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

I think we'll go ahead and appreciate everybody who's coming or joining us today. My name is Michael Leithead, I head of U.S. Chemicals and Packaging [indiscernible]. Really happy to have to the DuPont team here with us at [indiscernible] CFO role as well. Before we get started and dig into the Q&A, we're going to walk through some of the audience response questions really quickly. So if you could flip to number one. Do you currently own the stock? Yes, over rate, market rate, under rate, no? Okay. A lot of opportunity here, I think, to get some new investors. Next question. What is your general bias towards DuPont stock right now? Positive, negative, neutral. Okay, little bit of a mix right now. Next question. In your opinion, through-cycle EPS growth for DuPont, will be above, in line or below peers. Okay. Most people say in line. Next question. In your opinion, what should DuPont do with excess cash, bolt-on M&A, larger M&A, repos dives at paydown and internal investment. Okay. It seems like share repurchases the biggest with bolt-on M&A and internal investment number 2. Next question. In your opinion, on what multiple of '24 earnings should DuPont trade. The range from a [indiscernible]. Fortunately, we don't give Lori [indiscernible].

[indiscernible] you would.

All right. It sounds like 16 to 18 is sort of the [indiscernible]. Last question, I believe. What do you see is the most significant share price headwind facing DuPont? Or growth, margin, capital deployment or execution strategy? Okay. It seems like core growth is the winner there, the biggest focus for investors, I should say. So look, we'll go ahead and get started ahead, Lori. I appreciate you guys joining as always, again this year.

And maybe let's just kind of start off big picture kind of level set where things are for DuPont obviously in a lot of end markets, touch a lot of different regions. Can you maybe just do a quick tour around the world, what are you seeing? What are you hearing as we enter '24?

I'll let Lori go through some detail in a minute if you want to begin more. But I'd say overall general theme and by the way, that last question for growth, we really had a year-end 2023, where we had a lot of destocking going along and accelerated in the back half of the year in our W&P business. So the electronics went into the destock first, and that's well over a year ago, both our ICS business and our semi business are now coming out of the destock and we're starting to see growth there as we've talked about on the earnings call, was interesting in the fourth quarter. Again, we're a lot of short-cycle businesses. We saw order rates decline in some of our W&P businesses on the safety side, the water side. And with all destocking going on there, what was really interesting about it on the earnings call the other week, we talked about our orders pretty much across the board, accelerated throughout January. And I would add that 2 weeks now into February, our orders since January 1 through the middle of February are up low double digits. So we continued to see lift in the first to second week of February and the only 2 end markets -- and by the way, it was very broad, which was interesting. The only 2 markets we did not see significant lift in Liveo Biopharma business and our Kalrez business. Both of those, we destock in the second half of the year, more towards the fourth quarter. But across our safety like Nomex, Kevlar, our water business, a little bit on the medical packaging, they all started lifting for 6 weeks now. So I think we're, by and large, mostly out of the destock that we were seeing last year and getting worse at the end of the year, except for those 2 end markets that I mentioned. And I think on the biopharma side, there's 6 or 7 other vendors out there that have said the same thing. We think it's a second half recovery. So we're hedging in the same fourth quarter.

Yes. Okay. That makes sense. Maybe let's start with electronics because you mentioned, obviously, it feels like we kind of went through that first. A lot of buzz around their topics like AI, data center, but you don't always see that in quarter-to-quarter numbers or there's so much volatility. So can you just remind us high level -- what are the biggest volume drivers for your electronics business and sort of near term, how you're thinking about that recovery?

