DuPont de Nemours, Inc. (DD) Earnings Call Transcript & Summary

Good morning, everybody. This is Bob Koort. I head up the U.S. equity research effort on chemicals here at Goldman Sachs. I'll make a quick disclosure statement required to make certain disclosures in public appearances about Goldman's relationships with companies we discuss. They relate to investment banking relationships, compensation received or 1% or more ownership. Prepared to read those disclosures allowed for any issuer upon request, however, the disclosures are available in our most recent reports available to you as our clients on our firm portals. Disclosures and updates to those disclosures are also available by ticker on the firm's public website at gs.com\research\hedge.html. With that, very excited this morning to get started with DuPont. We've got Ed Breen, who's the Executive Chairman and CEO; and Lori Koch, who is Executive VP and CFO. The way we're going to do this, this morning is myself and Anthony Walker, who covers DuPont with me here at Goldman, are going to ask questions of Ed and Lori. There's also a question box for those of you on the webcast where you can submit your own questions. Of course, we always like to ask our client questions first, so we're happy to do that. But until we see some of those or as you send those in, we'll start with our own questions.

And with that, Ed, I thought given the reach both geographically and product and end market-wise, it might be helpful if you could just go around the world a little bit and tell us what you guys are seeing so far this quarter. And maybe, as you started to see China and some other areas start to go back towards more normal activity, what that might inform us about the rest of the world or what you're seeing?

Yes. Let me give you a few kind of high-level comments on it, and I'll have Lori jump in and maybe give you a little more detail geographically. And I think important maybe to talk about the month of April because, obviously, the first month of the second quarter. And as we said when we did earnings, our sales were down in aggregate low double digits. And we think, as the quarter plays out, it wouldn't -- we wouldn't get any worse than mid-double-digits, so kind of 15% down in kind of our worst-case scenario. So we feel pretty good about that the way the portfolio has held up through this. And then, interestingly, I don't know the rest of the world as it comes back will be exactly like China, but China rolled back pretty nicely here. We were down in the first quarter in China organically about 1%, which I was actually pleasantly surprised by that. I thought the first quarter would be down a little bit more because of the shutdown for a few extra weeks that occurred there. But anyway, in aggregate, we ended up down 1%. And in the April, the month of April, on the core DuPont businesses, we were up kind of 6%, 7% organically. So we saw a really nice comeback there. So kind of high level, that's what we're seeing. We expect those trends to continue through the month of May. June is still a little bit fuzzier. We don't see the order book as clearly in some of our businesses. But again, I don't think it would get any worse than kind of a 15% down range. Lori, would you like to give a little more geographically?

Yes, sure. Yes. So as Ed had mentioned, China continues to recover for us. So it was -- our core segments were up about 6% or 7%. In total, Asia was up low single digits for the month of April. North America and Europe continue to be where the areas of weakness are, really predominantly from auto. So with all of the OEMs shut down in March, they are starting to come back up. I think Europe is coming up slowly. And the North America one should be coming up any day now slowly. So North America in total was down in the high teens, low 20s. Europe was down in the low teens. So kind of in total, as Ed had mentioned, down low to mid-teens for the total company.

And Ed, you and Lori, there's been some change in leadership roles here recently. Can you talk a little bit about, as you come back to the CEO suite, maybe what the objectives you are -- sort of what are your model posts as you start back in the CEO spot again? And how things are going? Or anything has changed relative to those plans and with the COVID impacts and that sort of thing?

