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

Good morning, and welcome. Again, my name is David Begleiter at Deutsche Bank's U.S. chemicals equity research team. We are very pleased to have with us today the team from DuPont, of course, Chairman and CEO, Ed Breen; and CFO, Lori Koch. We'll have a fireside chat here. If you have some questions, you can ask them via the chat function on the platform.

So with that, we'll get started. Ed and Lori, how are you today?

Good. Good to see you, David.

Good. Nice to see you.

And thank you -- great. Thank you, and thank you for coming again to the conference. So first, leading off, how are demand trends, how's business, maybe both by business, by region and by end markets?

Yes. Let me give you a little overview and let Lori jump in with any other detail. The business feels good. Momentum is out there, and it's in every one of the regions. When we kind of came into the new year data, I would say Asia was hotter than the other regions, but both Europe and North America are looking good. So nice momentum geographically around the world. Some of the key end markets, I would say, many of them are recovering or have recovered to '19 levels, more like a V recovery. So clearly, you're seeing that in the auto space. The water space is very hot. In fact, that those type of levels, auto is way up again, but not going back to '19 levels, as you know, because auto builds aren't quite back. They're down about 6%. But a nice V recovery. So water, hot. Safety business, running very, very well. And the electronics business has just been hot for us, and you see it from all our competitors, and that continues. And a few of the areas that are now recovered to '19 levels would be our end markets in oil and gas, commercial, construction, 2 of them, but by the way, they are in our space. That would be the 3 that are not recovered, but they are all rebounding off the bottom. But again, not back to '19 levels.

Very good. Maybe let's talk raws since it's so topical. When you get Q2 guidance back in May, you talked about maybe $90 million to $100 million of raws inflation ahead of prices in Q2, but for the full year, you expected pricing to have [indiscernible]. So given the recent increase in oil, are we seeing maybe a little bit higher inflation in Q2 and maybe you look behind the curve? Or how does that play out in Q2?

Yes. I think we're still seeing the same as we had mentioned back in May with guidance. So escalation coming out of year-end when we thought we would see only about $100 million of raw material inflation. So we're up to the $300 million, 2/3 of that is within the M&M portfolio. So a lot of it is nylon, intermediates, driven not only by demand, but also by the Texas freeze, causing some of the intermediates into the nylon chain to go into force majeure. So I think we're still in the same place. We're so confident that we will get price over time to neutralize it from a dollar impact on margin. We did mention that there'll be a little bit of a timing lag with respect to the second quarter. So the raws rose a little bit bigger than what we were able to get the price through. But we've been very consistent with price increases across the board in all parts of the portfolio, but primarily within M&M. And so that business is well diversed and taking price and taking advantage of the market dynamics. And so we feel confident with where we are.

Yes. But just one point, as Lori said, we're going to -- we've raised prices a few times here in recent months, mostly in the M&M business, but won't catch it all in the second quarter. But we took that into account at the time that we did guidance.

Very good. Also, [indiscernible] guidance talked about some delay in deferred sales, maybe $100 million to $120 million in the quarter due to raw material constraints. Is that still the case for Q2, and mainly I assume mainly impacting M&M in those businesses?

Yes. So that was the case in Q1 also. We had missed about $100 million in sales, and we'll miss about another $100 million in the second quarter. We will definitely make it up as the material supply comes through. All the vendors are having this issue. So it's not lost business, it's delayed business. But yes, it's about $100 million in each of the quarters. Raw material situation is getting better, but I don't think it'll be fully resolved in the third quarter. I think some of these delays kind of almost until the end of the year. But yes, that's about the impact of it.

And then, Lori, what roles are you seeing the most tightness in, in terms of availability for you guys?

Yes. So it's back to the M&M business. So starting back earlier here with the Texas freeze impacting some of the nylon intermediates. We also are seeing constraints in that business with some of the polyester raw materials. And also, mainly the one that's still lingering for us is glass supply. So we use a lot of glass fiber across the polymer portfolio and M&M, and that market is still very, very tight. I think if you look outside M&M, it's more in W&P, less so in E&I. There is a little bit of tightness in E&I, but kind of the tranche it goes M&M then [indiscernible] E&I. And M&M, it's [ rounds ], polyethylene. So in the Tyvek supply chain, there's some tightness there. There's some tightness in acrylates that go into the construction business within the Corian business line.