Yes. So within semi, which is about a $2 billion segment within electronics, the largest key driver is going to be [indiscernible] growth. And for 2024, our current expectation is about 6% to 7% MSI growth and we'll outperform that metric by about 200 to 300 basis points. So a key driver of that, not only 6% to 7% market growth that our outperformance is that exposure to data centers and AI and more advanced chips. So we've got about $700 million business in data centers, about $250 million of that is AI, small but growing a very nice clip for us. So that's going to be the key driver for semi, coupled with the fact that we expect the fab to get back to more normal utilization levels as you head into 2025. So we're definitely going to bring up [indiscernible] 2024 starting in the low 70s, probably ending in the low 80s and then get back into that low 90s utilization rate as we head into 2025. It's similar dynamics on the ICS side, which is primarily PCB and layered. We do see improved utilization on the PCB side versus where we were -- it was the first business to go into the downturn in the third quarter, roughly [indiscernible]. It was the first business to come out. We saw positive volume growth in ICS in the fourth quarter of about 2%, and we'll look for continued recovery throughout 2024. So it feels like that ICS and the semi business have definitely normalized in line with a growth trajectory past those businesses, E&I in total should get back closer to the normal margin profile as you head into the back half of the year. It will be kind of more in a much [ smaller ] position.

Yes. Okay. No, that makes a lot of sense. And then circling back to W&P, it seems like, obviously, inventory dynamics surprised a number of folks in the fourth quarter. Can you just talk about -- I mean, is it more just around the visibility given so much goes through distribution, that kind of caught people off guard. And then to your point around the first quarter is sort of this low double-digit trend just 6 weeks now of more buying sort of what gets you comfortable that when the destocking is behind us now?

Yes. Look, I think 6 weeks is pretty telling now. And as I said, when we did our earnings call, we were up 8%. Now we're saying low kind of low double-digit. But I think it verifies the ramp that we said we're going to see from first to second quarter. I think that solidifies that's occurring. On the W&P side, a lot of it was what you said. It was not our end customers as much as they were doing some destocking, but the numbers that were really down were with our distributor at about 50-some percent of the [indiscernible] W&P goes through distribution. So for instance, in China, 1/3 of our water business is in China, we have more than this, but we have 4 main distributors over there, but they were down 30%. They just stop buying from you until their inventory back on work. So we [indiscernible] all pretty rapidly. Just to give you the rest of the story in the China distributors, they're about halfway through their destocking. And in January, beginning of February, we saw them start to place orders for over in May and June. So which kind of verify against and starting to see some of that sequential ramp in the second -- kind of the end of the second quarter or a quarter end. We're tracking those 4 distributors very closely, and we can literally see, they're about halfway down, will be where they need to be made in May and June and then would take 60 days to get product [indiscernible]. They're ordering about what we thought they would.

So in some ways, again, I don't want to just characterize with visibility in some ways, it's getting a little bit better here as we're going into the year.

Well -- and look, it's just in my whole career doing this. I've never used the word destock except the one other time in '08, '09, which was mostly the economy went but there was destocking because the economy went to budget. But this was over rated. It was supply chain buildup. We had too much inventory. We all did. And then when you're a short-cycle business, and you also go through distribution, that was just a little bit of a surprise that it was severe [indiscernible] 6 weeks bouncing back.

Somebody earlier was talking about a normal year, and they can't remember what a normal year was because you got to go back to 2018 or so before normal...

In the 26 years as the CEO, I said the last 4 have been the most unusual. It also makes a [indiscernible].

No, exactly. I keep you going. And then maybe just to round out the portfolio. I think investors maybe sometimes under-appreciate what you guys have in the retained business -- that's kind of in there with the corporate line. But it's done quite well, I think, the past year. So can you just remind us kind of what the key businesses are there and kind of what the growth algorithm?

I'll let Lori do it because Lori actually besides being the CFO, she's head of [indiscernible] job by the way, but...

Thank you. Yes. So there's 3 main businesses in that portfolio. There's adhesives, which is the largest, which we'll talk much about. And then there's [indiscernible]. The largest end market for those most is automotive. And so obviously, driving the automotive story for us is the EVP, got a really nice position with all the OEMs, not only on the structural and body side of EV system, more importantly on the battery side, which is what's really driving the growth. So adhesives at about $800 million business this year, almost 30% of it is EV and about 1/3 of that 30% is battery and growing in a much [indiscernible]. So that's really what's driving the opportunity there. Ed and I will actually be in China, visiting a new facility that we built in outside of Shanghai to address the Chinese automotive market. So that's really the piece of that. They've done a really nice job driving margins as well, to be able to deliver really nice productivity as we saw 2023 unfolds.

