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

Okay. Great. We'll go ahead and get started. My name is Mike Leithead, head of the U.S. Chemicals and Packaging [indiscernible] at Barclays. Very pleased to have DuPont management here with us today. We have Ed Breen, who frankly probably doesn't need much of an introduction [indiscernible] CEO; and Lori Koch, CFO. To start off, I'm going to rock you a few of these ARS questions. So I think [indiscernible] fire this fairly quickly. Question one, do you currently own a stock, overweight, market-weight, underweight or no? [indiscernible] [Voting]

[indiscernible] here. Question two, what is your general bias for [indiscernible], positive, negative, neutral? [Voting]

Okay. Next question. In your opinion, through cycle EPS growth for DuPont will be above, in line or below peers? [Voting]

Okay. Most people say above. Next question. In your opinion, what should DuPont do with the excess cash, bolt-on M&A, larger M&A, share repurchases, dividends, paydown or internal investment? I always ask you guys this question before.

It's great to see though. [Voting]

Okay. Share repurchase is number one, bolt-on M&A, two. Next question. In your opinion, what multiple of [indiscernible] EPS should DuPont trade at? [Voting]

Okay. Most people say 16 to 18. Next question. What do you see as the most significant share price headwind facing DuPont, core growth, margins, cap deployment or execution strategy? And then we have one more after this, and then onto the real questions. [Voting]

Core growth, and execution in a distant second. Last question around ESG. Does ESG play an active role in your decision-making process: Yes, it's a positive factor; no -- yes, it's a negative consideration; no, it doesn't play any role today; no, but we plan to incorporate it? [Voting]

Okay. No, it does not play any much of a role as of right now. Great. Well, that kind of sums up of the ARS questions. Again, Ed, Lori, happy to have you guys here. Just kind of dive into the business a little bit.

Maybe just kind of start off big picture to level set for people in the room with DuPont. I've touched a lot of end markets, a lot of different regions. You just kind of do a quick tour in the world where you're seeing in terms of growth outlook so far this quarter as you see the lay of the land.

Yes. Maybe, first, we'll go buy our business mix. So we're roughly 1/3 electronics, about 1/3 between protection and industrial site market, and then rest is roughly split between water and next-gen automotive, which is primarily the EV space we have. So they're kind of a scale of the book once, right? So electronics is the weaker side of the portfolio right now in the short term, longer term, we believe it's one of our [indiscernible] growth engines. But for now, it's working through some destocking, primarily in the consumer-driven spaces. So you see smartphones affecting both our interconnect business and our [indiscernible] business. And so we see Q1 and Q2 kind of down in that generally mid-teens range from an organic perspective, and then as we turn the quarter into the second half being return to growth again as we get inventory out of the channel and as we get demand, again, primarily within the Asia Pacific region. So a lot of our electronics business obviously is centered within Asia Pacific. It's positive if the China reopening is starting to happen then. Our belief is that, initially, the reopening will favor more of the essential plays or the food and the clothing and then it would eventually move into more of the discretionary spend, which impacts our portfolio. But we're still very bullish overall on China as the market continued a nice position to be able to be competitive and deliver outsized growth. On the other side, we continue to see nice strength in water and EV. Those two pieces combined are about 25% of our revenue. As I had mentioned, they'll continue to grow through the cycle. So water, obviously, everybody has asked that particularly in water. [indiscernible] technologies will get to address the need for clean water. So we continue to be really excited about that space. And then the EV opportunity for us is very robust. So last year, we delivered growth from a volume perspective in excess of auto builds, and we'll expect that, again, this year as we continue to grow the EV portion of our portfolio. So it's about $200 million in revenue of around $1.5 billion of overall auto exposure, and it has significant growth. So for example, our adhesives business had [indiscernible] 60% volume growth last year on the EV play. So really nice performance there. And I think there's still continued demand that's pent up in the auto space. So it is one market as you look at full year expectations, but does see growth overall. I mean those in the middle kind of the industrial, we generally see performing alongside [indiscernible]. So there's puts and takes within that overall industrial protection portfolio. But in general, it's kind of in the middle between the electronics being weaker [indiscernible] and a lot of strength in water and EV and then the industrial protection for the [indiscernible].

I think by way, overall, if you [ went ] together everything Lori said, it's really a portfolio we've now put together that about half of it should grow nicely above GDP through a cycle. So electronics, as always, now we're in a couple of quarters here of destocking. Generally, that will outgrow GDP and certainly our semi play in that where we normally outgrow the semi-market by 200 to 300 basis points. So you kind of have that piece. You got the water piece, as we mentioned. You got the next-generation auto. So you take different sub pieces and added up 50% [ will offer ] on GDP. The other 50% will grow GDP or industrial production. Yes. Also, I think we're at a really nice mix. By the way, significantly took the cyclicality out of the business with the last big portfolio we made to divest the M&M business.

