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

Thank you for standing by, and welcome to the DuPont Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ann Giancristoforo, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for DuPont's Third Quarter 2026 Financial Results Conference Call. Joining me today are Lori Koch, Chief Executive Officer; and Antonella Franzen, Chief Financial Officer. 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 read the forward-looking statement disclaimer contained in the slide. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and has been posted to DuPont's Investor Relations website. Consistent with our prior earnings calls, we will provide comments on our results versus the prior year pro forma, which adjusts for our post-separation corporate costs, interest expense and income tax rate. This is consistent with the methodology and financial metrics that we provided at our 2025 Investor Day. I'll now turn the call over to Lori, who will begin on Slide 3.

Good morning, and thanks, everyone, for joining our call. Earlier today, we reported our third quarter financial results, which again exceeded our previously communicated guidance, demonstrating the strength of our portfolio and the consistent execution of our team. Broad-based sales growth, combined with a continued focus on productivity, enabled organic growth of 5%, 90 basis points of margin expansion, 31% adjusted EPS growth and robust free cash flow conversion in the quarter. As a result of our performance, we are again raising our full year 2026 financial guidance for organic sales growth, operating EBITDA and adjusted EPS, all at or above the high end of our previously communicated range. Antonella will provide further details shortly. We also continue to execute our capital allocation priorities. We completed the previously announced $250 million ASR and substantially completed an additional $100 million of open market repurchases in the quarter. We also announced our intention to repurchase another $250 million of shares in the fourth quarter. This underscores our confidence in DuPont's long-term growth potential and reinforces our focus on allocating capital where we see compelling return opportunities, including investing in our own shares. Overall, this was another solid quarter of strong execution. We delivered strong organic growth, expanded margins generate robust free cash flow and return meaningful capital to shareholders, all while continuing to advance our strategic priorities. Moving to our strategic priorities on Slide 4. We continue to strengthen the operating framework that connects our culture, planning and execution. Our focus remains on accountability, productivity and performance excellence with the objective of building a more consistent and sustainable growth engine. Innovation excellence continues to strengthen DuPont's ability to turn [indiscernible] in technology and application expertise into opportunities for sustainable growth. We are enhancing the quality of our innovation portfolio through more rigorous portfolio management, stronger visibility to accretive growth opportunities and differential resource allocation. In the past quarter, we substantially increased our front-end innovation pipeline and increased the grow versus renewed ratio of our innovation portfolio by about 5%, ensuring that our vitality mix remains strong in the mid-30% range. The results are increasingly visible across our growth markets. In Water Technologies, we expanded our bioprocessing portfolio with a new purification technology aimed at the fast-growing peptide therapeutics market, including GLP-1 drug. This product helps pharmaceutical manufacturers achieve the purity, yield and scale needed to meet rising demand for these therapies. In addition, we launched Tyvek with Renewable Attribution in the quarter, which provides customers with a solution that maintains the superior performance they know while supporting progress on sustainable material sourcing and carbon footprint reduction. Commercially, we continue to see strong order patterns with the total company order book follow the up double digits year-over-year. In addition, we are strengthening the connection across innovation, marketing and sales into a more systemic growth engine, enabling better win rates, faster activation of sales place, stronger launch readiness and more disciplined execution from opportunity creation through conversion. The focus on this connection is driving key customer wins. Our adhesive business recently secured a customer win with BETATECH, an advanced thermal material that maintains optimal battery temperatures and helps automakers enhance vehicle performance, reliability and circularity. Our Vespel custom engineered seal were recently selected for their exceptional durability, wear resistance and thermal stability, enabling safe, reliable fuel transfer during launch operations and showcasing our ability to solve complex aerospace challenges. In addition, we were recently awarded the largest containerized desalination project in EMEA, where our ultrafiltration modules provide greater efficiencies from a cost and space perspective, increasing the amount of clean drinking water that can be produced in each container. Operational excellence continues to deliver measurable results. We completed more than 20 Kaizen events during the quarter across our businesses and functions with a continued focus on safety, quality, delivery, inventory and costs. We are seeing the results of this work in our key performance indicators, delivering over 2% net productivity in the quarter, which was also a key component of our margin expansion. Additionally, our OTIF improved by more than 100 basis points, marking the third consecutive quarter of improvement. More broadly, the adoption of AI tools continues to accelerate as we work to connect our business system framework to AI-enabled tool sets. We are seeing faster and better decision-making from our teams on the factory floor where we are starting to realize material benefits in the areas of planning and quality. Our 2026 financial performance continues to demonstrate the strength and quality of our portfolio, positioning us above the high end of all of the medium-term targets we established at Investor Day. We have a strong foundation for consistent, profitable growth supported by attractive end market exposure, continued operating leverage and robust cash generation. We will enter 2027 with confidence in our ability to execute and the significant opportunity we have to drive earnings growth and create long-term shareholder value. With that, I will now turn the call over to Antonella to cover the financials and outlook in more detail.