Okay. Great. And then on the portfolio, Ed, obviously, there's been a lot of changes in the past 3 or 4 years. You've got Delrin across the finish line. As you sit here today, I mean, is there any major changes left or anything the underlying businesses and the pieces kind of where they should be for the next 2 or 3 years?

I think we've got where we want to be kind of bisect the portfolio again, with destocking allow the way kind of normal time. About half of the portfolio should outgrow GDP and the [indiscernible] GDP industrial production depending on what it is. So I think that's a pretty nice mix. And by the way, if you go back and look before the destocking, we got 3 years, if you just took M&N out of the portfolio and look at the new DuPont portfolio, we were growing around 5% organically. So I think we have a nice mix of businesses and the portfolios where we want it.

And getting -- or maybe just following up on sort of that organic growth piece because obviously, it's a key focus or a key question for a lot of people in the room. What is the right kind of growth algorithm in this business with the portfolio over the next, again, 2, 3 years? You've got quarter oscillations. But just how should we think about the organic EPS algorithm, if you will, of DuPont over time.

Yes. I mean I think you have kind of -- again, it depends with the economy's growth, but the business is growing 5% top line, your 1.5x levered on the P&L and then your EPS growth can be double digit, whether it's your buyback or bolt-on M&A and all that, it should be a pretty consistent model year in and year out. And then we'll -- our cash conversion with the year was 100% plus we should be north of 90% on a pretty consistent basis.

And then, on the balance sheet side, I think you ended the year 2x, 2.1x net leverage. What is the right leverage portfolio you think about this business as we look out to 12 to 18 months.

Yes. We've set our leverage target early last year to 2x. So that's where we're comfortable being really there at the end of 2023. So we'll look to be in that 2x range. We don't have a debt repayment in November 2025. So we've got a fair amount of time before we hit that next milestone. And then after that, it's [indiscernible] pretty far apart with respect to the paydown. So we're comfortable with 2x. It allows us to be [indiscernible] to shareholders and also opportunistic even on the both on the M&A side, but right now, obviously, the focus has been on share repurchase [indiscernible].

And how should we think about the cadence of share repurchases? Obviously, I think you guys talked about the potential for another ASR coming here. Just maybe remind folks about sort of -- obviously, you guys have done a lot probably 18 months, but what do you guys have over the next 12...

Well, high level, we just took up 15% of our shares over the last 1.5 years and where we just announced another $1 billion. Lori, you want to walk through the ASR.

Yes. We already launched the first $500 million ASR shortly after earnings. So that probably will take until the end of the first quarter to complete. And so you can expect that on the other side that the earnings announcement in late April or early May to get as far as on the other $500 million even though we had authorization from the Board into mid-2025, we commented on the call that we will look to wrap it up this year. So we found the last overall round we've done in ASR -- a very efficient model. There's a lot of bidding to get the program that gives us a nice discount. And it's also just very efficient. You get 80% out day 1 and then you get the remaining 20% at close.

And maybe just following on to that. As you just mentioned, I mean, you guys have been very active in the market buying back your shares. And I think implied in that as you feel that DuPont is probably undervalued in the share of our margins [indiscernible]. What do you think investors or the market is missing? Or again, if you look at your share price, I mean, what do you think [indiscernible] people don't fully appreciate with where DuPont is trading today.

Well, I think -- by the way, short term, I think the destock is not helpful, obviously, when you're coming through that, you can see the numbers really fine. But I think, look, we made a lot of moves in the last 5 years. I mean a lot of us to get the portfolio to where we have it. So a lot of people are just studying it, just getting to know it what's in it. And then of course, we have kind of the year with the destock and the electronics downturn. And generally, they're all great businesses and people have to learn the portfolio. They got to study what's this top line is like 5% in a normal economy doable. It was -- we did a 3 years in a row before the downturn. So very doable. But I think it's just a learning process for people. And look, we clearly feel we're very undervalued and most of you that own the stock and look at it, say the same thing. We're basically a 12 multiple. You have business in our electronics portfolio in water, just in into which are 18 multiple businesses. So we like buying our shares back at this point.

