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spk06: Good day and welcome to the DuPont Specialty Products USA LLC third quarter 223 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. And if you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. In the interest of time, please keep to one question and one follow-up question per person. For operational assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Chris McRae to begin the conference. Chris, over to you.
spk03: Good morning, and thank you for joining us for DuPont's third quarter 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer, and Lori Koch, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future, because these statements are based on current assumptions and factors that involve risks and uncertainties. Our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and have been posted to DuPont's investor relations website. I'll now turn the call over to Ed.
spk16: Good morning, and thank you for joining our third quarter 2023 financial review. This morning we announced third quarter results and delivered solid earnings accomplished through strong operating execution by our teams despite ongoing volume headwinds, including channel inventory destocking and continued weak demand in China. We reported sequential operating EBITDA growth of 5% and margin improvement of 140 basis points in the third quarter. We also produced strong cash flow during the quarter, with adjusted free cash flow almost 50% higher than the year-ago period, highlighting our efforts to prioritize working capital improvement in a challenging global business environment and normalizing after last year's global supply chain difficulties. Compared to third quarter 2022, organic revenue declined 10% due primarily to the impact of incremental channel inventory destocking. along with lower volumes from semiconductor and construction end markets. Within our electronics portfolio, our interconnect solution business recorded a second straight quarter of sequential sales lift as underlying demand improvement and normal seasonality contributed to an 8% sales increase. We also saw signs of stabilization with the semiconductor markets and expect some sequential sales improvement from semiconductor technologies in the fourth quarter. Third quarter volume was lower than expected, primarily due to incremental channel inventory destocking, including with our distributor customers, which was evident in the water solutions and safety solutions lines of business. In this environment, we remain focused on controlling discretionary spending and are also planning additional restructuring actions to continue to ensure we can drive sound operational and financial performance, targeting at least $150 million in annualized run rate cost savings, which we expect to be seeing later in the first quarter of 2024. It's always difficult to precisely time market inflections, but current industry forecasts within electronic submarkets fall for recovery by 2024. This includes forecasts for PC shipments that grow mid-single digits, driven by replacement demand, smartphone shipment growth in the mid-single digits, also driven by replacement demand, and new product launches, and for server demand to gradually improve next year. This growth is supported by the rapid surge in demand for AI servers, as well as replacement for traditional servers. In general, demand for high-performance and high-density memory chips is accelerating, supported by AI growth as well as overall growth for new mobile product launches. This directly correlates with DuPont's product strengths within the semiconductor and consumer electronics markets. Despite the near-term headwinds we are experiencing, we are confident that our key end markets are well-positioned for long-term growth and we expect these structurally attractive markets will provide the foundation for DuPont's value creation looking ahead. Turning to slide four, we significantly advanced our strategic and capital allocation priorities during the quarter to drive shareholder value. First, we closed the acquisition of Spectrum on August 1, which fits nicely alongside our Livio healthcare-related product line within our industrial solutions line of business within ENI. We are pleased with Spectrum's operating results to date, which are aligned with our modeled estimates. We are excited to welcome the Spectrum team, which is currently focused on executing new revenue growth opportunities stemming from significant customer wins earlier in the year. Second, I am pleased to announce that we are in the process of closing today the previously announced sale of our roughly 80% ownership interest in the Delrin business. the remaining piece of the former M&M segment held for sale to the private equity firm TJC in a transaction value in the business at $1.8 billion. This deal was structured to maximize value for our shareholders. It provides significant upfront cash proceeds with minimal expected tax impact, which can then be deployed in line with our strategic priorities. It also provides an opportunity for us to participate in future upside returns upon the exit of our retained interest in Delrin. TJC has an excellent track record of creating value, and we look forward to leveraging their talent and focus to continue to grow the high-quality Delrin business. Regarding share repurchases, in September, we completed the $3.25 billion accelerated share repurchase transaction launched last November. We then launched a new 2 billion ASR, which we expect to complete during the first quarter of 2024. Combining these two ASR transactions, we have repurchased approximately 15% of our outstanding shares when complete, reflecting our continued commitment to returning capital to shareholders as part of our balanced financial policy. Including these ASRs and the proceeds from the dollar in sale, we anticipate finishing the year close to our target net leverage ratio of about 2.1 times. Further, we anticipate using a significant portion of excess cash during 2024 for incremental share repurchases once the ASR is complete. With that, I'll turn it over to Lori.