Thanks, Lori, and good morning, everyone. Strong operational execution and broad-based growth drove another quarter of results ahead of our financial guidance. Organic growth and disciplined productivity translated into strong operating leverage and meaningful margin expansion. Additionally, our businesses continue to convert earnings into cash at a high rate, giving us significant financial flexibility. Beginning with our third quarter financial highlights on Slide 5. Net sales of $1.9 billion were up 4% versus the year ago period on 5% organic sales growth, partially offset by a 1% headwind from currency. Top line growth was broad-based, led by continued strength in Healthcare and Aerospace as well as year-over-year growth in Building Technologies on gains in North America and Asia. From a segment view, during the quarter, organic sales grew 4% in Healthcare & Water Technologies and 5% in Diversified Industrial. Third quarter operating EBITDA of $469 million increased 8% versus the year ago period on organic sales growth and productivity. This resulted in operating EBITDA margin of 25.1% in the quarter, an increase of 90 basis points year-over-year. Turning to cash flow. We delivered transaction-adjusted free cash flow of $341 million and related conversion of 121%, underpinned by earnings growth and net working capital productivity. Based on our year-to-date results, we now expect our full year free cash flow conversion to be approximately 100%, nicely ahead of our 90% target. Turning to Slide 6. Adjusted EPS for the quarter of $2.09 was up 31% versus the year ago period. Stronger operations benefits from higher cash capital allocation and actions taken to lower the tax rate drove 24% of the increase. Turning to our segment results on Slide 7. Healthcare & Water Technologies third quarter net sales of $865 million were up 4% versus the year ago period on 4% organic growth. For the third quarter, Healthcare sales were up mid-single digits percent on an organic basis versus the year ago period. Organic growth was led by double-digit gains in personal protection and medical packaging. Water sales were up low single digits percent on an organic basis on strength in industrial water and double-digit gains in semiconductor and specialty markets, partially offset by continued disruptions in the Middle East. Excluding the Middle East, organic sales increased mid-single digits percent in the quarter. Operating EBITDA for the segment during the quarter of $263 million was up 7% versus the year ago period on organic growth and productivity gains. Strong operating leverage resulted in operating EBITDA margin of 30.4%, an increase of 80 basis points year-over-year. Turning to Diversified Industrials. Third quarter net sales of $1 billion increased 4% versus the year ago period on 5% organic sales growth, partially offset by a 1% headwind from currency. At the line of business level, organic sales for Building Technologies were up mid-single digits percent on growth in North America and Asia. Growth in North America was broad-based led by share gains and building envelope for residential markets. Industrial Technologies organic sales were up mid-single digits percent on double-digit gains in aerospace and electric vehicle battery applications. Operating EBITDA for Diversified Industrials of $242 million was up 11% versus the year ago period on organic growth and productivity. This translated to operating EBITDA margin in the quarter of 24.1%, an increase of 140 basis points versus the year ago period. Turning to Slide 8. We are again raising our full year 2026 financial guidance with all metrics at or above the high end of our previously communicated range. For the full year 2026 our net sales guidance now assumes organic growth to be approximately 4.5%, reflecting our performance to date and continued strength across most of our key end markets. We now expect sales to be about $7.19 billion, an increase of $15 million from the midpoint of our prior guidance and at the top end of our prior guidance range. While we have the orders in hand for our large water projects in the Middle East, given the continued disruptions, our guidance now assumes these projects will be pushed into 2027. Continued strength in our other markets allowed us to raise our guidance to the high end of our previous range. Operating EBITDA is now expected to be $1.785 billion, an increase of $25 million from the midpoint of our prior guidance, reflecting our stronger third quarter results as well as increased productivity benefits as we exit the year. Our operating EBITDA growth represents about 40% incrementals and translates into margin of 24.8%, an 80 basis point improvement year-over-year. We continue to expect to fully offset higher input costs through pricing actions already taken. Our adjusted EPS at the midpoint of $7.50 is a $0.25 increase versus our prior guidance and represents a 22% increase compared to the prior year pro forma. Underlying business performance, coupled with the benefits from capital deployment, are driving the year-over-year increase. For the fourth quarter, our estimated net sales of $1.825 billion assumes organic growth of about 8% year-over-year, driven by continued strength in Healthcare, Aerospace and Industrial, Water end markets as well as pricing actions taken to offset higher input costs. As a reminder, our fourth quarter 2025 net sales included a headwind of $30 million or 2% from the order timing shift into the third quarter 2025 due to separation-related activities. Currency is expected to be neutral in the quarter. Operating EBITDA is expected to be $455 million, resulting in operating EBITDA margin of 24.9%. Adjusted EPS is expected to be in the range of $1.90 to $1.95 per share, representing an increase of 17% to 19% compared to the prior year pro forma. For the Healthcare & Water segment, we expect fourth quarter organic sales growth in the high single digits percent range, led by strength in personal protection, medical devices and industrial water market. For the Diversified Industrial segment, we expect fourth quarter organic sales growth in the high single-digit percent range on continued strength in aerospace and electric vehicle battery applications. Before I close, I want to recognize and thank our teams around the world. Our strong performance this year is a direct reflection of their dedication, exceptional execution and commitment to our customers. We have built strong momentum through the first 9 months, and we remain focused on carrying that momentum through the balance of the year. With leading positions in attractive markets, a strong execution mindset, and an exceptional team, I'm confident in our ability to finish the year strong. 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] And our first question comes from the line of Jeff Sprague with Vertical Research Partners.

