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

Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont Investor Update Call. [Operator Instructions] I will now turn the conference over to Chris Mecray, Vice President of Investor Relations. Chris, you may begin your conference.

Good morning, and thank you for joining us on short notice for today's call. Joining me today are Ed Breen, Executive Chairman and Chief Executive Officer; and Lori Koch, Chief Financial Officer. We will spend about 15 minutes discussing details of yesterday's announcements, which are posted to our website, and we will then conduct a question-and-answer session. We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please note the cautions regarding forward-looking statements included in yesterday's announcement and our slides. In summary, statements in the announcements, slides and on this conference call regarding our expectations or predictions for the future are forward-looking statements intended to be covered by the safe harbor provision under federal securities laws. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. Our Form 10-K, as updated by current and periodic reports, includes detailed discussion of certain risks and uncertainties which may cause such differences. We also may refer to non-GAAP measures. Reconciliations to the most directly comparable GAAP financial measures are maintained on DuPont's Investor Relations website. I'll now turn the call over to Ed.

Thank you, and good morning, everyone. Yesterday, we announced our plan to separate DuPont into 3 independent publicly traded companies. We intend to accomplish this by executing tax-free separations of our Electronics and Water businesses, which will create stand-alone pure-play entities in the respective industries with new DuPont continuing as a diversified industrials company. At separation, all 3 companies are expected to have attractive financial profiles and compelling opportunities for long-term growth supported by strong secular trends and balance sheets to enable both organic and acquisitive growth. Turning to Slide 4. After careful consideration, we concluded that operating these businesses as independent companies provides the best path for long-term value creation, and we believe the time to do it is now. First, we believe these actions will unlock value, given the expected valuation of each stand-alone company relative to market peers. Medium term, we also believe each future company will benefit from increased flexibility and focus on voice of the customer in each distinct market. From a shareholder view, we believe that each company will offer a distinct and compelling investment profile appealing to different shareholder bases. Tailored capital allocation framework should also maximize growth outcomes while allowing flexibility to pursue portfolio-enhancing M&A. Each company will also have strong differentiated balance sheets as a foundation to execute its growth plans, which will allow prioritization of investment where the most value can be created. From an employee and management perspective, these actions will create compelling advancement opportunities as each company can provide more tailored career opportunities and incentives as well as attract talent. Over my career, I have witnessed this approach play out well across multiple prior separations. Finally, each company will have dedicated governance with their own boards with deep domain expertise in their respective industries. Turning to Slide 5. We also announced yesterday that effective June 1, I will be transitioning to a full-time role as Executive Chairman to oversee the separations and I will remain actively involved in the company. I am very excited to turn over the CE role to Lori Koch. Lori has been a key leader within DuPont for many years and her elevation to the CFO role in 2020 was in recognition of her deep skill set and overall strong business acumen, something which has been very well affirmed over time and recognized by me, by the Board and by the broader DuPont leadership team. I'm confident that Lori will be terrific in the new role. Lori and I are also both thrilled to announce the appointment of Antonella Franzen as our Chief Financial Officer. Some of you may know Antonella already given her background with Tyco for nearly a decade and subsequently for over 5 years with Johnson Controls, including IR and Communications leadership roles. She has been our Water & Protection CFO since joining in 2022 and we are confident that she will be excellent in the new role given her extensive experience, including with companies undergoing significant transformation. Lori and Antonella will continue in their respective positions within the new DuPont following completion of the separations. With that, I'll turn it over to Lori to provide more detail on the 3 future companies.