Yes. So we came into the position, and COVID wasn't really known at that point in time in a significant way. But literally within a few weeks of being back in the chair, it hit pretty broadly, as we all know. So look, I wouldn't say a lot changed in my head from what I was thinking, except, clearly, we immediately jumped around the scenario planning. I'm always a big believer in what's the possible worst-case scenario that could happen to you. Not that you expect it's going to happen, but just from a planning purpose, I like to do that. So we jumped on that very, very heavily. As I mentioned on the earnings call, we looked at a couple of pretty significant draconian scenarios just to see, hey, how would we perform through it, what are the actions and steps we would take if we had to. And one of them that I did mention, we planned a, literally, a revenue scenario down 30%. We planned it to be down for a whole year that way. By the way, that was broken down, 20% volume, 10% price. And I mentioned that because price being down 10%, all drops to the bottom line. So it's a very significant draconian case. And we said, all right, if we were in that scenario, how would we perform? What would we do? And we would be fine through a scenario like that. Now there are other actions, Bob, we would take in a more draconian scenario that we have not done and we don't plan on doing, but we have a list of things, obviously, we would enact if things did get worse. But what we've decided to do was really focused on what structural changes can we make in the company that are going to last for years. We haven't taken many steps that are kind of temporary cost reductions. I don't feel like we need to. And so we're ready if we have to with, say, furloughs like other companies are doing, salary cuts, things like that, we have not enacted. But we have driven pretty hard on the structural front. So as you know, we're taking $180 million of costs out. We doubled that in the last couple of months. It was $90 million. It's now $180 million. And we still have the $165 million that carries into this year to do from the synergy program from the Dow-DuPont deal. So again, about $330 million, $340 million of structural costs are coming out of the business. So that's kind of job #1 there. And then Lori and the team are working really hard on working capital. We're just driving for cash performance, obviously, more rigorously, and we expect at least $500 million from that to occur. We are very focused on noncore assets. Although I do think in this environment, that's going to be a little bit slower to accomplish that. We do have interested strategic parties in the 3 core assets that are left in the noncore. We still are talking kind of on a weekly basis there. I have a feeling, though, that will take a little bit more time. And then I'd say the other big area for us on -- just running the business is the IFF-N&B transaction, a lot of work going on, on the separation activities there. As you know, we filed our S-4 the other day. Things are progressing very well, but a lot of focus is occurring there. And then I'll have -- let me have Lori mention. Obviously, we did a lot immediately because of our scenario planning. We jumped on the balance sheet of the company. I just want to make sure we're safe in any scenario, and I think we've really done a nice job there. And Lori, why don't you comment on what we did?

Yes. So we quickly put the wheels in motion to get -- to shore up our liquidity. So the first thing we did was we had an existing 364-day facility that's for general liquidity needs that was set to expire in June. We extended that as well as upsized it to $1 billion. We also knew we had the November maturity upon us. So initially, we went out to the banks to secure commitments from them to be able to cover the $2 billion maturity. And the reason we did that was, initially, the credit markets weren't open to us just given 2 nuances that we had associated with the IFF transaction. So one, we wanted a short-dated bond because we knew, eventually, we were going to pay that off with the IFF fund. And therefore, we also needed a trigger, so an SMR function on the bond. So those 2 pieces kind of had us locked out in the initial start of COVID back in mid-March. So we went to the banks first to get that commitment to shore it up, and then ultimately, the credit markets did loosen a bit, and we were able to place a 3-year bond with an SMR feature kind of in the late April time frame. So really confident with where we sit with respect to our debt profile. As you know, we're going to get $7.3 billion when the IFF transaction closes. We'll use $5 billion of that to pay down debt. So $2 billion for the aforementioned bond that we just placed, and then we'll pay down the $3 billion term loan. So where that leaves us is we don't have another maturity in our long-term debt profile until late 2023, so in a really nice position there to be able to ride this out.

Bob, I'd also mention just, I think, important for everyone to hear through this pandemic, that we really worked hard on the supply chain side of the company, keeping our factories up and running. Because of a lot of what we do, we were designated an essential production facility everywhere pretty much in the world. So out of our 170 manufacturing locations, only 2 of them were shut down by regulation in 2 different countries. So we really got to run everything. The supply chain has worked fairly well. And then the other one last point I'd make on this topic just because it's a little unique to this time is, as we mentioned, we are truly running the T&I business for cash performance. We're shutting down on a temporary basis about 50% of our polymer production facilities. And we expect that to generate over a couple of hundred million dollars of cash from working capital improvement. We purposely are hurting our earnings, as we've talked about, by $90 million to $100 million. But I think short term, that's the right decision. And that will just put the supply chain in the right position as we come out of this, and we'll just be better off going into next year, 2021.