spk09: Thanks, Ed, and good morning. Our teams continue to execute well in a softer volume backdrop driven by broad-based inventory destocking. demonstrating strong financial discipline and focus on operational excellence. I am most pleased with the sequential margin improvement registered by each of our segments in the third quarter, as well as our strong cash performance in the period. Given volume headwinds, the delivery of stronger margins and better cash flow are attributed to execution around lowering our input costs, coordination with the operating teams to right-size our inventory position, as well as overall progress with productivity via operational excellence initiatives. We are very focused on operating discipline and pleased that site-level operating execution is positively positioning us for solid margin upsides as volumes recover. We expect to see evidence of this in 2024, given expected recovery in key end markets, including electronics. Turning to our financial highlights on slide five, Third quarter net sales of $3.1 billion decreased 8% versus the year-ago period. A 10% organic sales decline was slightly offset by a 2% portfolio benefit due primarily to revenue contribution from spectrum acquisition. The organic sales decline reflects a 10% decrease in volume resulting primarily from semiconductor and construction end markets, as well as the impact of channel inventory destocking. D&I and W&P organic sales declined 13% and 8%, respectively, while the retained businesses and corporates reported 1% organic sales growth, including mid-single-digit growth in the adhesives portfolio. From a regional perspective, consolidated DuPont sales decreased on an organic basis globally versus the year-ago period, with Asia Pacific, North America, and Europe down 12%, 10%, and 2%, respectively. China sales were down 16% on an organic basis versus the third quarter of 2022, so E&I sales in China increased sequentially in this quarter and saw smaller year-over-year declines in each of the last three quarters. Third quarter operating EBITDA of $775 million decreased 9% versus the year-ago period, driven by lower volumes and the impact of reduced production rates primarily within E&I as we align inventory with demand. partially offset by lower in-point costs related to raw materials, logistics, and energy, along with the portfolio benefits and spectrum. Operating EBITDA margin during the quarter of 25.3% was down 50 basis points versus the year-go period, driven by volume pressure in the high-margin semi-business and reduced production rates, primarily within the E&I segment, offset partially by cost-equation benefits, which increased somewhat from second-quarter levels. On a sequential basis, operating EBITDA was up 5% and operating EBITDA margin improved 140 basis points. Sacramento margin for the quarter was 31% enabled by cost inflation and aggressive actions taken year to date to reduce spending. As I mentioned earlier, I am pleased with our cash flow improvement during the quarter. Optimizing working capital performance continues to be a top priority for us. On a continued operations basis, Cash flow from operations of $740 million, less capital expenditures of $119 million, resulted in adjusted free cash flow of $621 million in the third quarter, a 47% increase versus the year-ago period. Adjusted free cash flow conversion during the quarter was 151%, an increase versus last year and much improved compared to the first half of this year. We currently expect to finish the year with conversion around our targeted level of 90%. Turning to slide six, adjusted EPS for the quarter of $0.92 a share increased 12% compared to $0.82 in the year-ago period. Below-the-line benefits, including combined $0.16 benefit related to a lower share count and lower net interest expense, more than offset lower segment earnings. Other below-the-line benefits, including a lower tax rate and lower foreign exchange losses, contributed $0.06 to adjusted EPS improvement versus the year-ago period. Our tax rate for the quarter was 24.6%, down from 26.2% in the year-ago period, driven by the impact of a rate true-up in the year-ago period, and lower than our previously communicated modeling guidance, as discreet tax headwinds were lower than expected. Our expectation of a full-year 2023 base tax rate of 24% remains unchanged. Starting to segment results, beginning with E&I on slide seven. D&I third quarter net sales of $1.4 billion decreased 9% as organic sales declined 13%, offset partially by a portfolio benefit of 4% from the Spectrum acquisition. The organic sales decline reflected a 12% decrease in volume and a 1% decrease in price. At the line of business level, organic sales for semiconductor technologies were down high teams versus the year-ago period, resulting from a continuation of inventory stocking across the channel and, to a lesser extent, ongoing weak end-market demand and the impact of China trade restrictions. On a reported basis, semiconductor technology sales were flat sequentially in the third quarter. With an interconnect solution, organic sales declined 11% year-over-year due to both volume and price declines driven by the pass-through of lower metal pricing. Volume continued to be impacted by weak smartphone, PC, and tablet demand, particularly in China, along with more moderate inventory destocking, which we believe is largely complete. On a sequential basis, the InterConnect business recorded a second straight quarter of sales improvement, with sales up 8% driven by seasonality, as well as some underlying demand improvement within PCB markets. Organic sales for industrial solutions were down five single digits versus the year-ago period due primarily to destocking within biopharma applications for Olivia product lines and continued lower demands in electronics-related end markets. These declines were partially offset by increased demand for OLED display materials. Operating EBITDA for E&I at $383 million was down versus the year-ago period primarily due to volume declines and lower operating rates to better align inventory with demand, slightly offset by a portfolio benefit related to Spectrum. Operating EBITDA margin increased 140 basis points sequentially during the third quarter. Turning to slide eight, W&P third quarter net sales of $1.4 billion declined 8% versus last year, as volume decline of 9% was slightly offset by a 1% increase in price due to the carryover impact of actions taken last year. Within safety solutions, organic sales were down high single digits due primarily to channel inventory destocking. Shelter solution sales were down high single digits on an organic basis driven by continued demand softness in construction markets and ongoing channel inventory destocking. On a sequential basis from the second quarter, shelter sales increased slightly, and we expect narrower year-over-year declines in fourth quarter. Organic sales for water solutions were down mid-single digits versus the year-ago period due primarily to inventory destocking, including with distributor customers and lower industrial project demand in China, mainly impacting reverse osmosis. We expect generally flat sequential volumes in the fourth quarter versus the third quarter. Operating EBITDA for W&P during the third quarter of $362 million decreased versus the earlier period due to lower volume, partially offset by the impact of net pricing benefits. Operating EBITDA margin of 25.6% increased 70 basis points year-over-year and 100 basis points sequentially from the second quarter. Turning to slide nine, I will close with a few comments and what we are seeing in the fourth quarter and how that translates to our full year 2023 guidance. Underlying consumer electronics demand in the fourth quarter is expected to be generally similar to the third quarter, with some sequential sales much expected in semiconductor technologies. As mentioned earlier, we saw additional channel inventory destocking and slower industrial demand in China, mainly impacting water solutions compared to prior expectations, and we assume these same trends will continue through the end of the year. As a result of this incremental volume softness, we are adjusting our net sales and operating EBITDA guidance and now expect full-year net sales to be about $12.17 billion and operating EBITDA to be at about 2.97 billion, which is at the low end of our prior range. For the fourth quarter, we expect net sales of approximately 3 billion, with a sequential decline versus third quarter driven predominantly by additional inventory stocking in the safety solution side of business, and to a lesser extent by the impact of seasonality and incremental currency headwinds. We expect full year 2023 adjusted EPS to be approximately $3.45 per share, which is the midpoint of our prior guidance range. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.