And maybe tying into that, I think one area -- and you've talked about it before, but it's coming out of the fourth quarter, that's increasingly refined as sort of your focus on five growth pillars overall. Can you maybe just kind of talk about, with this portfolio, just the opportunities you see there, and kind of why, from the outside, those 5 growth pillars are kind of fits best with DuPont's portfolio strategy and kind of where you want to drive the company?

Yes. So the key growth pillars are electronics, which is the largest in protection, which comprises mainly within W&P, so both on the shelter side and the personal protection side. Water, general industrial and mix of automotive. I mean the tie that binds them all together is how we go to market. So they all have very specific technologies that we deliver through [indiscernible] application development. And so obviously, they don't play in similar end markets. It's how they play and compete in their own end markets is very similar with application development off of our [indiscernible] technology base. And so as the bread and butter of DuPont, that's what helps us enable the outsized growth in the market that we compete in at earlier point in semi. Over the long term, semi is a great business to be -- obviously, with all the investment that's going in, in the U.S. I think the trajectory is still from a semi-CapEx perspective. And new fabs being added to be in that mid- to high single-digit range will perform in advance of that by about 200 to 300 basis points, just given our portfolio, and our customer relationships are more in the advanced node spaces and also more bias towards those higher growth areas. So longer term, it's a great place to be the pillars that we will continue to invest appropriately in those pillars as well. So it's not peanut butter across the applications. So we look and say, where are our peers from a benchmark perspective from both [indiscernible] capital perspective, and that forms our investment in the company. Same thing from an M&A perspective. So there's certain pieces of the portfolio that are in [indiscernible] outsized growth, and that's where we will see us making our M&A [indiscernible] as well.

Great. And on M&A, Ed, there's obviously been a lot of portfolio changes over the past 3 years or so. Outside of Delaware -- and then we'll get to Delaware in a second. Is there any other kind of major changes you'd expect? Or are we kind of talking about bolt-ons or adjacencies around that?

Well, I'll correct you on one thing, there's been a lot of portfolio for 7 years. And the first 3 more so than the last 3, the last 3 were not quiet. So -- and by the way, just to punctuate that, it feels good to kind of near the end, having spend back to your question [indiscernible]. I mean we touched [indiscernible] markets with some of these core technologies. So -- but you're not going to see anything big. We're done, the big moves are over and will be probably the biggest thing we've done in 2023. It looks like we'll be ready to go. We're ready with a whole material, so we can move fast. It looks like we're potentially going to go at the beginning of the second quarter to really go market. We think we've got strategic interest. It's a really good business, by the way. There's not a lot of competitive landscape out there. So there's not going to be antitrust issues anywhere. So we think strategic interest, private equity interest, and we could consummate a deal pretty quickly once we go. So that's why we haven't been in a rush to financing markets. They're not wonderful. You can't put the leverage on it, you would have. So we're [indiscernible] improve a little bit. And then back -- I'm glad at least some investors, I think #2, said we don't mind you doing bolt-on M&A. We are doing a ton of share repurchase. So we're not letting you down there on your #1. But we'll look at things, I think, what size [indiscernible]. It's something that we could [indiscernible] fix in the pillars Lori just talked about. By the way, I think some attributes, I don't mind sharing, it would be on the higher growth and above GDP. And we have to have the real core technology that adds into something we do or build on something, which I think Laird is a great example of it, but perfectly in with some new technologies in electronics. And it's really helped us with our customers to have more tools in that toolkit. So it's things like that, we'll look at.

And maybe just on Delrin, the timing is helpful. But for folks maybe aren't as familiar, can you just remind us kind of the sizing of the business or, I guess, to the degree that you've kind of publicly stated on EBITDA generation or just so people can get a broad set of level of proceeds that could kind of help model in...

Yes. So it's around the $1 billion business on the top line, and it has EBITDA margins in the high 20s. So if you look at the portfolio, that's originally within the scope to be divested. It was all of the M&M business, which Delrin was a piece of. And then subsequently, when we consummated the deal with [indiscernible] for antitrust reasons, we pulled Delrin out. In that portfolio, it was at the high, very high end of the margin profile. So it's a great business. It's also auto-exposed, but it's auto-exposed in the sense that it's not in the engine. So it's in the body of the car. If you think about your seatbelt clip, that red thing that you clip into is Delrin. So it's kind of agnostic to the engine side. So if eventually I start to give share to EV, it doesn't matter from a perspective for them. So it's been a nice secular growth market.