I guess on that note, Ed, what is the hangover? How long do you suffer that sort of fixed cost and punishment as you're applying lower production to a fixed cost base? Will that work its way out by the end of the year? So next year, you'll be back to more normal accounting and sort of unit economics there?

Yes. So what we're doing in T&I, we're taking the idle mills as it really allows us to not have that material headwind whenever the markets recover. So given that we're expensing the fixed cost in the period versus taking them into inventory and let them bleed out as volume is shipped, we won't have that significant headwind with higher unit rates stuck in inventory. So it will be a little bit of a drag, but not as material had we not taken the actions that we're taking. That's T&I. There will be some impacts on some of the other segments, most notably, S&C, as we're not taking idle mills or shutting down production there, but we are slowing production, so we will see higher unit rates in S&C. I would see once the recovery starts and we get back to normal production, it would take about a quarter for that to bleed out. So based on our kind of our average inventory turns, it could be about 1 quarter.

Got it. And I was doing some math. I was looking at the IFF transaction, obviously, just a super deal for you guys. You get some cash back. You get a very full valuation on that asset. And I guess, by default, it implies a pretty thin valuation on Remainco DuPont. So I'm just wondering, does that affect at all how you think about the potential to monetize those pieces or to relieve that some of the parts discount in T&I or S&C and electronics? How do you think about how valuations and/or the COVID impacts other portfolio transition? And should we assume you're a seller or looking for an RMT? Could you be a buyer in those assets? Maybe just talk around the strategic plan post-IFF.

Yes. Well, just overall, by the way, on the IFF-N&B deal, the value of N&B is basically where we announced the deal at $26 billion. When you do the math on the share price of IFF, that's what it comes to. I would also point out, Bob, I am a very big believer that by putting the portfolio together, N&B with IFF, that there is going to be significant value uplift in the multiple of that company as we move forward here over the next couple of years. If you look at the, what I would consider the other 2 big companies in that sector, their multiples are like 22, 23x. And we're 600 basis points, 700 basis points below that, IFF, the way it trades now. And we're putting together the best market-leading company with the best breadth of product to service whether it's small customers, medium customers, the big large customers in the segment. So as long as we perform well when we put the businesses together, there's no reason it shouldn't be afforded a multiple at the top of the peer set. So even though we got full value at $26 billion for the asset, I'm a big believer there's a lot of upside there as we perform and show the market that we're performing. So I would just keep that in mind. And then, look, most of you have known me for years. We'll do whatever makes sense from a value standpoint for our shareholders. We wouldn't be shy about looking at other alternatives in the portfolio. But I would say right now, obviously, it's managing through this kind of unprecedented time, that's not top of mind for me right this second. Getting rid of and selling the noncore assets is top of mind for us because there's a lot of potential cash freed up there for us. So that I would put still very high among the list. But just overall, look, we know every potential opportunity out there. We know what the math is on it. And if there's opportunities down the road, we're not going to be shy about it. I would also just add, Bob, and you probably would get to this question anyway, it's important for us and for me personally to try to ring-fence a lot of this PFOA over the next kind of year because I think that plays into the discount of Remainco DuPont. And the liability here is not that significant, but we have to prove that to the marketplace. And so I spend a lot of time on that topic also. I think as we can dissipate that, that will clearly help the multiple of Remainco.

Lori, this is Anthony Walker. I just wanted to follow up on that last point. I do think that part of the valuation disconnect, and unfortunately, the conversation around DuPont has been a little bit clouded by this PFOA-PFAS issue. And those offshore comments in the first quarter conference call are actually pretty interesting, both as it relates to your view of having limited liability, but also this potential settlement look more as the cases move to arbitration. Can you just walk us through potentially the time line there? What, from an economic perspective, might make sense for both parties? And what gives you confidence in your assertion that the ultimate legacy liabilities here could be minimal?