spk06: At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. In the interest of time, please keep to one question and one follow-up question per person. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jess Brugg, of virtual research partners, vertical research partners. Your line is open.
spk15: Thank you. Good morning, everyone. Good morning, Jeff. Good morning, Ed. A lot going on in these channels, obviously. Do you have any kind of sense or how do you measure, you know, kind of your sell-in versus sell-through, trying to kind of understand, you know, kind of what that incremental headwind is from inventory versus just kind of general demand trends And, you know, maybe just a little bit of color on, you know, how much more you might have to do on inventory or production to kind of get things where you need them to be balanced out.
spk16: Yeah, Jeff, so we did a pretty detailed analysis of it. And I think a good way to look at it is what is our distributor customers doing versus our direct end customers? So maybe just to give you a couple of numbers on the W and P side of our business, about 50% of our volume goes through distribution and the other 50% we sell direct to customers. And so we did a whole analysis, obviously, because, you know, the distributors, you can see quick what's going on with them and almost across the board, the distributor network is destocking pretty broadly. um and and it's on a percentage basis down significantly more than our direct customers so probably just just one because it hit us this quarter our water business in china which is mostly reverse osmosis um was down at 36 percent of it goes through distribution the rest we sell direct to customers but the 36 percent the third of our sales that go through distributors in China, it was down 36% through distribution was down about 12% direct to the customer base. So if you do that analysis in our safety business, you get very similar trends. going on so clearly the distributors are going through a d stock and i'm sure as we're approaching your end everyone's trying to get their inventories kind of where they want them um now by the way having said that my take is that the d stock obviously goes into the first quarter if we just started to see it in some of these wp businesses uh but i would think the distributors work it down you know fairly quickly um you know after we're kind of exiting the first quarter But that same trend applies almost across the board when you do that analysis. It's the distributors are way down vis-a-vis the direct customer channel.
spk09: And on the absorption question, we're still in the same general ballpark in the second half as where we were in the first half. There's a little bit of a mix, and we'll be taking a little less absorption headwinds in E&I and a little more in W&P as we see the desox continue as we head into the fourth quarter. But in total, the number is about equal to the first half.
spk15: I was wondering if you could give us a little color on restructuring also. Ed, I think you mentioned 150 million run rate. I wasn't sure if that was full year 2024, but maybe just give us a sense of how much restructuring tail you have in 23, the incremental benefit you expect in 24, and as volumes kind of hopefully improve into 2024, is some of that just kind of discretionary, temporary stuff that kind of comes back into the P&L?
spk16: Yeah, so on an annual basis, Jeff, will be about $150 million of savings kind of spread between plant fixed costs and functional costs are mostly gna expense not not touching r d and all but by the way just to back up on that lori and i have been looking at this kind of how we can do some restructuring for over a year so we're not doing it just in response to what's going on i i think i've said on other earnings calls we started looking at it actually a summer ago um you know how could we streamline a little bit more so we're we're ready with that we'll start seeing the benefits of the restructuring towards the tail end of the first quarter. We'll get going on it by the middle of December. So, you know, by the time it hits, we get things going. You'll start to see the benefit then. So you'll kind of get three quarters of the benefit um for a big chunk of that in 2024. a little bit of that would potentially come back on the fixed cost the the the plant fixed cost side as volumes pick up but not all of it so you get a little bit of it coming back in as we we see the volumes lift um but that's basically the program great thank you thanks john
spk06: Your next question comes from the line of Scott Davies, Admin List Research. Your line is open.
spk10: Hey, good morning, everybody. Ed and Lauren. Chris. Good morning. A couple things. I mean, just to follow up on Jeff's question, because it just seems like it's so important and topical for you guys. I mean, there's kind of two reasons why people de-stock inventory, right? I mean, one is maybe lead times come down and they feel like they can get it fast. And two is they're really worried about their customers not wanting product, and I'm talking at the distribution level, not your direct. What do you think of the main drivers of this kind of incremental, because we've been talking about the inventory destock for several quarters now, and this quarter seemed like it almost got a little bit worse, particularly in water and protection.
spk13: Yeah, you know, Scott, I'll just give you a ballpark of my thinking.
