remember, to Lori's comments, it's still going to be about over the next year that we're still taking shares out of the market you know existing asr as we said and then we'll as soon as we finish this one we'll re we'll launch the new asr for 2 billion and that'll take us till the end of the first quarter of 2024 so any excess cash we'll deal with at that point in time but i i it depends on the environment obviously but if the environment were like it is now where the multiple is for the company like my gut is we lean towards share repurchase

And could you, thanks for that, could you speak to, I guess for lack of a better term, kind of contingency planning? You know, on the electronic stuff, as you said, I think you tried to triangulate between your own intel and third parties and what your customers are telling you, but it does look and feel like some of these customers are chasing a ball down the hill here on some of this stuff. So, you know, there's things you can't control, but the question is, and things you can control, kind of cost actions that you might be taking or considering. And I wonder if also part of that answer, you could kind of speak to, you know, maybe the opportunity to unlock some additional cash from working capital as, you know, as we work through this kind of cycling down in the electronics markets.

Yeah, Byron, just as an overall comment, though, Jeff, it's interesting. The Semi, you know, you go back and study all the other downturns. Remember, Semi's a great industry, by the way. It's going to go up the next couple decades, but you always do hit these pockets of some destock and some softness. But this actually, for us, when you look at our sales rates, Semi started coming down at the beginning of the fourth quarter. So we're two full quarters down. into the downturn. Now, we think the quarter we're in now is the bottom, just slightly down more from the first quarter. When you look at them, they're usually three to maximum four quarters of a D-stock. Remember, a lot of this is D-stock on top of some consumer softness, obviously. So we're pretty deep into it, it would appear. Having said that, to your direct question, though, we've got a couple other layers of actions we would take on the cost side to protect ourselves. And then back to the conversation we just had with Steve Tusa, obviously we're going to work this price-cost thing real hard and haven't baked a ton in at this point in time. So that would be where the two levers would be.

Yeah, I think on the inventory piece too, so we did take action in the first quarter that was a headwind to E&I margins. of about $40 to $45 million to be able to better align inventory and production rates. And so we saw a headwind there. We'll continue to see that headwind in the second quarter as well as we try to get inventory more in line with where the demand signal is. But to Ed's point too, just to reiterate, on the discretionary side, we are doing a fair amount of actions. You can see on the face of our P&L that we took about 10% out of our total SARs. That was really a function of the restructuring that we did in the tail end of 2022, as well as really tensioning backfills and travel and expense. And we'll continue in that mode as we go into 2Q, as we said in 2Q as well.

Great. Thank you. Thanks, Jo.

Our next question comes from the line of Scott Davis from Melius Research. Please proceed.

Thank you, operator. Good morning, Ed, Lori, and Chris.

Good morning.

Can you guys talk, I know it's not giant, but it can move the needle if you do it right on spectrum. Can you make it better? You commented just that it's more North American based. Is there an opportunity to take it globally? Is there anything that you can do? Synergies look fairly modest and maybe you're just being conservative, but Is there anything you can do with that asset to perhaps drive those returns up a little higher than the deal model?