Very good. And Ed, you mentioned auto is obviously still very topical in terms of input and component shortages there on the chip side. What are you seeing from that in Q2 and maybe heading into Q3 there?

Improving, but I don't think it'll be totally resolved from the auto industry standpoint. So I think the industry missed out. And probably the guesstimates are out there, 1.3 million vehicles first quarter, another 1 million or so this quarter. So I think that's probably fairly accurate about the delay. The demand is there, but you can't get the finished product now. And it is definitely improving on raw side. But again, I don't think, to some of the points, Lori just made, I don't think it's totally resolved even in the third quarter. So it's probably a full year effort.

And from our supply chain perspective, we obviously sell into the tier players, and we didn't see a material pullback in demand from them. So they were still building probably to be able to have the stock once the OEMs are ready to get running again. And so it was a little bit different of a dynamic. The OEMs were short on chips. Tier players were still trying to pull the hand, but the marketing was tight and couldn't fully satisfy [indiscernible]. And so it ended up being the same impacts from an auto market perspective, but it was a little bit different between where you play in, in the supply chain.

And clearly, still impacting inventories at customers. How long will it take to rebuild inventories downstream from you? And that could, I assume, impact earnings throughout the year, at least into next year.

Yes. Well, I think it does go into next year, David, to rebuild the supply. I mean most of the supply chain in the middle is very, very low in finished goods inventories. And while we just take autos, I mean, you all know it, auto inventories are extremely low. But it's -- residential construction markets are tight. I don't think that resolves real quickly here. A lot of the markets are in that. Even our do-it-yourself products are very tight that we sell our styrofoam in the retail channel. It's extremely tight. So it's pretty broad-based right now. My gut is it plays out through the whole year.

Ed, you've seen 2 different cycles. This one seems pretty strong. How would you characterize this cycle and this visibility demand with others you've seen in your career?

This is one of the most heated I've ever seen, and I've never in my career saw a supply chain issue like days out there. Now I've never seen so many force majeures from so many different vendors. And by the way, it's not just our industries. It's many other industries. You're all hearing things you might be trying to buy in your home, whether it's furniture, refrigerators, whatever it is, it's pretty incredible. I've never seen anything quite like it.

And inflation is very topical in the popular press. Is inflation good for DuPont? And what do you come out on the inflation debate for the overall economy?

Maybe I'll get started for the DuPont. So I would say, in the environment we're in right now is fairly neutral over the cycle. And so we mentioned that we are seeing the raw material escalation of $300 million reference point, but over time, we get that in price. So I would say inflation is about neutral for us. We're able to go out command products. We're obviously paying attention on the other side of what happens when the inflation starts to unwind and what impact that may have and what price we can keep and what price we may have to return. A lot of it is going to be dictated by demand. So demand stays very strong as raw material prices start to wane, then you obviously are in better position to maintain your price if demand starts to [ retreat ] at the same time. You may have to give some price, but it should be neutralized by the raw material [indiscernible] neutralizing as well. So we love maintain neutrality throughout the positive and the negative.

Yes. And David, this is different. Lori, you might want to explain it in the last time when we raised price a few years ago. It's a very different dynamic. So this time, we should be able to maintain margins even if we give up price because it would be -- the rolls would be coming down. And the last go around you might want to talk that it was a very different scenario.

Yes. So we're -- in the nylon chain, everybody remember back to like the '17 to '19 time frame when the nylon fly up happened, and we were able to significantly improve margins within the M&M portfolio. So that was really driven by nylon tightness, not by raw material escalation into the nylon chain. So nylon was very tight. We had secure stable supply of intermediates and production of nylon. So we were able to drive price and didn't have an offsetting impact from escalating raw materials. So the price impacts that we drove in '17 to '19 in nylon in a $230 million range pretty well dropped to the bottom line. As we look at what's going right now, we are getting sizable amounts of price just driven by demand and the force majeure in the industry, but it's in more in relation to the raw material escalations. You're not having the same drop to margin. So therefore, when and if this unwinds, you shouldn't have the margin headwind like we saw back post '17 to '19 when nylon fly up happened.

Very good. And Ed, what are your thoughts on the inflation debate on the impact on the economy?