Thanks, Ed. I am deeply honored to take over as CEO of DuPont to lead this next chapter, and I'm excited to partner with Antonella. Turning to Slide 6. We believe the portfolio focus that we will achieve through creation of these 3 independent companies will create compelling value. New DuPont will continue as a premier diversified industrial company consisting of a set of market-leading businesses, which generated net sales of $6.6 billion in 2023 and collectively are expected to grow at above GDP rates. We expect new DuPont will have solid margins and strong free cash flow conversion. We are targeting an investment-grade balance sheet and will maintain a balanced financial policy. Electronics will consist of businesses which generated net sales of $4 billion in 2023, and it will be a leading global pure-play provider of advanced semiconductor and electronics products. The new company will benefit from excellent secular growth opportunities associated with semiconductor markets while leveraging a strong financial profile. Electronics will compete with a set of recognized global semi participants and we expect to attract an investor base commensurate with this profile. The future Water company will consist of businesses which generated net sales of approximately $1.5 billion in 2023 and it will be a global pure-play water technology leader with a comprehensive portfolio of filtration technologies serving an array of end markets. The business has a strong financial profile reflective of its industry-leading IP and product differentiation, while megatrends in Water are expected to drive secular growth well above GDP. The business competes with recognized water industry participants that also attract a unique investor base differentiated from DuPont today. I will provide further detail on each of the 3 companies, beginning with New DuPont on Slide 7. Following the separation, New DuPont will be comprised of 3 focused business lines, including health care, advanced mobility and safety & protection. The company will remain a premier diversified industrial company with a portfolio of iconic brands and solutions powered by deep material science innovation and customer-centric application engineering expertise. New DuPont will have a significant exposure to health care end markets with a variety of products across different channels. It will also have a strong and differentiated position in advanced mobility, including significant leverage from EV growth and wear and friction applications with global auto markets. Finally, our Safety & Protection business will continue to leverage the iconic brands such as Tyvek, Kevlar and Nomex. As I mentioned earlier, New DuPont is expected to maintain its investment-grade credit rating and we'll continue to prioritize cash flow generation and have a balanced financial policy similar to DuPont today. Turning to Slide 8. I'd like to highlight some of the key features of the New DuPont portfolio. The health care pillar, representing about 25% of net sales, will feature Liveo biopharma consumables, our Spectrum advanced medical device business and the industry-leading Tyvek garments and medical packaging franchise, all providing exposure to fast-growing health care markets. This growth area will benefit from a set of mega trends within health care and life sciences, which should generate growth above GDP. Our advanced mobility pillar, which will constitute about 25% of net sales, consists of our adhesives and other technologies and applications that are well positioned to address secular demand tailwinds for hybrid and electric vehicles as well as next-generation engines in aerospace. The business has an excellent growth track record with the site and business infrastructure well situated to serve a global customer base. Within Safety and Protection, comprising about 50% of net sales, our trusted and iconic brands and deep multi-decade customer relationships serve a wide-ranging set of customer requirements from protecting first responders and military personnel to helping meet ever-changing sustainability and regulatory mandates in the building product space. The business also includes industrial applications, providing specialized advanced materials for demanding and challenging environments within markets such as electrical infrastructure and commercial aerospace. Turning to Slide 9. Electronics will be a leading pure-play materials provider comprised of the existing semiconductor technologies and Interconnect Solutions lines of business and including the electronics-related portion of Industrial Solutions. The company will consist of a leading portfolio of differentiated electronics materials and component solutions for leading-edge semiconductor chips, advanced packaging and interconnect and several management solutions. The company is perfectly positioned to benefit from the long-term drivers inherent in the electronics space, including the emerging driver of artificial intelligence. We have long-term relationships with all key semiconductor and other electronics industry OEMs and a strong history of co-development and application engineering to ensure customer success. As a company, Electronics will be well positioned to pursue innovation-based growth as well as M&A, covering a strong financial profile and a pure-play focus on its attractive end market. Continuing with Electronics on Slide 10. The new company will be well positioned to capture growth driven by key megatrends such as artificial intelligence and high-performance computing, high-speed connectivity, smart and autonomous vehicles and the Internet of Things. With about 60% of net sales centered around semiconductors, the Electronics business expects to benefit from key leadership positions and strong customer relationships, serving semiconductor OEMs, primarily via consumables used in the chip manufacturing process as well as serving broader consumer-based electronics markets with metallization chemistries, connectivity solutions, displays and printed circuit board materials. As mentioned, the business is well equipped to participate in the AI-driven growth acceleration via both our semi-related products geared towards advanced node chips for data centers as well as other key AI-enabling applications, including advanced interconnect products, assembly and packaging technologies and thermal management solutions. We believe these leading positions and exposures to advanced and leading-edge technologies will continue to drive industry outperformance for the future Electronics company. Turning to Slide 11. Following its planned separation, Water will be a leading pure-play company with excellent alignment to key macro growth drivers. The new company will be comprised of the existing Water Solutions line of business which includes one of the broadest filtration portfolios globally with leading technologies, including reverse osmosis, ion exchange resins and ultra filtration as well as specialized technology offering. The Water business is well aligned with secular growth trends that combine leading-edge innovation, global scale and deep customer relationships, including a strong presence in the emerging markets. The business model also benefits from a significant recurring revenue profile. On Slide 12, you can see the key mega trends within Water are driving growth across its primary market segments. These include industrial water and energy, life sciences and specialties, municipal and desalination, and residential and commercial applications. Growth in these areas is driven by a range of global sources, including growing demand and critical need for access to clean water, evolving wastewater management regulations and the global response to concerns for water scarcity and circularity. In addition to leading technology platforms, we believe our water portfolio will benefit from continued focus and investment in emerging and new technology offerings. We have key technologies to serve customers in multiple channels, including large emerging markets such as direct lithium extraction and green hydrogen production. Regarding the transactions overview on Slide 13, I'll highlight that we expect the separation to be completed within 18 to 24 months. I would also note that the full leadership team as well as Boards at the future Electronics and Water businesses will be named later, and we do expect to operate and report with these new leadership teams in advance of the separation. With that, I'll turn it back to Ed.