Yeah, well, Scott, we didn't take into account any revenue synergies. So let me just talk the cost piece a second. We only put in $20 million of cost synergies, which, by the way, is only 3% to 4% of revenue, which is obviously low compared to what deals normally are on the synergy side. So I think our net 13.2 times is pretty conservative based on just that 20 million. The real opportunity here is going to be on the growth side. Remember, our relationships at DuPont are mainly, and by the way, they're very deep relationships are with the biopharma OEMs. Spectrums are more with the medical device OEMs, but a lot of our technology actually goes through companies like Spectrum into that industry. So when we look at the ability for DuPont to move its technologies and material science into the medical device market with Spectrum, and by the way, the opposite of that, Spectrum moving into the biopharma space, and when we look at the joint opportunities we could have together, we could drive some nice incremental growth there. And by the way, we've been talking to them and looking at this opportunity that I'm talking to for a very long time. So I think that's the big benefit. Can we get some more cost synergies? Probably can, but we haven't counted on it yet. But it'll be the growth. This business has been growing. You can see in our charts. kind of right around 10% over the last four years. It's going to actually grow faster this year. They've got a couple big new wins from OEM customers. And then we can broaden it out a little bit more globally because of our footprint on the Livio side. But remember, a lot of the medical device players are U.S.-based companies that sell globally. The other opportunity, Scott, the other big one we have, is we have a path to get the margins of Spectrum up about 300 basis points. They very recently, I say in the last year, put in a fair amount of new production capacity that's getting filled up because just the growth rate, David, I think about four years in a row of 10%. So they have a fair amount that they're just completing on. the factory expansion side. And as we fill up those assets and get them utilized, um, we'll drive the margins up another 300 basis points. So that would back to me would even be a bigger lever than the cost one. It'd be more of that margin expansion and then the revenue opportunity.

Okay. Interesting. And then just as a, as a quick follow-up, the, um, uh, the price comments that you just made, Laurie, the sequential, uh, kind of dropdown is, is that, uh, Mathematically, is that more just that we're getting to the tougher comps on when you jacked prices up a year ago, or is there – okay, so there's no sequential weakness.

No, there's no sequential price declines of any magnitude baked in. It's more just lapping. Last year, the bulk of the raise was in, like, February-March timeframe.

That's what I figured. Okay, great. Best of luck. Thanks. Appreciate it. Thanks, Joe.

Our next question comes from the line of Christopher Parkinson from Mizuho. Please proceed.

Great. Thank you so much. Your performance in WMP specifically on the water and the safety side has been pretty solid. You know, depending on obviously where the macro takes us, which is naturally out of your control, can you speak to the potential resiliency of those two businesses in terms of your expectations for the second half embedded in guidance? Thank you.

Yeah, so we still expect continued strength in water. So we had a nice organic growth in the first quarter on both a price and volume basis, and we'll expect that to continue as we head into the rest of the year. There's a lot of secular trends favoring our water portfolio right now. And on the safety side, we're seeing strength as well in most areas, especially what we highlighted with respect to the spectrum acquisition on our healthcare portfolio. So we've got about a $500 million medical fund packaging business in Tyvek that's performing very nicely. So we see those secular trends continuing throughout the rest of 2023. One other area, too, that we can highlight of growth within the safety portfolio is the EVP. So there's a nice application for Nomex paper within the e-motor that we're seeing nice growth in the first quarter, and we'll look for that to continue as well.

That's very helpful. And just given the results on the margin front, Lori, for the first quarter, can you just give us a real quick update on your expectation for the intermediate to long-term outlook to 27%, 28%? Is that still roughly in line with your expectations in terms of your progression back to those levels? Thank you.

Yeah, I mean, that's still our expectation with three big tailwinds between now and then. One is obviously the volume recovery in E&I and getting those margins back into the low 30. So we dipped In Q1, that was really a reflection of the volume and the actions we took to align production with demand. So, that $40 to $45 million created the headwind in the first quarter. So, that, you know, is not permanent. That will resolve itself. Another tailwind is the price-cost piece. So, as we can see potential future benefit there, that will be margin accretive for us. And so, those are the two biggest levers. The final piece is the mix component. So as you get E&I back on its growth trajectory, obviously it's the highest margin piece of our portfolio. So there's a favorable mix list there as that market starts to recover.

Helpful as always. Thank you so much. Our next question comes from the line of Mike Lighthead from Barclays. Please proceed. Great. Thanks. Good morning, guys.

Good morning. First question, just on Spectrum. Apologies if I missed this in the materials, but is it possible to provide the 2022 revenue in EBITDA for the business?

Yeah, so 2022 revenue was about $450 million, and EBITDA was about $95 million.