Well, first of all, everyone keeps saying it's transitory on the government. I don't know that I believe that at all because wage inflation is definitely going on in many, many industries right now, and I don't think that unwinds. I do think some of what Lori was talking about, some of those things eventually unwind some. The raw material escalation has been very significant. So I don't see that holding. But I think inflation is here, and you're going to see it on the wage side for sure. And we are seeing it. The whole service industry is -- given bonuses and raises, and restaurant industry, hotel industry. It's pretty broad-based. So I don't think it's all transitory.

How is the wage inflation at DuPont right now?

We're fine, by the way. We just -- we're looking actually the other day, our turnover levels are at all-time low in the company over the last couple of years and continue to be that way. So we feel really good about that. I think that says something about the culture in the company. We did do a salary increase this year. We did not do one last year. It was right around the time when the pandemic hit is when we do it. So we held off. We did do that this year, which was very nice. And last year, I think, as you know, this will be 1 year or a little bit of a headwind thing. We paid out 70% bonus to our employees last year. So I think that was extremely good for morale. I think it was well deserved by our employee base for the [ open ] job last year. And this year, we're obviously looking it at 100%, planning on having a very solid year. It may be obviously even above 100%, depending on where we land.

Yes. I think I've always mention going into the year that the net headwinds and tailwinds from COVID and then potentially some reopenings was about $50 million. So we're still roughly in that ballpark. To Ed's point, we'll see how we go this year with our expected performance and what that does to the bonus payout for employees, but probably significantly different than a lot of [indiscernible] that our bias in 2020, when we look the cost actions to be able to navigate through [indiscernible] permanent costs takeout. And so therefore, as we look to 2021, potentially cost escalation from cost returning to the system as the reopening continues to happen, it's more mitigated for us. So all of the puts and takes last year, the positives of not having the idle mills that we took in T&I as well as the carryforward from the 2020 actions offset by, as I've mentioned, the employee impacts from the merit and the increased bonus and some reopening and some travel returning, we see that really only in the $50 million range for the company. And obviously, the reopening is a little bit slower I think than what we had planned going into the year with respect to returning to more normal travel practices, but we continue to keep a lid on travel. We are opening up a little bit, but internal travel is really [indiscernible] at this point. We're all doing what we're doing today [indiscernible] and we're getting back out to customers [indiscernible] we're keeping a lid on that to set back on track.

Our travel has probably picked up when we look at our numbers, about 15% of where -- maybe 20% max of where it used to be at this point in time. We kind of track it on a weekly basis. So my gut is it's going to snap back more than that, obviously, but I don't see it getting much more than they have 50%, 50% of the levels we used to run it at because we're going to make a real conscious effort, as Lori said, internal meetings, Zoom and Teams as much as possible, obviously, customer business, application engineering, people are going to be traveling.

That's great. I'll come back to businesses, but I want to address -- always a key question for you in DuPont, really what's next? IFF has done very successful transaction. Everything else is done, Corteva, Dow. How are you thinking about the next step for DuPont? And is there a next step for DuPont on all of those types of transactions?

Yes. Yes. So I think right now, it's all kind of hands-on deck operationally in the company. As I've said over the last months, we've got a lot on our plate operationally, but we're finishing off the noncore sales. As you know, we'll get that cash in, in the third quarter of this year on 3, I guess, are left here that we've sold. But well, we have a key [indiscernible] we haven't closed it yet. So get that, that we're in a really good balance sheet position, as you know, after the IFF transaction and feel great about where we're at. And we have excess cash. We have [indiscernible] $1.5 billion additional share repurchase. And we just finished the prior one about a month ago. So I feel good. Operationally, we feel like we have runway on our gross margin line. So we're really working that, and we are definitely looking at selective acquisition targets in the core businesses that we're already in if it strategically improves our positioning, and the numbers absolutely have to work on the cost synergies we could do. And I would just point everyone to the Laird deal that we announced a month or 2 ago. We bought it at 15x, which I thought was very reasonable for the kind of business it is. But with cost synergies, we'll have it at 11x, and we'll get most of those cost synergies in the first 18 months. We've got a very detailed plan. So I think we picked up a very nice strategic asset that really fits into our electronics portfolio and really gives us more of a solution sell. So it's things like that. You're going to be safe right down the middle of the plate, and the numbers are going to make sense for our investors. So that's how I would look at that. And I would just add one other overlay to that, David. As you've probably heard me talk about the last couple of quarters, I really like to continue to get resolution around PFOA. I think doing that is extremely important. I'm hoping 2021 is a year we can get -- that we've resolved a lot, as you know already, but we're kind of getting down now to the firefighting phone cases. The good news is being all consolidated down in South Carolina pretty much. So that makes it probably more manageable. And as you know, we never made firefighting foam, but there's a couple of different paths to try to continue to resolve that. And I think if anything did happen to come up strategically, like all the things you just mentioned a minute ago, it'd be nice to have those things cleaned up and out of the way to even think about that. So we just want to run the company where we are, grow with some tuck-in acquisitions. And that's kind of the game plan over the next year.