Thanks, Lori. In closing on Slide 14, this continued transformation is enabled by the hard work and dedication that our teams have shown over recent years to establish the structure around each business that can allow them to stand alone and thrive. We are proud that our financial and operational progress over recent years will allow us to take this next step in value creation, which we firmly believe will benefit all stakeholders. We are excited about the next chapter, and we look forward to updating you on our progress along the way. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

[Operator Instructions] Your first question comes from the line of Jeff Sprague from Vertical Research.

Congrats, especially to Lori and Antonella. Yes. A couple of things here. First, just thinking about the potential for something beyond what you've announced here today, the play out. I have 2 questions, Ed or Lori. First, as it relates the kind of the PFAS liabilities. Would there be any issue with the remaining burden of the PFAS liabilities on say, 2 of these 3 pieces, if you were to somehow kind of execute an outright divestiture of a third piece in advance of the spins?

Yes. No, Jeff, it's going to be allocated between the 3 business pro rata based on their EBITDA as we get into the last year before the spin, that's what the side letter says. And obviously, we're going to follow the side letter on that.

Okay. So there's no way to carve out and kind of keep the PFAS away from a particular piece, okay.

No. But Jeff, I would hope with this being 18 to 24 months down the road, we've made great progress on settling PFAS. And look, you can see by the other settlements, this thing is playing out where our consortium is kind of in that 3% to 7% exposure range, and we're only 1/3 of that. And obviously, I would expect in the next 18 to 24 months to continue to make more progress against that. So it's going to become -- keep getting diminished what's left over time here and hopefully, good progress in the next 2 years.

Great. And then just as a follow-up, 18 to 24 months does sound like a long time. Is there a particular complexity you're working through here as part of this? And do you have an initial view on what the kind of the dis-synergies are standing up 2 new public companies?

Yes. Jeff, it's -- we'll move as fast as we can, but 18 to 24 -- for something this size 24 months is actually pretty typical. It was pretty typical what I've done in the past. But the long pole in the tent is the tax work that we have to do. So we make sure as we go into these 3 companies, we're as tax efficient as we can be. And there are some countries where you have to actually stand up the separate business and run it for a full 12 months to get the tax-free status or the status that you had. So that -- but we'll move as fast as we can on that. And Lori, you can cover that?

Yes. On the dis-synergies, Jeff, we're looking at roughly $60 million across all 3. So not a huge number. We'll look to maintain the efficiency that we have in corporate costs at that 1% of sales rate.

Your next question comes from the line of Steve Tusa with JPMorgan.

Congrats. I'm just curious as to timing, Ed. I mean, when do you actually like leave the building? And it just seems a little bit sudden that you'd announce this and then, I guess, you're moving into the Executive Chairman role like before you guys actually report the second quarter. Is that right?