[indiscernible] see the volume and the internal initiatives all kind of come in to...

Jeff, it's really hard to hear you.

How about that? Any better?

Much better.

Okay. Sorry about that. I wanted to see if we could unpack a little bit just kind of the impact of the internal initiatives on what's going on with margins relative to the volume lift you must be getting? And I'm sure you're -- you view yourself as relatively early in these internal initiatives. But maybe you could just give us a little perspective on the runway you have there.

Yes. Thanks, Jeff. Yes, we are seeing a lot of momentum on the productivity side that was a big piece of the improvement that we saw in overall EBITDA margins in the quarter of about 90 basis points on a pro forma basis. So off to a really great start. We've mentioned that we're targeting a net 3% productivity in the COGS, meaning that we would drive a net 3% reduction there outside, obviously, volume increases. So we're well on our way. In the quarter, we were a little over 2% net productivity, which drove about 100 basis points of the EBITDA margin lift that we saw in the quarter, which was slightly offset by some growth investments that we continue to make within the organization. So really nice improvement. It's really coming from many different levers, not only improvements in cost support quality and volume variance with being able to get more production off of the fixed asset base, but also on the procurement side, especially in a tough market where obviously there's a lot of oil and gas headwinds, we are driving procurement savings as well. And then from a top line perspective, really nice improvement in OTIF and defect rates. So we've made steady progress in OTIF. We target -- 95% is our ultimate target on a delivery to request date, not a delivery to promise, so even a higher bar for us, and we're in the low 80s now. So lots of room for improvement, but we've also made a fair band improvement. So we're really happy with the progress.