Yes. So as I had mentioned, and by the way, I feel the exact same way as what I said on the earnings call recently, there is a path to settle the open cases in Ohio in that MDL. There's basically 2 plaintiffs involved there. So I feel highly confident we can get to a settlement and resolve that. And remember, whatever that resolution is in dollars will get divvied up between Corteva, Chemours and DuPont. So it's not a significant number when you look at it that way. And so I think we can clean that up in the foreseeable future here. We have been in conversations for about 3 months, I would say, maybe 4 months now with Chemours, talking to them. I personally talk pretty much every week to Mark Vergnano, the CEO of Chemours. And we kind of laid out a framework of an agreement between the companies. By the way, there still are areas of dispute. That's obviously why it's not done, but we're making progress there. So I feel pretty confident that we'll get to some agreement that makes sense for, again, for all 3 of the companies. It's got to be a kind of a win-win-win deal. And look, I think the fact that the judge ruled in our favor and sent this thing to arbitration was a little bit helpful for us because I'm highly confident we will win in arbitration. And arbitration, the only reason I really like it is that the process will be much faster than probably going through the court system. So that's a good sign. But again, I do think we can get to a settlement there. And then I would say, Anthony, the bigger area which is going to take a little longer than the next couple of months, but I don't know that it's much more than, say, a year or so, is really to get cleaned up on the firefighting foam cases. We're getting named in them as many other companies are, but it's really not our issue. And if you -- by the way, if you want to make the case that it's our issue, we are a very, very minor player in it because we had one surfactant that was used in it. We supplied that for 10 years. By the way, we were not the only ones. So when you do the math, we are so, so small if you want to try to bring us in because of that. The firefighting foam has been made for over 70 years. We never did it. We never had it in products we shipped. We have it in 4 manufacturing sites that we're already, by the way, for quite a few years, been doing remediation at. So I think, obviously, we can get Ohio behind us. We can get an agreement with Chemours and all. But if you ask me, it's getting cleaned up on the firefighting foam front that will really, I think, take that cloud away, and therefore, the discount on the multiple, whatever is related to PFOA. So we're personally very focused on that also.

I think the other variable that's likely impacting the stock price at present is primarily related to the business performance. And you've got some segments that have performed and some that have held up relatively well, and I think we'll dive into a little bit on each. But I think one bright spot, at least in the first quarter, was the Electronics & Imaging business. And I'm particularly curious to what's led to the resilience in volumes there. Understanding you're levered to some pretty strong secular growth trends as you look out over the next several years, but talk about what you're seeing in present the market that's allowing volumes to remain somewhat more resilient versus the balance of your portfolio.

Yes. I'll let Lori jump in on that. But I probably have just kind of a high-level comment on E&I. If you just look at the -- and by the way, this goes back to the last conversation we were having. If you look at the sum of the parts on DuPont that all of you guys modeled out, the sum of the parts even shows on E&I that there's a discount relative to where the peer set trades at 15, 16x, and our multiple is 300-or-so basis points below that even in sum of the parts. And yet, I would argue that the E&I portfolio is a top-tier portfolio in that electronics space. So just overall, there's even a discount there on a real high-quality asset. And by the way, I think this environment right now is showing what a high-quality asset it is. But Lori, why don't you walk through the pieces there?

Yes. Yes. So the strength that we saw in Q1 and then what we're expecting again in Q2 is really within semi. So we'll walk through semi first and then I'll walk through Interconnect Solutions next. So within semi which is our, by far, the highest-margin segment in the company, so therefore, obviously, the highest-margin segment in E&I, the strength there that we're seeing is really from advanced nodes coming to market. So our materials are consumed in the production of semi, so we're not actually in the final chip. So as the nodes get more and more complex and have more and more layers, that benefits our portfolio because then you need more and more product to be able to complete the chip manufacturer. So we're seeing nice growth there. We did indicate that potentially in the second half, there could be some headwinds as potentially some chip manufacturer pulls back, but the tendency for the large fabs is once they actually start production on a new chip, they'll complete it regardless of what's going on in the end market. So they'll be -- they won't stop at midstream. It's too costly. So that's why we're seeing the benefit. In the first quarter and the second quarter, potentially some headwinds as we head to the back half in that space. Interconnect Solutions, primarily into smartphones, over 75% into smartphones, really was driven by the strength that we're seeing from higher content in the next-generation smartphones. So as smartphones are moving towards being 5G-enabled, we have share of an antenna application that enables us to increase our content in those phones by about $1, heading to more than $2 on a longer-term road map. So that lift was really what drove the Q1 results in E&I.