Yes, yes, it's effective, I guess, in about a week, June 1. But first of all, the role I'm taking is a full-time role, Steve. And Lori, I've known Antonella for, I think, 20 years now. So -- we all have a great working relationship. But I'll focus more on all the separation work. We got to hire the new Boards, put the right management teams in place of the companies. So we got a lot of work to do here. By the way, I -- we thought with the Board, I said that a Board timing is good. We're coming out of the destock cycle. I clearly wanted to get a part of the PFOA, so people could box in the exposure on that, which I think people can very well do now. And I think we're going into a real up cycle in the semiconductor industry. I think timing is actually perfect for us at this point in time.

So I guess when it comes to this kind of orders backlog thing you guys have been talking about for a while. Any update there as we move through the end of -- get to the end of May?

No. Order rates are tracking to what we need to hit the numbers. I think you could see in the press release, Steve, we reconfirmed guidance for the quarter and for the year. And I will just add one other tidbit, the month of April was a very solid month for us.

Okay. Great. Congrats again and looking forward to watching this progress.

Your next question comes from the line of John Roberts with Mizuho.

Ed, would you plan on going on the Boards of the 2 spincos like you did in nutrition?

Yes, not decided yet, John, but I'm sure we'll be having that conversation. Clearly, I have a lot of vested interest in all 3 of these companies. So we'll see how that plays out. But that will be a conversation we'll have down the road. And by the way, just to mention a little more on that whole front. We will announce along the way management teams, new Board members, and we would expect, Lori and I have talked about this, that we would run in the new form factor somewhere kind of in the middle of the separation process. So we can report to you guys and our investors in the new format of the 3 companies. And most likely, we'd have the management team or the CEOs of the other companies do their own presentation. So you'll really get a good feel for it before we spin it.

And then the peers for old DuPont included peers that had water and electronic or technical products. Who would you consider the smaller subset as the peers for new DuPont?

We would look at Dover, ITT, other types of multi-industrials with similar portfolios to us with many various secular-based growth drivers.

Your next question comes from the line of Josh Spector with UBS.

Congrats to the team here. I just wanted to ask on, is there any thought around dual tracking any of this? So I guess, specifically, when I look at Water, clearly, it's a good business, but it's smaller scale relative to these other 2. So while this process might take 2 years to stand them up, would you run potentially a divestment process for that or frankly, anything at the same time of any of this?

Well, I would just say it this way. I mean, look, if somebody -- we're planning on spinning. That's our goal here. That's the game plan. You always take phone calls if somebody wants to call you and propose something, sure, we're going to listen to it and you'd always make the analysis is there a different path that creates more value or not. But our plan is, moving forward, get the spins done. Potentially, by the way, because the Water is a little bit smaller, we potentially could get that one done before the separation of the Electronics. And if we could get it done a little bit earlier, we would just spin it at that point. We wouldn't wait. So we'll keep you guys apprised to that as we get down the road. So that's a possibility also.

Okay. And just if I could follow up specifically again around Water. I think relative to investor perceptions, probably the peers for that business relative to your business is arguably probably the biggest gap in valuation in the portfolio. I guess, can you give some comments on how you view your positioning in that business versus some of those peers you mentioned because there's definitely differences in how you compete and go to market and mix. So why do you think your business should deserve a much higher multiple similar to those peers?

Well, everyone in the water business has a multiple up in that range, number one. Number two, we have the most extensive line of filtration technologies possible, and we have technologies that are kind of just new for us in our portfolio, as Lori mentioned in the prepared remarks for lithium extraction, green hydrogen, some really hot areas for the future. So I think from an R&D standpoint and an evolution standpoint, we're in a really very neat spot with this portfolio. It's also a very global portfolio and it's -- by the way, it's shown besides the destocking we went through recently because of China, it's shown very nice steady growth rates over time, similar to those other companies. And by the way, the margin profile is similar to the companies that we mentioned. So it's -- there's no other portfolio that has this filtration technology in the extent and the breadth of what we have.

Your next question comes from the line of Christopher Parkinson with Wolfe Research.

This is Harris Fein on for Chris. So you cited an ability just to be more agile and drive more tailored capital allocation strategy across the businesses. I guess, are there any areas that stand out to you as places where maybe you've been sub-optimally investing in? And I'm just curious, given the level of buybacks over the last couple of years, why that would be the case.