spk16: I think two-thirds of it or 75%, something like that, is really that the supply chain healed itself. It's pretty darn normal for everybody again. So everyone sat on excess inventory. I mean, look, we're doing the same thing. We had 151% cash conversion. We're lowering our inventory levels because we have built up more than we normally would during COVID. And every other CEO I talk to is doing the same thing. And by the way, I think it's the pressure you're getting near the end of your year. You're really trying to get things in line for 2024. So I think a big part of it's that. But there certainly is a percent of people just more worried, is there a recession coming? You know, you got an inverted yield curve for 18 months. People start getting nervous. There's always been a recession. So I can't say that's not it. That's in there. But I think the bigger part of it is we just all build excess inventory. You know, we got what we could get, you know, during COVID. And Bobby, I'll give you one example because we're seeing some destocking on the metal packaging side. A year ago, I had most of the CEOs of the medical device companies personally call me pleading that we could ship more Tyvek material for packaging so they could ship their products out. And I remember telling them all, in fact, I sent a letter to the trade industry. I said, our shipments to you are up 18% so far this year. I mean, I can't do much more. And, you know, that was everyone scrambling to get it. And then they overshot. And now I probably shouldn't be surprised we're seeing some destocking on the medical packaging side. So I think that's just a great example that has nothing to do with a recession. That's just everyone had too much.
spk10: Yeah, that's great color and makes a lot of sense. I want to ask about price. And I know the two segments are just way different. E&I, you kind of manage price versus cost. And W&P, maybe there's a little bit of a different price strategy. But when you think about like this this new normal of higher inflation, wages, other costs, you know, not explicitly material costs, but other costs. How do you think about price in kind of a future construct, meaning, you know, maybe entering into 2024? It's probably more of a valid question for W&P, but maybe you can address for both segments and give us a little bit sense of what you're thinking there. Yeah, I don't think...
spk16: Yeah, Scott, I don't think 2024 will be what you'd consider a normal year. In a normal environment, you know, a few years in a row, just normal things, which we haven't had in four years for anybody, we would always get like one and a half to two percent price lift in the W&P business. Our goal in 2024 is to hold on to as much pricing as we can. And you obviously see us and others, we're getting benefit from price-cost spread. We saw it in the third quarter, which helped us out. We'll obviously see it in the fourth quarter. So our goal is to really manage that well for 2024 because there's still, you know, quite a bit there. Now, we're not going to get all the costs back by renegotiating contracts. Everyone's trying to hold price. Some of our vendors are trying to hold it, too. But, you know, we're still up to about $225 million that we've gotten back. um that we so i mean that's pretty significant for us and so we're hoping to hold that for next year my gut is we're going to give up some pricing in the shelter business because we don't want to lose market share uh but a lot of the other businesses will really be managing that tightly uh but then if we ever get we get back to normal times hopefully 2025 we would look at that one and a half to two percent price increase um and then electronics we just try to hold up you know about and usually we're flat to down 1%, but you get nice volume lift.
spk10: Yeah, good color. Thank you. I'll pass it on. Appreciate it. Thanks, Scott. Good talking to you.
spk06: Thank you.
spk10: Thank you.
spk06: Your next question comes from the line of Steve Tusser of J.P. Morgan. Your line is open.
spk02: Hi, good morning.
spk06: Good morning.
spk02: Can you just update us on what you actually expect for what was the price cost spread this quarter and what you expect now for the year?
spk09: Yeah, so our full year number, we ticked up to 225 million versus the last quarter we had expected about 140 million. So we're seeing that deflation benefit come through in the back half. So in the third quarter, we saw net about 75 million benefit. We'll see that tick up to around the 100 million in the fourth quarter.
spk02: And so does some of that carry into next year? Yes. Okay.
spk09: And then I guess... Yeah, the spread will continue into next year with the caveat that we don't quite know to as earlier comment what the price is going to do, but we do expect the deflation benefit to continue because it took its time to get through inventory. this year.
spk02: Got it. And then just kind of a philosophical question on how you, you know, think about next year. I mean, your exit rate now on some of these businesses, just from a revenue perspective is, you know, more negative. You're taking revenue down. You talked about some of it being destock, which is effectively, you know, an easier comp next year in the second half of the year. I mean, do you think with this profile that, you know, you guys can still grow revenues next year?
spk16: yeah yeah i think i think the first quarter steve to your comment will be light um you know more similar to the fourth quarter because i don't think the d stock will end but that quick but the distributors will move very fast they just stop ordering for a while you know they literally we talk directly to them and they're like just don't ship me something for a few months and then we'll be back on track so um So, yeah, I think, you know, first quarter will be on the light side. But I think after that, we'll see some nice lift. I would certainly by then the electronics part of our business, which, you know, is highly profitable. I think we'll be back to, you know, a really nice lift. You know, just on the semi side, the fabs are running a little below 70 percent utilization. I think if we do the math on what the industry is thinking, they're going to. kind of get up as the year goes more to 80% utilization the following year, more like the 90% where you would run a map. So you'll start to see some on a percentage basis, some pretty nice lift. And then we've had two quarters in a row of ICS lifting so it's clearly off the bottom um you know that will i think continue to grow as we go through next year so i think you know you're kind of through the electronics one um although you know we're kind of now doing a d stock on the wmp side and remember we're mostly short cycle so you know we'll we'll see it first and then you know i think by the second quarter you'll see a lot of that d stock over with and you know you'll see the volume lift and one one last one for you i mean you've uh
spk02: You know, you've been through a few cycles, DuPont having, I guess, high single-digit to even double-digit organic volume declines. I mean, are we already, you know, in a recession here in your mind?