Got it. And on PFOA and PFAS, are there -- in that South Carolina MDL, are there upcoming dates and milestones you're looking at to have you kicked out that MDL? Or what's the next process to get the overhanging move for you guys?

Yes. It's out, I guess, next spring, I think, is the -- and I hesitate because you never know with that COVID, when things come back though. But I think there is some cases going to come up with your district water type cases, I think, are the first ones that are going to be taken on. And the issue is do we get out of them, do we do some settlement, something that would make sense for our shareholders to get it out of the way. They're all things, obviously, we're looking at, and we'll figure that out over the coming [ months ]. So there's a few different paths that can get us there, and we'll get there.

I'm struck by...

The nice thing about [indiscernible] is we have the agreement between the 3 companies. That was a real hindrance not having that in place, and it was hard to cooperate when we didn't have an agreement in place. So the nice thing is Chemours, Corteva and DuPont, we're all now holding hands together as a team. If we want to resolve, want to play it out in court, we have a unified strategy. And it just -- it's going to help the timeline, too, that we're not arguing between ourselves.

Right. No, it should be a big help, I would think. I'm struck by the fact that you thought '21 would be the year you resolve this firefighting foam issue. That will be obviously a very big positive for the stock and for you guys.

Yes. It might be a partial resolution. You don't know yet. It could be -- you just don't know, but I think we can be kind of peeling the onion back on this one.

I look forward to that. Just going back for a second to the portfolio. These 3 segments, these 3 businesses, is there a rationale for them to be together via a technology underlay or an operational underlay? Obviously, people harp on electronics, given some of the high multiples of their peers. But now you made electronics even bigger, perhaps has a bigger influence on the overall company valuations. How do you think about these 3 segments acting in concert together?

Yes. Well, look, I feel good where we have the portfolio, too. I loved our Nutrition & Health business, but I think that was a very strategic deal. We were able to do great for our shareholders, and I think that's going to play out extremely well over time. So I think that was very easy, and it was easier. But no R&D is easy, let me say that, but it was easier to accomplish an R&D with the right player just because of size of the companies and all that. So I like where we have the portfolio, too. By the way, I'm a believer. There's no conglomerate that needs to be together. So you need to have a reason that you're together, and I think one of our key reasons is the core of the science in this company is very, very strong. And some of our platforms cross-fertilize with each other. I mean, clearly, our auto business absolutely does, which is 22% or so to 23% of our portfolio. So there's a lot of cross ties in our scientific efforts, our R&D efforts in the business. But you got to have a great operating discipline in the company, and they happen to be very, very good at allocating capital. I mean that's what you need to do in a multi-industry type company. So if we're good at it, you're running very well together. But you always have the alternative to head down a different path. Everyone's got that option when you're [indiscernible]. So -- but our game plan now run the business, but we think we can make pretty significant improvements here.

You mentioned innovation, R&D. How much better is your innovation process, your R&D commercialization effort now than when you got to DuPont a few years ago?