Great. Thank you. And then secondly, can you just talk about the lower leverage target now about kind of 2.0 instead of 2.75? Is this just more conservatism in the current rate environment or just kind of help frame the pivot there?

Yeah, it's exactly what you said. It's more, you know, higher interest rate environment we're in. And I think it's, you know, just prudent to set there. By the way, not the number one reason, but another reason is the premier multi-industrial companies are all, if you look at it, kind of centered around two times leverage um you know we were kind of targeted up at that 275 so we think that this environment um interest rate environment it's just a prudent place to be um you know and so that's where we'll end the year about there maybe actually a little slightly below 2x depending on the delrin uh proceeds that we get and then you know what we always have you know we preserve our strategic flexibility there but that's kind of where we'd like to target ourselves um

know moving forward but really the interest rate environment is the key reason right thank you yeah thanks mike our next question comes from the line of alexi yeframon from key bank please proceed uh thank you good morning everyone um ad i wanted to follow up on your 300 basis point margin expansion opportunity for spectrum to clarify Is this opportunity in your high single-digit ROIC number, or it could push the number higher?

No, it's in there. We have a – I mean, just the growth rate they're on right now, if you look at it, they're going to be – I won't get into specific numbers, but they'll be north of 10% growth this year. So just adding that leverage into the system. really moves the needle for us, especially when they built new capacity in place. And, you know, you're sitting there with it. You're hiring people on, you know, you're just kind of going through that digestion period as you're ramping up. So as we said, their revenues this year, Lori just mentioned 2022, their revenues this year will be like $500 million. So, you know, nice growth trajectory. And you just play those numbers through the system. That's where you get to.

And even if you back into the numbers that I had mentioned for 2022, that's about a 21%. EBITDA margin. 2023 is expected to be 22%, so already 100 basis points of improvement. And they had a really nice first quarter ahead of their management plan, actually. So they're on a very nice trajectory to achieve that average 110 million of EBITDA in 2023.

Thanks. And as a follow-up, incentives and interconnect clearly is a challenging market. Can you discuss your outgrowth? Are you continuing to gain content in these markets this year?

Yeah, we would expect to see that. And we actually are seeing some share gains in the LIFO in the packaging space still underneath the numbers that we're reporting. So what is clouding our performance versus the MSI is the D-stock piece. So the D-stock is pretty significant that's going on in the first half that would be another headwind on top of the MSI numbers that we had presented in the deck. And so That's what's crowding the story a little bit, but we still expect that content and exposure to advance notes to be able to give us that performance in total.

Thanks a lot.

Thank you.

Our next question comes from the line of Vincent Andrews from Morgan Stanley. Please proceed.

Thank you, and good morning, everyone. You know, Ed, point taken on the sort of historical electronic cycle, the three to four quarter downturn, Just curious if there's any sensitivity to that, and what I mean by that is you're looking for the recovery in the third quarter. If for some reason it doesn't come in the third quarter, can it still come in the fourth quarter, or is there some seasonal reason why it might get kicked into the first quarter if that were to play out?

No, there's no seasonal reason, Vincent. It's hard to tell exactly what month it is in there, but we've modeled all the other downturns. Remember, this downturn is preseason. Now, 13% down is correct. You're hitting it pretty quick on the destocking. And then, by the way, there's one other factor here that kind of pushed it out a little bit. One of the very large semiconductor players kept running hard on their fabulization through the first quarter. And that's public knowledge. I'm not going to mention the name, but one of the big players. So you know, that is creating also the fact that they got to, you know, take their utilization down pretty rapidly here. And I think they just talked publicly about that a week or so ago. So that was one of the other reasons that just kind of pushed it out a little. And, you know, they got to go through a D-stock also. Okay, great.

And can I just ask on spectrum, I don't know if you mentioned this before, I didn't see it, but what polymers and materials, you know, are critical to their products? And, you know, are there any particular folks that they tend to compete against?