spk16: I'm kind of one foot in, yes. I've been there for a while, by the way. I track a lot of economic indicators, and I said earlier, you know, when you see the yield curve, where it's been and all, there's always been a recession. So I like to manage, I guess, conservatively. So I've been telling the team for a long time, just prepare for a softer environment. And if we're wrong, great. You know, we'll have done all the right actions to position ourselves. But Yeah, I think there was this quarter, just reading all the results from companies I saw, they were pretty mixed. Right. Great. Thanks a lot. And people were mostly missing on the volume and not on their EBITDA. Right.
spk02: Yep. Thanks a lot.
spk16: Okay, Steve. Okay, Steve.
spk06: Your next question comes from Michael Leach of Park Leach. Your line is open.
spk13: Great. Thanks. Good morning, guys. Ed, good morning. I'm still an adult. on the delrin sale can you maybe speak to why this monetization structure was sort of the best ultimate outcome and then relatedly maybe for lori when should we expect a note receivable to accrue or i guess when do you get that 350 million in cash yeah so so we we like that look we sold delrin in a tougher environment um than when we sold the rest of m m
spk16: uh so this optimized what we could get for the asset um over a few year period you know we're getting 1.2 some billion dollars up front uh we're riding 20 equity in it um djc has a phenomenal track record so my gut is we have some nice upside coming from the retained interest that we have in the business that that's to be proved out but i'm highly confident in that It is a good business. It should do well over the next few years. So we think that optimizes our position. So we sold it at 1.8 billion in value. My gut is we can end up nicely above that with the equity that we have. And by the way, it just goes to our whole capital allocation strategy. It was not a business we wanted to be in long-term, even though it's a good business. We're taking the volatility out of the portfolio. And, you know, we'll redeploy that cash. And as we said in our prepared remarks, we will actually do more share repurchase after the ASR ends next year because we're in a great balance sheet position and we'll have good free cash flow and we plan on buying back more shares.
spk09: Yeah. And, Michael, on the debt, so we gave them a $350 million loan. It's an eight-year loan if the venture were to go that long. So, like, you know, normally they would monetize quicker than that and then we would get get the repayment of the loan. So if it went to the longest poll, it would be eight years, but that's most likely not the reality.
spk13: Great. That's super helpful. And then second, I was hoping maybe you could give us a bit more color on the moving pieces within the corporate and other segment. I assume the retained businesses are doing fairly well in the auto backdrop. So can you speak to what's kind of the moving pieces there? And should we expect that business to continue to deliver some level of double-digit millions of EBITDA?
spk09: Yeah, so the businesses just for refresher that are in corporate are primarily the auto adhesives business, and then we have Tedlar and Multibase. But the largest end market served is automotive, and there's a large EV exposure there. So we saw a nice mid-single-digit volume growth again. We expect for a full year from a volume growth perspective the auto adhesives to grow up in the high single digits. And we continue to expect really great things from that business with the EV penetration that we've seen. So from an earnings perspective, they were up very nicely as well. We saw a nice earnings growth and margin appreciation in the third quarter. In the fourth quarter, we have a little bit of a just a lot of their exposure is in the U.S. with automotive, so there's some headwind from the strike that fortunately is now over, but there will be a little bit of a headwind from the October impact. And then the U.S. car bills right now from IHS are expected to be down. But overall, the trajectory of this business is really strong. They had a great 2023, and we expect a really strong 2024 again. Great. Thank you. Thank you.
spk06: Your next question comes from the line of John McNulty of BMO Capital Markets. Your line is open.
spk05: Yeah, thanks for taking my question. So it looks like the electronics end markets seem like they're starting to stabilize a little bit. You expect semi-technologies to be up quarter over quarter. Can you add some color on what you expect from the other two subsectors in the E&I division? Do you see normal 4Q seasonality? Is there maybe a little bit of D-stock in the industrial solution side? I guess, can you help us to think about the trends there?
spk16: Yeah, so semi will lift a little bit. So I would still say bouncing along the bottom, but getting through the D stock. And when I say a little bit, you know, a few percentage points sequentially up in the business, the ICS business. will be down some, but that's all seasonality. If you look at it, just the normal drop you see in seasonality, it's less. So the business continues maybe a few more points to improve after the last two quarters of improvement. So kind of less seasonality because the business is recovering. And then on the industrial part of E&I, we'll definitely see a little bit of destocking there. The biopharma destocking, which is in that business, picked up some during the quarter. So I expect that to continue into the fourth quarter and hopefully be kind of done by then with that. And there's just a little bit of other destocking going on with some of our distributors in that business.
spk05: um so you know nothing significant but yeah i think that'll see a little bit of softness got it okay thanks um and then maybe just as a follow-up i think you know as we get to kind of mid-december the opt-out period should be kind of done on the on the pfa side i guess can you give us any update on the water district um water district settlement is there anything that you can speak to at this point it seems like that should put a lot of a lot of kind of the pressures behind you but um but i guess any update there would be would be helpful
spk16: yeah so we um the the date that's coming up here is the deadline for the opt-outs is december 4th and then we will see a list of who the opt-outs are on december the 6th and then there's a final fairness hearing in South Carolina on December the 14th. So it's all kind of happening that, you know, first two weeks of December. And I really can't add any other color. I just don't have any other facts in front of me. We're feeling obviously very good about it, highly confident that this will get signed off and get done. And I just add, obviously, People are talking to the key water districts around the country. So, you know, we're feeling good, and hopefully we're close to getting that cemented.