Great. And on the balance sheet, I think you ended the year, I don't know, 1.2x levered something like that. Obviously, there's some mixed responses around buybacks or bolt-on M&A. I just -- when you pro forma for everything, Delrin proceeds. I mean what's kind of the right leverage ratio you'd like to get this business to? Again, maybe it's not a year-end 2023 number, but just kind of steady state where should have...

We've always targeted 2.75x. I'm in no rush to get there, by the way. So I mean I would do it if we felt there was something -- create significant value, but we're obviously not staying here either. So we're doing a share repurchase now. We've got another $2 billion on the heels of that. We said we would start up as soon as we finished this ASR. So we'll have taken 5.2 billion hours of shares out of the market, which is perfect [indiscernible] let that work. We're still undervalued. We've closed the gap to a multi-industrial group, but they're still a gap. And so I just think it's a great time for us to be buying back shares. So that's why we're leaning more heavily there. Having said that, by the end of 2023, if we wanted to lever to that target again and the cash will have -- and we generate, we have give or take $6 billion of available cash. By the end of the year, it's not [indiscernible] share repurchase [indiscernible] or something like that.

That's with the Delrin proceeds.

Yes, with Delrin proceeds.

To your earlier point where you kind of sized your expectations of our core EPS growth and whether it would be above the market, and I'm happy to see it above the market. A key enabler of that, too, beyond just our earnings generation from the business is the capital allocation decisions that we make, obviously, taking significant share of the market. We also paid a November 2023 debt down early, which generated $100 million of interest expense savings for us this year. So between those 2 items, you had at least 10% EPS growth out of the gate without business earnings growth generation. So that's a good position.

Great. And Ed, you just touched on it, but I mean you've been fairly, I would say, consistent in your views of DuPont Premier multi-industrial company. And just given the sizable buyback, and I think you just stated now, you should consider -- continue to think the company is undervalued in the market today. What do you think investors are missing? Or I mean, again, would make that -- what do you think kind of mark to the areas that you think people underappreciate DuPont?

Yes. So we started on the multi-industrial thing like 4 years ago. I could tell you would all look at me a little [indiscernible] and I think a high percentage of people now tell us they really [indiscernible] is that where we [indiscernible]. So I understand. So I think there's a few things. One is because we've made so many moves that I just think there is a learning process with this portfolio -- there's a history of DuPont, it was a cyclical chemical company. And there's none of that in it anymore. But there's muscle memory that's very significant. And because of all these moves, it's been complicated to follow the story. So I think that's why we did the teach-ins. We'll probably continue things like that. And I think since the M&M transaction, very interesting. And I think our capital allocation moves we're making, we've had way more incoming interest in the company in the last 4, 5 months. It's been noticeable for me. So I think it's a learning process. I think PFAS is at the top of the list of getting that settled. I think that clearly has created a gap. Some people just don't own the stock because they want to see that resolve. In fact, I've told our Board of Directors at every Board meeting, it's now the number -- it's been high on my list personally. It's at the top of my list because I don't have any other big like M&M moves to make or anything. I mean it's literally #1 on the list to close the gap. And one other point, I showed -- we showed our Board, Lori and I, this is the last week of our meeting, it was crazy how we were viewed in a bucket with [indiscernible]. Just as a fun thing, every day I would look at Dow Stock first then [indiscernible], and then I would look at ours. And I can tell the [indiscernible], we literally to the -- every day we trade. If you put the line together, you can't see the 3 lines. And that was for the last 3 years about 6 months ago. They have drifted down a little, and we have significantly shot up. Having said that, they're still a gap of some significance that we should be able to close. So I think people finally are seeing the portfolio. And you can see we moved off of that, but that's just an interesting point.

Okay. And I remind you, we're at the Barclays Industrial Select Conference, which is a good start.

I thought about that.

And I did just quickly, I think it's -- I want to give a shout out to Chris Mecray and [indiscernible] from the IR team who did a great job, I think, organizing and setting up a lot of those [indiscernible]. On PFAS, on that, I mean do you agree you're able -- can you just update us where the AFFF settlement negotiations are going? You mentioned last quarter, I believe, about a judge appointing a mediator. I mean just kind of frame out what you're working on. And then maybe after that, for folks that aren't as familiar, kind of the cost sharing -- agreement you had with Corteva?