Yes. No. We've always and will continue to invest at benchmark levels from both an R&D and a capital perspective and actually in some areas that are really seeing hot growth, we will over-index like in the semi space. So really, the comment was more around M&A flexibility. So the valuation of the current DuPont sometimes can make it a challenge to do some of the deals in the electronics or water space just because they are trading in that 20%-plus range. So that comment was more around doing M&A activity. Also, if you look at the peer set with respect to their financial policies, they do tend to be more biased towards lower share repurchases and lower dividends and then they reinvest that capital in innovation or in M&A activity. So the financial profiles of the Water and the Electronics companies will be slightly different than the recurrent DuPont, which is more balanced in its investment of excess cash.

Got it. And then for my follow-up, maybe if you'd be able to just give a little bit more detail about the leadership search for the spincos. I guess, what will that process look like? And maybe just how you're thinking about the ideal capital structure for each of the 3 entities?

Yes, maybe I'll go first on capital structure. So the new DuPont will look exactly like the current DuPont. So we'll target an investment-grade credit rating and a leverage target similar to where DuPont is today. For Electronics, we will also target an investor-grade credit rating, but we're also cognizant that some of the peers don't have the investment grade, but they're still highly rated. So we'll go through the RAS, RES process for both of the spins, but the -- we'll look to the peers as well. And then on Water, just strictly due to size, it most likely wouldn't be investment grade, but it will, along with Electronics and DuPont have very strong balance sheets to be able to deliver value opportunities.

Yes. On the management side, I don't want to get into too much detail on it, but I'd just say I think that you'll see a nice mix of us hiring some outside talent and very nice promotions within the company into some key positions. When you build out 3 public companies, we don't have enough people for the 3 public, that $60 million of dis-synergy Lori talked about. So it will be some key hires, and we'll go look for the best talent out there. But clearly, some really nice internal promotions also will be coming.

Your next question comes from the line of John McNulty with BMO Capital Markets.

Congratulations again. So I guess, I understand you're trying to do this in a tax-free manner. I guess, that said, can you just give us your thoughts on the cost bases for each of these businesses? I guess my presumption would be water actually has a pretty high cost base, just given a bunch of acquisitions there. But maybe you can kind of help us to think about that just in case there is somebody who maybe is interested in some of these assets and comes over the top on them?

Yes. So our intention is to do a tax-free spend as we had mentioned. So the cost basis really won't come into play from that perspective. On your specific water question, I can just say that it won't have the same tax profile that we did on the M&M transaction because we were able to use some efficient structures from the DowDuPont deal. So the water assets are primarily Dow, so they did not have the step-up from the DowDuPont transaction in them. However, though, the acquisitions that we had done in that space were small. They were more on the technology side, so they wouldn't have a huge factor on the cost basis. But as we move forward, we'll provide more information as appropriate. But as of now, the cost basis really isn't determinant in the spin structure.

Got it. Okay. Okay. Fair enough. And then just as the follow-up, in terms of the balance sheet and maybe more importantly, the cash flows that you're going to be generating over the next 18 to 24 months, given all the moving parts now, are you precluded from buying back stock? And so should we just think about cash continuing to build on the balance sheet and further improving the balance sheet? Or can you keep deploying capital or cash into buybacks? How should we be thinking about that?

Yes, we're not precluded. We will start to deploy tax into the cost of the transactions to separate them. So that will be a use of cash. And we'll also continue to look at some small bolt-on activity to see if we can bolster the portfolios before they spin out. So there's no preclusion but right now, the focus will be on getting the separations done and getting the businesses as healthy as what they can do from an organic activity perspective if we can add.

Your next question comes from the line of Frank Mitsch with Fermium Research.

Congratulations, Lori. Ed, I'm curious, you mentioned that the timing for doing this transaction is perfect now. I think those are words. I'm curious how long have you been -- has the company been seriously considering doing this transaction? And along with that, when can we expect to see the pro forma financials for each of the 3 companies?

Yes. So Frank, the Board has been working on this for about half a year now, somewhere in that ZIP code. We've had multiple, multiple meetings on it. I mean, look, it's always -- you've heard me publicly say all along, Lori and I both said, we have a disconnect in valuation. These are great assets, and we always look at what the best path is. So things like this have been in our head for a long, long time, but the conversations with the Board were a good half a year here to get to this point.