Yeah, so they compete against TE, Nordson, and Integer are some of their larger competitors. As far as on the input side, they use their specialty polymers and design expertise to manufacture very high complexity materials for the large med device players. And so that's as Ed had mentioned earlier, where we see a really nice sweet spot of being able to leverage the two portfolios. They've got really nice physicians with the medical device guys, and we've got really nice physicians with the biopharma guys. And so being able to bring our two portfolios, leverage our expertise in material science across the broader portfolio is where we see the opportunity for us ahead.

Thanks very much.

Next question comes from the line of Josh Spector from UBS. Please proceed.

Yeah, hi. Thanks for taking my question. Just when I look at your E&I guidance for 2Q, I mean, you're basically flat to slightly up sequentially on the sales line. I mean, pretty clear how you're guiding towards semis and utilization rates come down. Zoom interconnects is kind of a push as well. So is industrial doing better sequentially? And is there anything you note there that's maybe different than what you expected?

No, you had walked through the pieces. So industrial, we still expect continued strength overall within industrial. There's a little bit of a flip between interconnect and semi-sequentially. So you'll start to see a little bit of the seasonal build that happens normally in interconnect primarily within the smartphone space. And then we actually see a little bit of sequential deceleration in semi from Q1 to Q2, really a function of what Ed had mentioned earlier on one of the larger customers overbuilding in Q1 and then pulling back in Q2. But net-net, there's not a material change in revenue for the total company or E&I from Q1 to Q2.

Okay, thanks. No, I appreciate that. And I guess kind of following up on a prior question, you know, if this all, this recovery in semis pushes out again another quarter, you know, you had 200 million sales cut, 100 million EBITDA cut. You talked about some production kind of realignment. If this were to push forward again or push out again, Were there any difference in the decrements that we should expect, either due to price costs or anything else that would maybe be an additional lever you consider?

Yeah, I mean, we would, so right now we expect that that headwind that we'll see in the first half of around the 90 million from pulling back production in E&I not being there in Q3 and Q4 in the second half. And so if this recovery extends into the fourth quarter, then you would expect that 45 million to recur. again in the third quarter. The one caveat that we will make that we don't have baked into the guide, too, that could offset any decremental weakness if the recovery is pushed out is that price-cost piece. So we don't have anything material baked in that could become a tailwind to the second half based on what we see right now versus what we see right now.

Okay. Thank you. Mm-hmm.

Our next question comes from the line of John Roberts from Credit Suisse. Please proceed.

Thank you. Healthcare alone now is going to be almost the same size as shelter solutions, so do you create a reportable healthcare segment and move the rest of safety into industrial, or do you put spectrum into a larger safety segment where healthcare will be about 40% of the safety segment?

Yeah, John, it's something we've been looking at how to report it. You know, it's interesting. Yeah, health care will be 10% of the portfolio now. The water business, by the way, is developed into 10% of the portfolio. I think both really nice, good secular end markets for us over the coming years at higher growth rates, obviously, both of those. So we'll take a look at that. We don't, you know, we'll probably look at it as we enter 2021. that yet.

Okay. And then on the delay in electronics, do you have any long lead time orders that actually show an inflection in demand yet?

No, because it's a short cycle business. So no, you can't really, you know, we'll have a little bit of lift as Lori said in the ICS business. And that's typical for us. As she said, you know, you're going into the holiday season later in the year. So we start our shipments and You can see on one of our charts, just the smartphone piece alone picks up in third, fourth quarter there. So we begin shipments there. But past that, it's a birth cycle business. And we'll see it, and we'll ship it pretty quick.

OK, thank you. Yep.

Our next question comes from the line of Steve Byrne from BOA. Please proceed.

Yeah, just wanted to ask about your water treatment growth. Would you say that it's being driven more by, you know, the treatment of water for consumption or for wastewater discharge? And are you seeing any increased demand for both of those buckets due to fluorinated compounds, either from, you know, EPA's drinking water standards that are underway or EPA scrutiny on any company that's using a fluorinated material?