Great. And then maybe just a more near-term question. Just the water-related projects in the Middle East that were sort of a question mark. So how much revenue was that, that you pushed out of your '26 plan into next year? $25 million or so?

We actually pushed out about $15 million, Jeff.

$15 million. Great.

Our next question comes from the line of Scott Davis with Melius Research.

Congrats on a good couple -- several quarters in a row here of improvement. But look, I wanted to move over a little bit on the innovation side. Jeff took my question on quality and delivery, which I think is really important for you guys. But on the innovation side, it seems like something that's getting some sort of traction. Is it possible to kind of, I don't know measure it, I mean, I guess, when you talk about Vitality Index, sometimes that can mean different things to different people because you could just be adjusting a product a little bit. But are you seeing more of an impact on your growth or your margins on the new product flow? And that sometimes can answer that question a bit.

Yes, I would say it's both. So on the growth side, in our Vitality Index, which last year was about 35%, we're targeting a similar number for this year. The current mix is about 60% replace, 40% growth. So to your point, we need to continue to drive improvement to be able to see more roundly a 50-50 mix between grower and replace. So in the quarter, as we mentioned on the call, we were able to move our R&D investment more into the growth space, ultimately then leading to more growth coming out of the innovation engine. So we're seeing nice progress. We have a lot of work going on in the front-end space to be able to continue to see that improvement to get to a targeted 50-50. We've used a lot of AI pools. We have AI agents running in 2 of our businesses to be able to speed up the front end. So what used to take us about 3 months to move something from stage 0 into stage 1 is now taking about 5 days because of the improvement that we've driven on using AI and to be able to feed at that front end. So it's both a growth and a margin improvement story. On the last year's basis, we saw about 150 basis points of margin lift from the investment that we're making in replace. The replace is not only to keep our product relevant and differentiated in the market. It also helps us on the productivity side to be able to input lower raw material costs and be able to get those [indiscernible]. So that's primarily what we see on the replace side.

Okay. That's super helpful. And has that -- have you had to change the entire organization around how you really deliver that kind of product flow, getting closer to the customer or closer to the facilities. I mean, what -- I mean, DuPont, I think, historically, always centralized a lot of its R&D. Have you guys kind of culturally and physically change that?

Yes. So there's no -- there's really no centralized R&D anymore. It all fits within the businesses and under the businesses. P&L and responsibility. So that was one big change that we made several years ago that we've continued to keep in place because they obviously know what the customer wants, which sees our innovation engine. So that's been a nice piece of it. Another piece is really just around the discipline that we've introduced into the system. So we've got all the data in one place where we can see where we're making our investments and making sure that we're differentially investing. We spend about 2.5% of sales in total on R&D, and that's differentially applied to the different businesses to make sure that we're investing more heavily and those that have higher growth entitlement. So we've been able to look [indiscernible] investing our resources, making sure that we're investing them back to the 80/20 work that applies to R&D investment as well, making sure that the R&D is being invested into the [ AV ] and making sure that we grow the [ AV ] so that we can see overall lift improvement with respect to growth.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

So I just wanted to first touch on the revenue beat this quarter. I think it was a little over $30 million higher than what the guide was for the quarter. I'm just wondering, how much of that came from additional price that you put through versus just the volume recovery that you're seeing across on the end markets that you highlighted earlier?

Joe, its Antonella. So about -- of the $30 million or so, about $10 million came from incremental price that got put into place in the quarter and the other $20 million was more from volume.

Okay. Got it. That's helpful, Antonella. And then just a quick question. Obviously, nice to see the -- how aggressive you guys are being from a share buyback perspective, as we kind of think out beyond the fourth quarter, I mean, should we start penciling in at $250 million buyback? Just how are you guys thinking about that versus your other M&A priorities because I know you still want to change the mix of your business to be more health care and waterfall focused.