Maybe we could -- this is Bob again. Maybe we could go on to S&C. It looks like there's shifting trends in there. Some things like PPE obviously doing quite well. You got some health care, but also a pretty big construction component. Can you maybe talk about the dynamics under the covers in S&P and what you're seeing?

Yes. So obviously, a lot of talk around Tyvek. So Tyvek for total DuPont is a little over $1 billion enterprise. And historically, about 1/3, maybe a little bit more than 1/3 of that was garment. We're seeing the garment portion of Tyvek really tick up. It was more than half of Tyvek in Q1, and we expect it to continue to grow heading into Q2, obviously, from what's going on with the COVID pandemic. And longer term, even once we're past COVID, we would see continued strength in Tyvek as a lot of the local governments look to get their stockpiles replenished or established. So historically, within Tyvek, we would produce about 16 million garments a month. We were able to tick up to 25 million garments per month in Q1, really from getting incremental capacity off of our existing lines as well as pulling some volume from non-health care market. And then we announced our Tyvek Together campaign, which will kick in, in the second quarter and add another 5 million to 6 million garments per month. So essentially, we've about doubled our production of Tyvek PPE. So really, really nice results by the business there to be enable -- to get those products as needed to the health care workers. Conversely within S&C, we are seeing headwinds within, as you had mentioned, construction as well as there is some exposure to oil and gas and aerospace within S&C. So if you look at shelter -- or safety, which is the largest segment in S&C, that's where the aerospace and the oil and gas exposure sit. So we see continued deceleration in those markets in 2Q that are offsetting the growth that we're seeing in Tyvek in total. Obviously, the stay-at-home orders, as I had mentioned, impacting construction. So net-net, we see S&C down in 2Q, but continued strength in Tyvek.

Yes. You mentioned...

Yes, I would add, by the way -- I would add on S&C, one of the big programs there is really our factory efficiency. S&C has the heavy facilities in DuPont because we make the Tyvek, and these are real big production lines, Kevlar, our huge production lines; Nomex, the same thing. So we've spent a lot of time the last few years working on our efficiencies there. And little incremental moves actually mean a lot in bottom line dollars in that business. And you can see that we've had a significant margin expansion, 300, 400 basis points over the last few years in that business, and a lot of that is a credit to that work that we've done there. So that continues. We have a lot of programs laid out around that. By the way, one of the other pieces that's a real star in that business for us is the water business, and we've had a major move-up in margins there. That was both factory efficiency program, but that was also a program that we've kicked off on SKU rationalization. It was just crazy how many SKUs there were in that business. And we've really cleaned a lot of that up, and we've had 1,000 basis point move in the margins there. We're very high on that business.

That's a pretty compelling, 1,000 basis points. You guys have talked, as you've come back into the CEO role, about improving operational efficiency. I guess from the outside, you've been there a few years, and it seemed like you've done quite a bit of heavy lifting. So where is it that you're finding this incremental opportunity, whether in S&C or across the portfolio, to drive costs out even further? It seems like you would have maybe picked out the low-hanging fruit. So where are you getting those incremental savings as you look ahead?

Yes. So remember, I guess it was 4.5 years ago when I came in, we took about $1 billion of structural cost out of DuPont, but that was the DuPont portfolio at that point in time which, by the way, still is a lot of these businesses, but not all of them. Then we merged kind of 40% of the portfolio into DuPont, which is the Dow assets, the FMC assets, and we took another $1 billion of structural cost out then. And now, as I mentioned earlier, we're doing about $330 million in total this year, which is structural cost. So what I look at going forward -- and by the way, we will always look at structural cost. You can always find ways to improve, but we're going to benchmark extremely well by business and by function when we get through this $330 million. And by the way, part of this $330 million is important because with N&B leaving the portfolio and that EBIT to leave in the portfolio, we're benchmarking based on Remainco DuPont being best-in-class. But as you move forward, I think there's really nice opportunity kind of across 3 big areas. One is IT rationalization in the company. The second one is the factory efficiency. There's just a lot more to do there and more automation we want to do there to get -- and by the way, and just uptime in our facilities. We had, a quarter ago, we had an issue in S&C where we had some downtime in our Kevlar production and getting that not to occur as we move forward. And then the SKU rationalization is a really important one. I've done that in the other companies I've run, and you always find a lot of opportunity there as you go through it. So we're going to spend a lot of time there over the next kind of 1 year, 1.5 years. So that would be the big opportunities.