No, I mean, so the growth we have seen would be more on the industrial side. The business is about 70% favored towards industrial wastewater treatment. So that's what's driving the growth. There's nothing material that we're seeing with respect to any groundwater remediation that's coming out from the EPA.

And remember, you know, 70% of that business is recurring. You know, we're replacing membranes and all at these industrial sites. And it's just a secular trend that should continue because including DuPont, we're all working on that for our ESG targets. And it's, you know, besides greenhouse gas emissions, it's the other big one.

And then one on shelter, clearly it's going through a cyclical downturn, but Just curious about your longer-term view on shelter solutions. Is it likely to remain a core business for you?

Yeah, no, it's a core business for us. Remember, a very key component of that is our Tyvek franchise, which is a very nice margin business for us against all of the end markets that we service with Tyvek, including the construction market. Obviously, Laurie mentioned a really nice market for that is medical packaging.

So it's definitely part of the portfolio. Okay, thank you. Thanks.

Our next question comes from the line of John McNulty from BMO Capital. Please proceed.

Yeah, good morning. Thanks for taking my question. So on the topic of raw materials, I know what you said is in the guide. I guess I'm curious, in terms of the raw material basket that you're buying today, acknowledging it takes some time to work through the P&L, Can you help us to understand how much that might be down from the peak and how we should be thinking about that?

Yeah, so we saw around the $800 billion of escalation last year. It was about 60% ROS and the rest roughly between logistics and energy. We are seeing deceleration on the logistics and the energy side. So obviously you can look at European and U.S. natural gas and see there's been a sizable pullback there. And the ocean freight rates, we're seeing tailwinds as well. And so that's where we're seeing most of the deceleration. I wouldn't say we've seen a material amount thus far on the raw material side, either on both the bulk buy or on the tail spend. So that's the upside as we head into the rest of the year is when we start to see an inflection in the raw material buy.

Okay, so you haven't actually, you're not buying them lower now. So that's to come and then it still has to work through the P&L, is that right?

Yeah, yes. Correct.

I think, John, it's important to note that there are individual raw materials where we would be buying at lower prices, but there are others that have maintained an inflation curve. And there are a lot of things that we buy that are very supply-driven in terms of the dynamic, and it could take quite a while to kind of unlock that. any kind of relief there, even if you take a really basic benchmark price and suggest that that could be down already today. So there are puts and takes within the portfolio, but I think the punchline here is that there's well less than $100 million of net benefit in the model that we have today, and that's inclusive of some of the savings that Lori mentioned. reference from logistics and energy, but netting out as we go through the year later, some potential give back that could be necessary. So there really isn't that much in there. And yeah, I suppose that could present an opportunity as we look forward, but we haven't seen a lot of benefit come through today. Got it. Okay.

Fair enough. And then just one question on the acquisition. So the growth rate from 2019 to 2023 is of 12% is a pretty chunky number. But at the same time, if memory recalls, like during the COVID period, medical device demand was actually pretty soft. You didn't have a whole lot of access to surgical suites. So is that 12% understated in your mind, or is that kind of a fair run rate? And it's just, you know, based on the specific products they make, maybe, you know, it didn't have that pressure that maybe some others in medical devices did. How should we be thinking about that?

Yeah, I mean, it wouldn't have had the same magnitude of pressure as some of the other providers into the elective surgery. So it's selling into the non-elective type, so kind of more the essential surgery. So it wouldn't have seen that as significant of a COVID headwind. So I would say the 12% CAGR that we saw from 19 to 23 wouldn't be too materially awesome where we see it going forward. We see it a little bit decelerating to the high single-digit range, but still a really nice growth for us. And then, obviously, really nice growth in 2023 on the back of already underlying strong volume, as well as they had some sizable new customer wins that are in the process of ramping and really get to a nice clip as we head into the back half of 2023 as well.

Got it. Thanks very much for the call. I appreciate it.