So Joe, I would say we do have a lot of financial flexibility given where we are. We have a nice position of cash on the balance sheet. And our net debt-to-EBITDA is at like 1.1x. So we have a lot of balance sheet flexibility as well. I view the buybacks as us being more opportunistic versus saying that we have an automatic $250 a quarter. So again, we have the flexibility. So given any timing of potential M&A, we'll determine how much we are doing relative to share buybacks. .

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

I had actually 2 for the D&I side. So maybe the first one just on -- on the construction piece, you seem to be doing a lot better than some of the other players in that end market. I guess can you speak to the drivers behind that? It sounds like some of it is around kind of maybe a better approach from a building envelope side. Just curious if that's the heavier weighting or if it's more about the specific end markets that you're maybe having access to, whether it's data centers or fabs or what have you, I guess, maybe just unpack some of the growth that you're seeing in that business for us, that would be great.

Sure. So let me -- there's a couple of things. Let me talk about here. So when you kind of take a look at our Building Technologies business, I would first say the team has done a really good job in what has been a relatively tough market, I would say, over the last 5 years at this point. So we are definitely outperforming the overall market based upon the weightings of where we play would suggest that the overall market is down low single digits, and our business has performed really well. I would bifurcate that between volume and price. So from a volume perspective, I would say we're expected to be relatively flat, and that's compared to a down market. And then we are getting pricing as well, which is really helping to drive the organic growth up. But where that's coming from the outperformance relative to the market is really in 2 factors. We have some share gains, and we also have some favorable mix as well. And just to unpack that a little bit more for you, when you think about the national builders and the large regional builders, we do see more conversions to our house wrap to Tyvek, that's clearly benefiting for us. And then also, we've talked before that we do have a nice presence in the multifamily. So within multifamily, increased penetration in that area typically brings, I would say, a broader bundle sale as well. So that's helping to drive the revenue as well.

Got it. No, that's really helpful color on it. And then I guess the second piece would be more on the industrial side. It's -- the last couple of quarters, you've kind of highlighted aerospace as kind of a big kind of crown jewel. I guess, can you help us to sell that business? And maybe think about the backlog that you see and how that may be playing out as we look out, say, into 2027?

Yes. So aerospace has done quite well for us. It's about $300 million or 3% of revenue or so, but really growing in the double-digit range and the backlog that we have is quite sizable as well. So this is one of our businesses across the whole portfolio, where we do have more visibility than others. So we generally can start each quarter with full order book and start each year with a pretty good sign of where we'll land. So we had highlighted on the call that a nice win we had with our Vespel business. We've got really great relationships with all the large OEMs. And on the Tedlar side, the same thing. So kind of Vespel is more within the engine, Tedlar is more within the body of the plane, and both of them are seeing a similar amount of kind of both low double-digit growth, and we continue to see that level of growth for the foreseeable future.

Our next question comes from the line of Chigusa Katoku with JPMorgan.

So my first question on the Diversified Industrial margins, I think they were especially stronger than what I had expected. Understanding you're driving a lot of good productivity. Just curious to know what drove the outperformance? And then I think it's just expected to step down sequentially in the fourth quarter. So what's driving that too?

Yes. We've seen really nice margin improvement within DI every quarter this year. So part of it is a little bit of favorable mix. Obviously, the conversation you just had with the with the low double-digit growth within aerospace that does have a really nice margin portfolio for us to be able to drive improvement. And the other piece is just the focus on productivity in 80/20 that we're feeling within that business. And so we've called out a few times the opportunities that we have from an 80/20 perspective that we've been piloting within best businesses within DI. So we continue to believe that we'll see a few million dollars of benefit this year from the 80/20 work and then kind of a runway to tens of millions on the initial scope that we first put in place, which is about $700 million of revenue. We've since expanded that 80/20 work the moly coat business, which is about a $200 million business, and we see a few million dollars of opportunity there on the pricing side where we put the 80/20 methodology should work. So just really nice improvement, really nice focus on productivity. We've had some businesses that have had assets that have run sold out and driven cycle improvement within capacity release that have helped the margin profile as well.