spk08: Great. Thanks very much for the call. Yeah, thanks.
spk06: Your next question comes from the line of David McClister of Deutsche Bank. Your line is open.
spk17: Thank you. Good morning. Ed and Laurie, just on the restructuring, do you have any more, you know, any more call you can provide, some more concrete examples of where that 150 is going to come from?
spk09: Yeah, so we had mentioned that it'll primarily come from plant fixed costs and then the GNA or the functional cost of the overhead structure of the company. So, you know, the plant fixed cost is really a function of the destocking and what we can do from a volume perspective. So looking hard at contractors, looking hard at the plant fixed costs, then looking hard at making sure that we can temporarily adjust our cost structure to align with the volume environment that we're seeing. And then on the I'm kind of the SARD side or the functional cost general administrative. That's just continued leaning out. So as Ed had mentioned, we're constantly looking to make sure that we're running as lean and efficient organizations as possible. So that's where the focus will be. We really won't be touching R&D and marketing and sales. So, you know, we believe this, this destocking period is temporary. And so we really need to be prepared when it comes back on the other side to be able to take advantage of the upside. So that really won't be the focus to be more on. on the plant cost and the functional spend.
spk17: Understood. And then just on interconnects and semis, did you gain any share this year, or is there any new technology products down the pipeline that you think can grow share this year or next year?
spk09: Yeah, so there's examples in both. So within semi, really around the packaging side, we've seen some nice share gains. And also just in general, we've seen an uptick on the advanced nodes components. And so if you actually look at our performance in the corridor, we had nice growth with TSMC as they continue to expand their advanced nodes and take advantage of the AI revolution. So we saw nice growth on the SEMI side. And then within ICS, we had a new application with one of the large smartphone producers, which took advantage of a material that crossed over our metalization business to be able to have a key win there. So that was part of the sequential growth that we saw in the quarter and we continue to see. It's on every single model of the phone for the one producer, so it was a nice win for us.
spk17: Thank you.
spk06: Your next question comes from the line of Alexis Gimeroff of Key Blanc Capital Markets. Your line is open.
spk14: Thanks and good morning everyone. This is Ryan from Alexi. My first question comes around the shelter solutions business. Just in terms of where do you think we are in the destocking cycle there and demand and then how good is your visibility into 2024 here?
spk09: Yeah, so we saw less of a year-over-year headwind in shelter in the third quarter versus what we saw in the first half. So we feel like things are starting to normalize a little bit, and then our expectations for the fourth quarter are to see less volume declines than we're seeing year-to-date. So it feels like things are normalizing a little bit. You know, obviously there's a little bit of disparity from a market perspective between the resi and the commercial side. A lot of the growth that was on the commercial side is more in commercial applications where we don't have a big footprint, like, for example, around the data centers. Our exposure in commercial is more around education and healthcare and government, where there hasn't been that step change growth. It's really been more on the data center side. But in general, it feels like we're nearing the end of the significant downturns. We expect the volumes in the fourth quarter to be more down in the mid single digits versus the double digits that we've seen all year. So it feels like it's starting to normalize. And we do believe that the stock is now behind us. So now it's just a function of when the demand returns.
spk14: Okay. very helpful thank you and then um you know just a question from me on you mentioned china trade restrictions and the impact it had on the semiconductor technologies business wondering if you might be able to quantify that impact there and then just uh you know any updated view um on the recently announced um restrictions there thank you yeah so no change to our current view um of about 60 million dollars of a revenue headwind um from
spk09: The exposure. So a lot of our for the year. Yes, it's about 15 million in Florida. So a lot of the restrictions have more been in the advanced node spaces. We don't have a huge footprint with the Chinese players from that perspective. So it's only about 60 million for us.
spk06: Your next question comes from Josh Spector of UBS. Your line is open.
spk00: Yeah, hi. Thanks for taking my question. So I just wanted to ask on the fourth quarter, I mean, it kind of seems like the puck's moving around in different areas in terms of de-stocking. But if I heard you right, your sales guidance is kind of flattish in the different segments sequentially. That means it's ticking up, which has the highest drop through, and you're expecting some higher raw material benefits. So what would drive EBITDA down sequentially, 20, 25 million versus flat to up?
spk09: Yeah, so we see the underlying revenue down about 100 million once you, on an organic basis. So we will get another quarter of the spectrum business first third quarter. But if you take that out, we see underlying organic revenue down about 100 billion. It's about split between seasonality and currency being about half of the headwind with the seasonality being within primarily the smartphone and consumer electronics business and ICS and shelter as they shrink throughout the summer months. And then currency we do see as a bit of a headwind sequentially. And then the other half of it is from the medical packaging piece that Ed had mentioned earlier. So we do see some medical packaging pullback in the fourth quarter as those device makers desocked from the overbuy that happened over the recent quarters. So it's really just, and then the EBITDA, you have a net benefit from additional spreads. We have mentioned there's about $25 million of additional benefit from spread, but that $100 million impact from the volume decline kind of net you out to the, around the $750 that we guided to for the fourth quarter versus the $775 that we posted in that third quarter.