Our next question comes from the line of David Begleiter from Deutsche Bank. Please proceed.

Thank you. Ed, do you have an update on PFAS and the MDL ahead of the upcoming trial in Florida?

Yeah, so the trial comes up in about a month out now, David. And I'll just say we've been talking pretty regularly with the plaintiffs. As I mentioned last quarter, the judge did appoint a mediator who, by the way, is very actively involved. with these regular conversations we're having. So, you know, we're feeling positive, but I'll leave it at that right now.

Got it. And can you provide a little more color on the weakness you're seeing in North American construction, resi versus non-resi, and any destocking that's still ongoing in that space? Thank you.

Yeah, we saw pretty similar volume declines across all three end markets, so do-it-yourself, residential, and commercial markets. And reminder, just on the exposure in commercial, it's more so on like the healthcare and education side versus large commercial construction in downtown cities. And so we saw similar performance from a volume deceleration in all three. We don't have a material pickup in 2023 planned for those markets. So we'll see how they continue to perform, but we don't see an inflection like we do in electronics in construction in general.

Thank you.

Mm-hmm.

Our next question comes from the line of Aaron Viswanathan from RBC Capital Markets. Please proceed.

Great. Thanks for taking my question. Hope you're doing well. So just looking at the full year guidance of $3.05 billion of EBITDA at the midpoint and your Q2 of $7.15, that would imply that your second half is around $1.62 billion and your first half is around $1.42. So that 190 uplift or 200 million almost uplift when you look at first half to second half, is that mainly, you know, the comps getting easier on the volume side for E&I? Are there any other special items we should kind of consider when we think about that cadence?

Yeah, I mean, it's mostly within E&I that lift, and it's going to be more favored to Q4 versus Q3 as you look at the slides that we presented on both the smartphone and the semi-MSI side. So most of it is that anticipated second half recovery. There is a little bit of seasonality that would play into a first half versus second half comp, but most of it is that electronics recovery, and as I had mentioned, a little bit more favored to Q4 versus Q3. Okay.

Thanks. And just one quicker one on M&A. So you guys, you know, have now reentered the market with the spectrum acquisition. You know, would you say that the portfolio transformation is now kind of complete and or are you still considering other opportunities within the five markets that you've been looking at?

You know, you're never, I guess, complete, but I would summarize it. Yes, we feel like we're complete for a period of time here. We like where we're at. This was the last piece we were looking at, and so I don't see anything over the next, like, year just to, again, stay the time period. You know, I think we like where the portfolio is at. We just want to operationally run it well.

Perfect. Thanks. Great. Thanks.

Our final question comes from the line of Mike Sison from Wells Fargo. Please proceed.

Hey, good morning. In terms of Spectrum, is there a pretty big runway in terms of other acquisitions there? You know, you sort of exited plastics. You're back into plastics. And I get it. Healthcare is so much better on market. But, you know, is this an opportunity to build a pretty big, you know, plastics healthcare unit over time?

There's definitely more you could add to it. And again, we like it secularly. So that's why we've kind of doubled down in this area. But remember, we have a lot of opportunity between what we already had and what they had. So we really like it because of that. So, yeah, there's other opportunities down the road. But it's just like the Lairdale. We want to get this in. We want to get it synergized. We want to get it really humming with our business. So, you know, over the next year, that's what we'll be focused on.

Then just a quick follow-up when I take a look at slide 14. Does inventory destocking end in 2Q? And even if the third quarter isn't that much of an improvement sequentially, ENI's results could improve if the destocking is sort of done.

Yeah, we do see the desocking moderating in Q2, yes. So it peaked kind of in the 1Q, 2Q timeframe, and then we see it pulling off a bit in Q3, Q4. Thank you.

Thanks. I would now like to turn the call over to Chris McCrae for closing remarks.

Yeah, thank you, everyone, for joining our call. And for your reference, a copy of our transcript will be posted on our website. This concludes the call. Thank you.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.