Okay. And then as a follow-up on the pricing side, I think you just earlier mentioned about $10 million of incremental price this quarter. So I guess, a few bps was pricing closer to maybe 3% this quarter. Are you offsetting inflation on a dollar per dollar basis or maybe better? And then how should we think about it heading into next quarter?

Yes. So we are offsetting inflation on a dollar basis. I would say, for the full year versus the $90 million of pricing we had previously discussed, that's now closer to $110 million. So you could expect that the fourth quarter pricing will be pretty similar to kind of the third quarter pricing that you're seeing as well. And again, obviously, the team continues and will continue to, if prices continue to move to take action to make sure that we continue to offset any incremental costs.

And our next question comes from the line of Chris Parkinson with Wolfe Research.

Just wanted to drill down a little bit more into Healthcare Tech. You've been consistently citing basically broad-based strength across the portfolio. But for intermediate and long term, do you see any kind of further divergence between kind of the personal protection market versus more of the med packaging? It seems like there's some kind of some newer products in there that could actually affect the growth rate. Just trying to get to the heart of kind of the longer-term growth algo within that business by subsegment?

Yes. So we can -- there is a bit of a bifurcation underneath the Tyvek business in general, which is what you're referring to. So we've got -- and broadly in healthcare, there's 5 [indiscernible] which is about $1 billion and the remaining $800 million or $900 million or so is the med device businesses with Liveo and Spectrum. So on the Tyvek side, the med packaging is about half of the revenue and the garment is about the other half. So garments will generally grow alongside industrial production, give or take, so in the 2% to 3% range and engine med packaging will more be along the surgical procedures, which are in the mid-single-digit range. And so we've got a nice opportunity to continue to drive expansion in both. So we talked about Tyvek with Renewable Attribution on the call that will give us more profile that is in line with the sustainability initiatives of our customers. And on the garment side, we've talked in previous calls about the Apex garments, which are coming out that provide more comfort and flexibility and breathability that will allow us to be competitive within the garment space. But overall, the net high back should be butting up against 4% from a volume perspective and then we obviously expect to drive above-market growth just based on the investments that we're making in the business but they'll generally be about 2% to 3% alongside industrial production for garments and then in the 5-ish percent range for the med packaging side.

That's very helpful. And just as a follow-up, Lori, we're exactly one year more or less away, following the Qnity [indiscernible]. I think everybody always focuses on the company that's been put out and the opportunities for independents. I'd love to give you the opportunity to say, what have you been doing differently? What are you satisfied with year one in terms of the more nimble industrial portfolio? And what should we be looking forward to for '27 and '28?

Yes. So it has been a year, November 1, and -- both of us [indiscernible] really a great start. So Qnity continues to produce really, really strong top line growth. They're squarely in the AI data center trade, and they have a lot of runway on the multiple side. So they should be up with Entegris in my opinion. So they've got a lot of room for opportunity to drive. On the DuPont side, I'm super proud about what we've driven out of the gate as well. So we are at the top end or above our medium-term targets that we just put out a year ago on all metrics on growth, on margin expansion, on EPS and on free cash flow generation. So off to a really great start. And what makes me the most proudest is a nice mix of both the top and the bottom line. So if is driving growth. It's really focusing on our innovation excellence and in our growth rooms and our commercial excellence opportunities that you're seeing play out, especially in a pretty choppy market. So you consider that we've got 4.5% organic growth this year. We still have about 40% of our portfolio that's down on the construction side and the automotive side. So when you look at those 2 markets, low single-digit declines in both. And we're still posting 4.5% growth kind of speaks to the quality of our portfolio on the group side. And then on the productivity perspective, I would say we're a little ahead of where I would have expected to be. So we said 50 to 70 basis points or so a year of annual lift, and we're sitting at 80 with a headwind of about 40 from price cost. So really nice strong performance out of the gate. So I'm just really proud of the team. I see a lot of momentum going forward. We've got a very energized quite [indiscernible] team to be honest. So I'm really happy with where we're sitting.

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