Yes. So I don't want to say too much on the judge appointing a mediator. By the way, we were already in negotiations in the class, which is good. There's a class because you can get the thing all settled. So we were in negotiations, but I thought the mediator was a really smart move because the trial start coming up in the spring. And I think the judge is trying to make sure he pushes everybody along to a settlement. So I think that's been very productive, and we're very focused on it. So let me leave that there. The sharing agreement is important because for a long time it was hard to negotiate because Chemours, Corteva and DuPont are all in it kind of is one because we were together as a company, and then separated after all. And so we came up with a sharing agreement that caps out at $4 billion, now if you ever get there. But just the net of that is the maximum exposure for DuPont is about $1.3 billion over a 20-year period. That's what the agreement is for. And -- but look, once we get the class settlement out of the way, the bulk of it, there are a few other onesie-twosie cases out there, so very focus on that.

Okay. Great. I do want to pause for a second if there's any questions from the audience. I could sit up here and ask Ed and Lori questions for 2 hours, but I did want to see if anybody in the room has any questions. Once, twice. All right. I'll continue firing away. And raise your hand if you want to stop or ask a question at any point. Lori, you touched on it a little bit, and a lot of people are focused on core growth. What should be kind of the normalized earnings power of this business? Again, there's been a lot of moving pieces. When you think about your core 5 pillars and what have you, I mean, GDP plus top line growth, double-digit EPS, I mean just steady state, how should we kind of conceptualize what DuPont is?

I think that's fair. So I had mentioned roughly 50% or 55% of the portfolio should grow above GDP and the remainder [indiscernible] that kind of puts you in that mid-single-digit top line growth range. And we'll target 1.5x earnings leverage on that mid-single digit top line growth. And then obviously, you would have in the low double-digit range on EPS outside whatever choices you're making from a share repurchase perspective or a leverage perspective. It's a nice place to be in a normal macro obviously. So trying to get to the other side of what's going on right now and then see that.

Yes. By the way, it's funny we feel this way, but I keep saying if there's a global recession, and certainly, we're seeing in electronics, I said -- I actually think it's kind of good for our investors to see us perform in the down part of the cycle because that was always -- for the last couple of years, Lori, that was the top 3 or 4 questions for investors. It goes back to they remember the DuPont portfolio the way it was, and they're like, "DuPont doesn't do good in the downturn." Well, yes, commodity come and close. They take a dive, and the price goes away. And we're just -- we don't have that in our portfolio. So the speed and resiliency in the portfolio, obviously, we were doing well in the upcycle in the last few years or a normal cycle, I would say, generally. And it would be interesting, obviously. We've laid out a plan for this year, and I think it's a totally different picture than the way it would have been.

To drill into electronics, obviously, there's a lot of moving pieces. I mean just how do you see -- can you touch on a little bit, how do you see the year unfolding? When do you think kind of all the inventories flush through and we can start to have a caught reasonable baseline to grow off of...

So the ICS business sold a downturn first, so that's the PCB business, the metallization, films and laminates. And by the way, everyone saw it almost at the same time. But it's interesting, it started in the middle of last year and probably troughed out this past quarter and talking to our end customers because that's really where we're getting our data, we're not trying to guess here. They all are pretty much about the middle of the second quarter, they're going to start ramping up. So those fabs in that business went down to like 40% utilization. They normally run like 70%, 75%. And the gut we're getting from talking, and we talked to our 10 largest, is they're going to kind of get up to around 60% and then ramp from there. So we could be off a month or something like that. And then the semi business, we really just saw that. It was no surprise because you see all our customers what they've announced. We're thinking that's a couple of quarters downturn. But to Lori's point, it's such a secular growth area for us in the next decade or two with what's going to buy most of the [ plants ] being built are the higher-end chips, the more dense layer, and that plays to why we outgrow the market. And we've outgrown the market for the last 3 years because that trend is continuing. It's going to accelerate at least too fast. So yes, we'll see this little -- I mean, a big part of this is destocking. It's not the end market demand is so low. Everyone in the world had elevated inventory because of COVID supply chains. So you get a little bit more of a whammy down until you get through the destock of it. So that's about the timing we're making that. We also plan that our construction business will stay down over a year. So I think that was good planning. And then everything else kind of fits in there, kind of where it's been running.

And the one area I did want to touch on, water, again, has been doing quite well. There's been a lot more, I think, interest in the space. And you guys have obviously done quite well. Can you just remind folks, again, kind of what you guys do in that area, why it's held in so well and kind of why you feel so good about the growth trajectory there?