Yes. No, that makes a lot of sense. One area I do want to touch on a little bit, medical. Now obviously, right now, it's a little choppy. But I mean you guys have expanded your exposure there with the recent acquisition. Can you maybe just talk about kind of what makes that attractive, why you think that's an interesting kind of avenue for what you already had in the portfolio? And then maybe moving forward.

Yes. And that's also an 18 multiple business, by the way, just add another one. If you just [indiscernible] do the benchmarks.

Yes, we spent about 10% of the portfolio in healthcare today. So it's a combination of the existing [indiscernible] healthcare as well as the Liveo business, which was in the E&I portfolio now the incoming $0.5 billion business roughly [indiscernible] those combined are not an insignificant portion of our portfolio that's [indiscernible] at much higher than we trade today. So we have a lot of affinity for the compensation of the Liveo business with the Spectrum business. There's already been a lot of customer engagement around how can we [indiscernible] toolkit to be able to bring more [indiscernible] to our customers. So the Liveo business was primarily a biopharma side [indiscernible] side, and we were each kind of in those places and not really looking on beyond that. Now with combination we can cross-fertilize and look beyond that, as we've already had a lot of inbound the customer on the spectrum side that has on the biopharma side with your Liveo business.

You have 1 large customer -- existing customer -- ask us to bid on 2 new projects we would have never been able to bid on because they saw the combination of what we could do between Liveo and the Spectrum business. By the way Spectrum is performing very well. Obviously the business model that we put together to do a major ramp with this one customer I just mentioned. That's going very well. Liveo business, the biopharma one that's going through destock, spectrum is not going through destocking in that end market. But biopharma and that's the one we think will kind of come out in the third kind of quarter.

And that cross pollination or what have you, I mean, is that just because of the breadth of the portfolio, the R&D efforts that you guys already have? I mean just all of the above.

Yes. And we've recently put them together under 1 leader as well. I was a former CEO section underneath the private equity firm now heads up not only the spectrum is [indiscernible] of the deal. So you have the further benefits we have from that combination.

And then maybe just shifting gears a little bit on the price cost side of things, obviously, you guys have done a good job pushing price through the entire inflationary cycle, not to -- we're seeing that much questions, but it seems like inflation at least moderating a little bit. Can you talk about your ability or comfort in holding that price? Or I mean, again, how you guys are thinking about managing price cost spreads here as we go out to '24.

Yes. For 2024, we've got a net neutral price position right now. So we believe we will have further deflation benefits primarily just coming from the procurement cycle. So as we went through 2023, and we saw deflation kick in a portion of that was in inventory and will continue to come out throughout 2024. Our expectation on the top line side is prices that we will have to give that a lot [indiscernible] that will neutralize what we believe we'll see on the raw material, energy and freight side. But we'll see how that pick up. So there's pockets where we'll probably be a little bit heavier than others, given the dynamics [indiscernible] level of customer engagement or primarily like they [indiscernible] with what they're doing from a pricing perspective. It's just a different, but in general, we will still maintain net price spread over the 3-year period. So in 2022, when you were in the crux of it all driving up and we had [indiscernible] cut off with price. And then in 2023, we actually saw [indiscernible].

We actually haven't given up price yet. We thought we would in one business to maintain market but we actually haven't done it yet. It's in our plan, we're going to go a little...

Name the business model...

[indiscernible] I will say it in private.

And obviously, you guys have moved -- a lot [indiscernible] in the past month or so. Is that beneficial for you guys on the energy side? Is it smaller? I mean just how should we think about energy grow?

Yes. It is a benefit. So we actually had the procurement meeting actually, where we came down and we saw an improvement in the natural gas and general utility [indiscernible]. However, it was offset by a cycle over segregation logistics, primarily from [indiscernible]. So we're seeing that neutral as we believe we will be from an inflation perspective, [indiscernible].