Yes. I think the team has done a great job because, look, we've always had great science. I mean it's just a core. And by the way, again, application engineering, very strong in this company. But we've really diverted about 55% of our R&D into kind of 8 core platforms that we're working on, which we think are all the big secular growth areas over the next decade or two. And so we've really differentiated where the R&D is going in the business. And so I think that is big. But the bigger -- even another big piece of that is we really are -- have rigor, I mean, on both R&D and CapEx on traffic, tracking return on invested capital on every project. And I felt 5, 6 years ago, that warrior was not in the company as well as it needed to be. So we know when to kill a project. We know if it's going well. We know -- that's where we're working our way through, get the return we expect it to get. And so I don't feel like we're wasting money. We have those 2 buckets. And if we manage that well, it really, in detail, manage it well. It's hard to screw it up. So our CapEx is, what, $800 million. I mean, Lori and I review it like literally every month, where we're at, how we track and my growth projects run to maintain. And having that rigor, I think, has really helped us the last few years, and I think you see it in the results.

I think we do. That's exciting. I want to use that to focus on the segments. Maybe first, mobility, given the focus on EVs and your innovation here. How big is your EV effort today? Why would you be a winner as EVs go move forward and get penetrated at a much higher level?

Yes. So it's really back to the content story that we were on a couple of years ago with, today, obviously, we have a large position and nice engines. So roughly $170 a car. You get all the way to the full conversion to electric vehicle. You get north of $300 per car. So that benefit is stemming from products within all 3 segments. So within M&M, we see benefits primarily on the adhesive side as adhesive can be used as a gas within the battery. So a lot of the growth is in the battery application, obviously. Within the W&P business and our Safety and [indiscernible] Kevlar portfolio, there's applications to use the paper as a battery separator within the battery. And then within electronics, obviously, all of the electric [indiscernible] much a vehicle to enable it. So we see opportunity across the portfolio. I would -- so the $170, the $300, I would say, today, we've got several hundred million dollars that we sell into the hybrid and logic vehicle space. I think we just looked it up yesterday hybrid today up about 10% of the cars, and there are some numbers out there that suggest electric vehicles [indiscernible] by 25% of cars by 2025. So we're well positioned. We like the portfolio that we have to be able to take it in as that market continues to grow.

And how is the margin on that? Is the margin similar at $300 per EV versus $170 for nice vehicle? Or is there a higher-margin content there?

So I would say within the M&M portfolio, it would be similar. So the interest in margins where the growth as are kind of similar to the polymer margins within W&P and Nomex application has higher margins than the existing polymer business that we have today. And obviously, electronics is our highest margin business in the company. So actually increase content [indiscernible] have margin left. So I'd say, overall, there would be a margin tailwind as that conversion happens, varies a little bit by the businesses.

Very good. And maybe just on electronics. The business has been exceptional. We know why smartphones, et cetera, the pandemic. How long does this growth continue do you think? And what does Laird bring to you that you didn't have beforehand?

Yes, we think the growth continues for the foreseeable future. So what we can -- everyone's seen all the significant investment that's going into the semi CapEx space that ultimately will benefit us as well once that is implemented. There appears to be no slowdown in demand from the consumer for smartphones and for data infrastructure to enable to continue to work from home. So as the reopening happens, I think it's clear that there will be some type of hybrid workforce. And so you will continue to have the pull on the data infrastructure to support additional needs required to facilitate that. On the smartphone side also, we continue to have a very nice position in smartphones. We're wrapping up our investment to expand our capacity for an application that's used in the antenna and 5G-enabled phones. So that capital project will be complete towards the end of this year and into commercialization early next year, which is great because we're flat out of capacity. We're having to make product [indiscernible] today be able to [indiscernible]

And that technology can be used in other applications. We just don't have the volume to sell in, like the rail industry and all that. So we're sending it all into the smartphone industry now, but we'll get the capacity on. We can supply more in the smartphone market, and in addition, breaking with the KATHON technology into other areas. So we're really excited about that common line where that was about [ $260 million ]. That's our second-biggest CapEx investment that we have kind of in this with [indiscernible] over the last couple of years, coming to an end.

And I think what Laird brings as it continues to surround our portfolio. So Laird has products that enable the electromagnetic shielding and the thermal management, which is very important as devices continue to get smaller and smaller and maturization happens. And so -- and it also enables us to get broader solutions set. And one other positive, too, is that it's very asset light. And so as we continue to move the company forward, we're into the 4% to 5% CapEx as a percent of sales versus the 5.5% that we are today. The more that we can get pieces of the portfolio that are very asset light enable us to get there.