Ed, it's Anthony Walker again. The T&I business, I think, is thought to be the business within the current portfolio that has a little more cyclical exposure just given the leverage to the industrial and automotive end markets. I think the issues that we've seen in nylon for some investors have somewhat validated that claim. Can you just talk about the expectations in terms of where margins for that business on a full year basis might bottom, understanding that you guys have done a great job in terms of demonstrating outgrowth relative to the market over the last several years and taking costs out? And how should we think about the real cyclicality of that segment?

Yes. I'll have Lori jump in. But look, it is the more cyclical business in DuPont. I mean I obviously don't deny that. But it's not a commodity business. We do a lot of application engineering with the OEMs and our customers. So the 60% that's related to auto is a lot of engineering application work that come up. And once you're spec-ed in, you're spec-ed in. So that's why we drive really nice margins in the business. By the way, don't forget, 60% of this business is automotive with spec-ed in product that we develop in conjunction with them. And the other 40% is other end markets, which are nice end markets like medical, for instance. So it is a nice business, but I would definitely say it's the most cyclical in the portfolio. But Lori, why don't you give a little more color around it?

Yes. So obviously, we're going to have a low point in Q2 with respect to margins just given that we're taking idle mills to the tune of $90 million to $100 million. So our margins in the quarter are probably going to be in the high teens. I think longer term, the profile of the business can enable margins in the low to mid-20s. Once we get through the nylon price headwinds that we're seeing in 2020 versus 2019, and we hopefully can expect some recovery as you head into 2020 in the auto space, I think the business is very well positioned. They run extremely, extremely lean with respect to their SG&A profile. So they're by far the lowest in the company, so very well positioned when the market recovers. And as I had mentioned, while it may follow -- the nylon market may follow the commodity nylon pricing trends, it is by far not a commodity business. So it has a much higher margin profile than what straight commodity nylon is, and all of the applications are spec-ed in with them, the OEMs, as Ed had mentioned. So especially as we see the conversion to hybrid and electric vehicles, that's where this segment as well as S&C and E&I are really going to benefit. So today, we sell about $170 million to $190 million per car for an ICE engine. As you move up towards the top with a full electric vehicle, that number gets to beyond $300 a car. So that's contribution and lift from each of the 3 segments: E&I, obviously, with a lot of the light-weighting or putting lighter material under the hood, enabled by our polymers; within S&C, we've got applications for the battery; and within E&I, obviously, just all the electronic -- electric components in the electric vehicle. So really nice opportunity there as we continue to take advantage of the shift towards electric cars.

And Ed, maybe the one last question, trying to combine a few client questions that came in. But there's questions around the ability to do M&A as -- in the face of the liabilities that may be out there being concentrated on a smaller DuPont after IFF. Does that hinder your ability to continue to do transactions?

No, I don't think so. But let me give you a little bit of math also. As you know, we do have an agreement with Corteva that Remainco DuPont would maintain $2.5 billion of EBITDA. So obviously, just if you say that agreement is in place, we obviously have maneuvering room if we wanted to, to do a deal with or without "PFOA liability" with it. But I also -- back to a point I made earlier, with time moving by here, I think not too far in the future, if I could use the term ring-fence the PFOA, so people understand what that means for DuPont, I think will have a major impact on the multiple where the company trades. And by the way, therefore, flexibility on other deals if we want to do them, whether we want to acquire something or we want to divest something, I think we'll have more flexibility as that cloud continues to go away. But we still have significant flexibility with the agreement in place with Corteva now. And we can always put PFOA liability to something if we want to make a move. But I think we'd be smart to try to ring-fence that more for our investors to understand it. And I think that would be very, very helpful.

Terrific. Unfortunately, that ends our time. Really appreciate it, Ed and Lori. And everybody, have a great day.

Great. Thank you, guys. Thanks, Anthony. Thanks, Bob.

Thank you.