Yes. So it's about $1.6 billion in revenue. It's primarily a filtration business today. So -- and the largest portion is Reverse Osmosis and Ion Exchange, the two technologies. And then at the end of -- losing track of time, 2019, we added some ultrafiltration technologies via acquisition. So the opportunity is massive just given the access to clean water. So it's primarily an industrial play for us today. So it's about 70% industrial, and the rest will clip around municipal and residential needs. But just with the access to clean water, the treatment of brackish water, that's where the opportunity really sits for us. And for us, it's the largest piece of our portfolio that has a recurring revenue stream. And so the industrial players will go in, they'll put in their infrastructure, then they have to replace the filtration on a periodic basis. And so that gives us confidence around the recurring revenue basis. It gives us certainty on the top line and also gives us a backlog from that perspective to be able to feel comfortable. It was what the revenue looks like at over several months. And so that is the longest piece of our portfolio that we have visibility to. So we'll continue to invest and see where we can be opportunistic to add on to our overall water play. You're probably a little bit tapped out on the filtration side, where leaders already in RO and Ion Exchange. But we'll continue to try to add that out. It's very secular, obviously, with all of the global demands and the U.S. has seen [indiscernible] goals and everything.

Great. And then I'll ask one more before I turn it back over and see if there's any questions. Ed, with fourth quarter results, there was, I'll call it, an update on your employment contract extending beyond the end of 2023. I think you made it pretty clear, the end of '23 was not your retirement date. So can you maybe just frame up for folks that kind of read that or saw that without as much context, just what, if anything at all, the contract change means and just kind of your ongoing commitment when it comes to...

So I had a contract because of the Dow-DuPont merger and call it payoffs around all that. And I was owed some payouts, and I delayed getting them because I didn't want to make it look like I was going to retire, so I get asked about it every meeting. And so I kept the contract in place because the payments were owed to me. They're being paid out at this point. The company don't want to change again. So that was the reason for the contract. Normally, you wouldn't have a contract. And then because I had the contract, everyone just looks natural that says retirement date at the end of 2023. So I actually went to the Board and I said, look, I don't need a contract. I work at will. Just like most other CEOs. And I don't -- ask me if I would stay longer, and I'm like I would love to stay longer. I'm really having fun. I'm enjoying it. I love the team. And so I don't have a retirement date. So I'm working well past the end of this year.

Great. Any other questions before I could -- again, one right there.

[indiscernible]

Sorry, [indiscernible] it's webcast.

Is there anything taking place on the regulatory frontier that you would be more informed of than we would be at this time?

No.

I guess maybe to ask better, come at that from a different angle. Beyond AFFF, is there anything else that investors should be really focused on, on PFAS? Or again, to your point, I think earlier, there's just a lot of, call, onesies and twosies in your view.

Yes, this is natural [indiscernible] settlement. We've settled with the natural resource claiming [indiscernible] 5. We settled Delaware for $50 million. So that's what I meant by a few other things. But look, some bulk of it, I won't present long because [indiscernible]. It's getting that settled. It's huge. And look, I've been around for doing this. There are some investors that literally just [indiscernible] I've invested with the [indiscernible] career, just get that settled. And it's always been on my top 3 to get out of the way to close the gap with the multi-industrials, but now it's the only one time. So -- but by the way, there lies an opportunity for people because we're buying back shares like for tomorrow, and we will get to the finish line.

Any other questions on room? Maybe there's 1 minute left, so I'll ask you a little bit broader question. I mean you've seen a number of these different industrial cycles and what have you in a number of different roles. I mean just when you put your macro head on, kind of how do you see the world today? I mean, I guess, there's a lot of different...

I don't know if I'm answering the question directly, but was so different this time is the macro, obviously, is a little wobbly out there, right? Everything slowed down a little bit. But what's so different this time [indiscernible] we had going into a potential soft period. And I've never, in my career, I've been CEO for 26 years, I've never raised prices like we've all done here. So as you all know, we raised prices $800 million last year. So how that dynamic plays out, especially if the economy softens and there's significant deflation in roll. There certainly is already coming on energy. Natural gas is way -- it's like crazy what happens. So we covered all, but inflation last year with that $800 million of price increases. And by the way, a lot of other companies did a phenomenal job on that. So I think the interesting thing is watching the quality companies, how do they lay that out in the next year, 1.5 years. That's a big driver of your bottom line going to bad or you're doing really well. And I think it showed the quality to some companies that could you get priced or couldn't you get priced. But I think it's just going to show just as much the quality on the way down when there's deflation. So I think that's a big fun difference.

Hopefully, we'll be sitting here in February 2024, and we'll have the answer. Appreciate it. Appreciate the DuPont team being here. Thank you.