Yes. And then I go back to point Lori made, it's very interesting. If they all play out, and these are very credible companies that have made these announcements, but the CapEx that's going to get spent in the semiconductor industry is like 60% above the levels that ever ran at before. I mean it's so significant when you add it all up. So if they're seeing the market correctly, there's a nice wave going to continue here.

And I assume you need to keep on making investments to supply this demand. Where do you stand on that process within electronics?

Yes. So we just actually had the review this week from a strategy group perspective. So the entire E&I portfolio is asset light compared to the rest of the businesses that we have within M&M and W&P. So we just mentioned we're wrapping up the roughly $250 million in spend in cash on expansion to enable the antenna and 5G phones. So that is a large investment for that business. The semi business is very asset light. So all of the growth that's happening on the semi, on the OEM and the foundry side is large, but we don't have to have that same level of capacity expansion to be able to enable us to continue to supply that market. And so the expansions are low cost and more modular in nature. So think about you just have a big building in U.S. [ line ] to be able to continue to facilitate and lead that demand. So we don't see material FX needs to be able to enable us to continue to participate in the upside in the semi space.

Yes. Our growth CapEx was really the #2 project, which is KATHON, we just talked about. Our #1 is Tyvek Line 8 over in Luxembourg, which comes on in 2023. We're absolutely flat out of capacity there. And it's, as you know, a very nice margin business, and we're going to need some capacity on the water end of the business also that we're looking at over the next couple of years because [indiscernible] capacity constrained there. So that would be the kind of the 3 big core areas where there will be some CapEx because of growth expansion.

Last question on electronics. You already have pretty robust margins here. Any potential to see the move even higher going forward?

I don't see that moving materially higher than the low 30% where they are today, as you mentioned, that's extremely robust. That business is one where a lot of the growth comes from volume, not so much price, which is more need of moving from a margin perspective. And so the price tends to be kind of flat to maybe a low single-digit headwind. So as the older products phased out and you maybe get price on that and the new products come in, and you get a significant value. So I don't see a sizable step change within the margin profile in E&I. So the low 30% range is not only the highest in the company, but it benchmarks very well next year. So if you look at the peer side markets in which they play, they're at the top of the [indiscernible] company.

Understood. Maybe lastly on water protection. You mentioned construction going quite well. How is that demand in both residential and commercial? And how do you see going forward over the next 6 to 12 months?

Yes. So residential demand is very strong. So the only constraint that we have is just being [indiscernible] supply. So one of the larger products that go into the residential space is Tyvek. And as I mentioned, we're sold out. So we're making application decisions on where to sell the Tyvek. So residential was very strong. It's probably about 40% of our overall construction market, 20% is more in the DIY space. That's very strong. As Ed had mentioned earlier, it's more around just getting the cans. So we sell great stuff, which if you go into Home Depot, you can see it on the shelves. It's still in a little can. We're actually having trouble gettings the cans, but the product [indiscernible]. So once they resolve that, that will be -- we'll see very robust growth there. And then the remaining 40% is commercial construction, a lot of that being core in sold into commercial applications like hospitals and schools. That, as Ed had mentioned, it's off the bottom, but it's not back to 2019 levels. And so we still have some recovery to be had there as we go forward.

You mentioned Tyvek being sold out for 2023, any more capacity, Line 8? Do you need to store in capacity the next increment as we speak given how strong underlying [indiscernible] is for Tyvek, do you think?

Well, we're doing capacity release. Every month, we have programs on it to release more capacity. So for instance, we've been bringing up actually a line that -- I forget how long it's been [indiscernible] down in our Spruance, which is our biggest factory down in Virginia for quite a period of time, and we're bringing that back up online. So there's always progress we're doing to get more capacity. But even, David, is we do it. Lori is correct. I mean, we'll have it sold right away. And it's just -- and it's not a big, big Line 8. It's a big move for us. So we'll keep the capacity release. We'll be allocating where we think we have the best strategic opportunity and therefore margin. And then we'll keep the capacity release, bring in Line 1 up and would give us some extra juice. But the real -- this bigger step change will be lining coming up.

Excellent. Lori, Ed, our time is up. So I thank you for your time, as always. And good luck with the rest of the quarter, and we'll talk soon. Thank you.

Good to see you. Thank you.

Nice to see you.