spk00: Okay, thanks. No, I appreciate that. And I mean, just if you kind of come back to electronics and semis, I think, as you said, utilization rates in the mid-70s, I think we've maybe troughed in the high 60s. So you guys haven't really felt as much of that pickup. I guess as you look at things improving, how much does semis reconnect in your business year on year, just from a reconnection to where the rates?
spk16: is now i mean is that mid single digits or higher just on where we're run rating now past inventory or would it be a different math to get to a different level thanks well the fabs have been to your point have been running kind of if you lump them all together i think you would average out in the high 60s and i think if you go through um all the projections out there and and i was talking to our customers that high 60s is going to ramp through 2024 up to, by the time you get maybe end of third quarter, beginning of fourth quarter, up to maybe a little over 80%. So you still won't be back, according to projections, kind of over 90% until you enter into 2025. But again, going from high 60s to 80% is a nice lift during the year. And then, you know, more of that Production will be advanced nodes, which back to Lori's point a minute ago, you know, plays to our strength. You know, that's usually why we outgrow two to 300 basis point what the market's doing. But, you know, it's also, by the way, you also got to look customer by customer on the semi side, because some are still we're shipping out of inventory. But all the signs I saw from all their reporting publicly, you know, they've seen their bottom, it looks like, pretty much across the board. But I don't think the lift will be, you know, dramatic at the beginning of the year. But I think as the year sequences, we'll see nice lift occurring in that business.
spk06: Okay. Thank you. Yep. Thanks. Your next question comes from Vincent Andrews of Morgan Stanley. Your line is open.
spk01: Thank you. A couple of questions here. First on the distributor part of the supply chain, not just for you, but for pretty much everybody seems to have taken it more on the chin with the overstocking and then the destocking. Do you have a sense of whether that was just they were a little too overzealous with principal risk loading up, and then on the way back down is the issue just that they don't have the same access to credit or just the higher rates? And I guess what I'm getting at is Do you think over time your terms with distribution and maybe some of your other customers are going to need to change in a way that might require you to hold more working capital or to give them incentives to move it along? I guess I'm just sort of asking what's going to ultimately break the logjam of the game of hot potato of nobody wanting to hold inventory?
spk16: Yeah, I don't think it's that. I really think it's just, you know, we all over build inventory. uh you know direct vendors and distributors through the covet period i mean we all talked about it um and and you know i go back to my example on the medical packaging side the customers were just yelling for us to get more to them and usually when that happens you see an overshoot happen you know and some of them probably even double order um you know i've been through that before in my career and, you know, and then you get the snap back. So I think that's what we're going through is that they're adjusting their inventory back to appropriate levels. They don't have to worry about carrying excess inventory, you know, because supply chains are normalized again. And again, we're doing the same thing. We're feeling confident about, you know, being able to get supply of all our different components. And so we're working our inventory levels down from what were elevated levels because of the COVID stuff. So I don't think we'll have to worry about different terms or anything with our distributors.
spk01: Okay, good to hear. Laurie, can I just ask you, what's updated thoughts on minimum cash levels that you want to keep just as we think about next year and your free cash flow generation versus what you might do from a share repurchase perspective?
spk09: Yeah, so we'll target about a billion and a half of minimum cash levels. As we had mentioned on the call, we'll look to return a significant portion of our cash flow to shareholders next year through share repurchases. So we'll be done with the existing ASR at some point later in the first quarter, and then that will give us the ability to get back into the market underneath a new program. As Ed had mentioned, we have the Delrin proceeds coming in at some point today. So we'll have that cash come in the door, and then when we're in an open window again, we'll be able to do more share repurchase.
spk08: Okay, great. Thanks so much.
spk06: Your next question comes from the line of Frank Minch of Fermium Research. Your line is open.
spk04: Good morning. I wanted to follow up on... Hey, Ed, how are you doing? I wanted to follow up on Spectrum. You indicated that financially it was performing in line with your projections. I was just curious. I think you indicated that you expected something like $45 million in EBITDA for the balance of $23 million. since you closed on August 1. And also, I think you guys indicated you get about 20 million of synergies. Are those numbers still accurate? What's your take on Spectrum so far?
spk09: Yeah, so Spectrum's performing according to plan. They've got nice growth on a year-over-year basis, especially within the medical device side. The majority of the business is medical device. There is a piece that goes into industrial, and it's really based on some nice key wins that they've had with some of the large medical device producers. So we're pleased with the performance that we've seen. The numbers that you had cited earlier are still on track. And then the synergy delivery is 60 million in total. It's over, you know, a couple-year time frame for us to realize those synergies, but that continues to remain on track as well. Obviously, the initial synergy delivery will come from some you know, overhead consolidation, and then we'll get after the procurement-related synergies and maybe some of the site-related synergies over time.
spk04: Very helpful. Thank you, Lori. And if I could follow up on semiconductor technologies, you indicated that AI growth is going to help this business in the future. Can you give us an idea of the of the size that you anticipate AI to grow to over 2024, 2025 in terms of your semiconductor business?