That's something different for management teams just in the craziness of the [indiscernible] Lori and I sit all the time in procurement meetings. You didn't have to do that [indiscernible] every month.

It's not important. It's been, like we said earlier, while [indiscernible]. If we maybe just turn over again and I'll open up for questions after this. There any questions will come around, Mike. But on the liability side, PFAS, you just finalized water district settlement at all taken care of. If we look over the next 12 to 18 months, are there any other sort of big items on the [indiscernible] investors should be focused on? Is it more smaller settlements from here? I mean how do you think about the landscape the next year or so on that...

I think there'll be a couple of smaller settlements over the next year, getting all details. Remember, it could split 3 ways [indiscernible]. So they're still the MDL with VAG cases at all. So but I don't think that's the one in 2024. I'm very happy with the settlement we got. I think investors can now scope out the numbers much better. The judge in the [indiscernible] our consortium is 3% to 7%. The exposure and [indiscernible] 3% to 7%. And I think the water treatment played out where you can see the math for us is not anywhere near the articles being written than what people were speculating. So I think you're in on that and do the math of the rest of this.

I mean I think any time you can ring fence or at least kind of...

It is the big one. The water districts, obviously, was a big settlement [indiscernible] other company.

And maybe just to kind of tie on [indiscernible] maybe just really remind us just how the cost sharing agreement works for those that maybe don't -- that aren't as intimately familiar with you guys?

Yes. We have an MOU with Chemours and Corteva round $4 billion, our share is $1.35 billion. So as expenses come in Chemours is 50% and [indiscernible].

Any questions in the audience? Again, I can ask Ed and Lori questions for a few more hours, if Chris doesn't cut me off from it. I think there's a question right there. They're going to bring you a mic.

[indiscernible] traffic standpoint with what you guys are seeing? I mean you've obviously seen a lot of resilience in the U.S., but Germany seems to be pretty flat. China has plenty of problems. Just be interested in any color.

Yes. I mean as we went through 2023, we saw China improved whereby it declines. So that's the expectation for 2024 as well, and [indiscernible] same stream. So that's obviously the 1 key market that we pay attention to that was volatile in 2023, and we've seen some resolution in2024. Generally outside of that, the order [indiscernible] mentioned really very different by region. So one of the big uses [indiscernible] business and the destock that was felt in Q4 was on the healthcare side. Healthcare is about $0.5 billion business for us. We see that resolving as we get out of Q1 and the expectation of revenue between -- or the first half and the second half for the healthcare business is about $80 million [indiscernible] different for us. But so we're seeing [indiscernible] starts to pick up and it will be a key top line growth river as well as a margin driver for the business.

Any other questions from the audience? Maybe the last one then for me. Ed, I think I ended on this last year, but you've obviously been involved in the industrial space for a number of years now. I've seen a number of different cycles kind of today, the maybe not as much DuPont [indiscernible] economy, where are you most focused on? What do you think is the most [indiscernible] things that people are focused on this year?

Well, we touched on a lot of them. I think it's going to be interesting like in a conversation with people holding price everyone got a lot of price and how that play out for the company [indiscernible] in every like the quality of the portfolio, the fact that we hold. I think just lots of companies in general, how that plays out over the next year, 1.5 years for them will be interesting. And then obviously, the destock was huge for -- I mean, the dispersion in earnings this past quarter was crazy. And then by the way, even within people's own portfolio, I'm excited because we're coming into major [indiscernible] in underage with this, a major upturn in electronics [indiscernible] and we're in the sweet spot of the semiconductor [indiscernible]. So I think the next few years are pretty exciting for us to watch [indiscernible] but in general, the economy feels pretty decent, a little bit lower growth probably just globally, the Germany comment [indiscernible] but companies to perform well in that environment.

Well, look, we'll end it there. Ed, Lori, I appreciate it as always. Thank you for coming.

Thanks, everyone.

Thank you.