spk16: Well, I would go, Frank, more high level. I think a lot of the growth we'll get will allow this semiconductor business, again, once we get through the downturn here and all that, that this business can grow kind of mid to high single digit, which, by the way, it was doing before all the D-stock hit. Again, if the market grows five to six to seven points, we'll grow 200 to 300 basis points above that. And that 200 to 300 basis points is mostly because of that high-end chip, because of AI enablement and all that. And that plays to our sweet spot. So that's how we get that outsized growth usually over the market. And AI plays right into that.
spk09: Maybe just to help disguise it for you, too. So within our semi-portfolio, we have about a $700 billion business in data centers overall, and about a little more than a third of that is direct to AI. So that's really a nice portion of growth that we can continue to see above the overall MSI projections.
spk04: Very helpful. Thanks so much. Thanks, Ray.
spk06: Your next question comes from Steve Byrne of Bank of America. Your line is open.
spk12: Hi, I have a rock off and on for Steve Byrne. Just going back to the Spectrum business, now that you've had the business for a couple of months, do you see any opportunities for cross-selling to these medical device companies?
spk09: Yeah, that was one of the large theses for the revenue synergy upside was that they are very strong and have great relationships on the medical device side, and we're very strong and have great relationships on the biopharma side, and how can we bring those two pieces together to generate revenue synergy. So it's been a couple of months, and that thesis, as we've initially seen it, continues to play out. And we don't have the revenue synergies on the hand right now, but we see nice opportunities as we continue to integrate these two businesses together.
spk12: I see. That's great. And then, which of your businesses do you see the most potential for share gains and a new product introduction? versus volumes that are driven primarily by cyclical recoveries?
spk09: Yeah, I mean, I think we see, if we take a bi-segment, within E&I, we've mentioned that we should see 200 to 300 basis points of outsized market growth within semi, and that's a combination of share gain and just where our exposure is in advanced nodes in the areas that are growing faster than others. We also see a step-change opportunity within the general consumer electronics space We have seen some nice share gain on the metallization side. It'll continue to show in the top line as the PCB providers start to ramp up their utilization rates to more normal levels, but we have seen our performance versus some of the peers in the metallization space be better. And then within the WP portfolio, we continue to expect nice growth within water. You know, obviously we're in a D-stock right now, but we'll see nice growth more from a secular basis. So just that water industry is generally growing in mid single digits, which is a nice market for us. And on the safety side, it's really going to be we've added capacity now and we have to, we'll get step change growth from utilizing that capacity. So we're nearing the completion of an additional line for Tyvek. We've constrained the Tyvek market for years. And so we'll see some nice lift there as we fill up that asset and we've recently expanded some capacity within a new technology in the Kevlar space. So it's a new opportunity for us to bring a lighter weight Kevlar to the market and we look for good things from that business as well. I mean, and Shelter generally should be more along the GDP type grower.
spk08: Understood. Thank you. Thanks.
spk06: And our final question today comes from the line of Arun Vishwavanthan of RBC Capital Markets.
spk11: Your line is open. Hey, just wanted to take a quick try at maybe kind of mid-cycle or longer-term earnings growth. If you think about volumes kind of maybe double digits below normal in electronics and then some leverage on a recovery there, you're exiting the year at around $3 billion of annual IP. Would that imply something in the 3.3 to 3.6 kind of range as far as when you take a look at longer term or mid-cycle where you want to get to? Thanks.
spk09: Yeah, I mean, longer term, you know, you should get back into the, we were running the E&I portfolio. I think it's where your focus was in the more of the 32% margin range, and we should see, you know, the volume kind of return there over time as the utilization rates at the large PCP guys and the semi guys return. But if we look more near term, as far as headwinds, tailwinds, as we head into 2024, there's definitely tailwinds from volume growth from the electronics recovery and normalization of the D stock. And there's obviously incremental tailwinds from the deflation we had mentioned as we go forward. And then the benefit of the restructuring actions that we are now taking and we'll start to see the benefit of at some point later in the first quarter. And then just from an EPS perspective, we do continue to lower our share count. So what we'll see lower fourth quarter share count versus the full year, which will carry us into 2024. And then we'll have the incremental benefit of the 2 billion program that we'll complete in the first quarter and then advance new shares, new share takeout as well. So we'll see a nice EPS benefit that we've seen as we took shares out throughout 2023. The headwinds though are, you know, I think we will continue to see the industrial destock impact the water and safety businesses primarily in the first quarter, so that'll be a headwind to the first quarter. We will see most likely some price modernization or give back primarily in the shelter businesses that I had mentioned, so we'll try and maintain that as long as we can, but we will be cognizant of potential share loss and potentially have to be giving some back there. And then just we have taken some aggressive actions on the compensation side in 2023. So we are paying a below target variable compensation payout this year. And so we would most likely see normalization of that as we head into 2024. So those are the big puts and takes with the one extra exception from a below the line perspective around interest income. So we did see about $145 million of interest income this year just as we held the the proceeds from the Selenese transaction in the first half before we could deploy them to Spectrum and then the full share repurchase program. So we would see a step down in 2024 from interest income from about $145 this year to probably $20 million next year.
spk06: Thanks. I would like to hand the call back over to Chris McCrae for closing comments.
spk03: Okay, thank you all for joining our call this morning. And for your reference, a copy of our transcript will be posted on our website. This concludes our call. Thank you.
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