DuPont de Nemours Q1 2024 Earnings Call Transcript

Good morning, Jeff.

Yeah, Jeff. So the cost actions we took, the bulk of them will stay in place. I would say out of the $150 million we did in -- we announced in November, we'll get about $100 million of that cost savings this year. And I would say out of the $150 million though, if you get into 2025 and we're really cranking along in all our end markets, we probably bring back about $30 million or $40 million of cost, which is kind of on the factory footprint side, where we'll need to add a little bit of cost there. So that would be it a little bit probably in 2025 on comp because we didn't payout at 100% on our bonus plans and probably won't be -- it could be 100% this year. So maybe that comp year-over-year won't be that different, but certainly from last year 2023, there's a little bit of that headwind there in '24, potentially not in '25.

Incrementals in the second half of the year, maybe just give you that for us as we start bouncing back here. Remember, we get some absorption benefit, obviously, because of the improvement in our sales rate, our incrementals are planned to be around 56% in the second half of the year. And I also think, Jeff, we've derisked the second half of the year now with the baseline we're working off of now. We only have to ramp $340 million in sales first half to second half, which is 6% and our EBITDA is planned in our guidance to ramp about 14% that gets you the 56% of incremental. So I think it's significantly derisked from potentially where we were.

Yeah, the 56% is first half, second half. If you look at our margin profile in the second half versus the first half in the implied guide, it is up, you know, almost 200 basis points, the low 25% range, which is a nice tailwind as we head into 2025.

Yeah. And Jeff, maybe just one other because the electronics is bouncing back nice. We've always consistently quarter in, quarter out ran that business at like 31% to 32% EBITDA margins. And going forward, remember with Spectrum in there, we press the EBITDA margin just because it's a great business, but they're a little bit lower than the average. So it brings it down like 100 basis points. But having said that, we should be able to run that business as we're cranking back at like 32% EBITDA margin as we get into 2025.

Yeah. Well, Jeff, usually the price down is a 1%, that's kind of what we've averaged. So it's not really significant. Having said that, more and more of this portfolio over the next set of years is going to be advanced nodes with all the AI coming. And by the way, the AI then moving down into mobile devices. So -- and as you know, we're advantaged there. That's how we always outgrow MSI by 200 basis points to 300 basis points. So as more of the business skews there, that helps our margins just from a mix perspective, but we also get price on the more advanced platforms that we have in electronics. So ICS will probably still lose price. That's more our PCB stuff there with the laminates and displays and all that. We'll lose a little bit of price, but I got to think we'll do a little better on the chip side.

Yeah, thanks, Jeff.

Your next question comes from the line of Steve Tusa of J.P. Morgan. Your line is open.

Hey, good morning, Steve.

Yeah. No, I think it was more of a reflection of the over delivery of Q1. So originally, when we said a 10% sequential lift, we were guiding to Q1 of $610, so would have got you roughly to $670. So delivering the $682 mutes the ramp a little bit, but we still are now at $710 versus the original $670. So actually some upside to the expectations that we had backin February when we gave that number.

Steve, it's pretty much as we said last quarter, shelter will be up sequentially first to second, mostly because of seasonality, but that clearly had bottomed-out already the water -- by the way, we just had our manager of our water business over in China the last two weeks and they're saying they're going to start placing more orders towards the back end of this quarter. So that feels the same. Same with the healthcare medical packaging business towards the end of this quarter, beginning of next quarter. And the only two that are delayed on their bottom by the way, but they haven't recovered yet, but this is no change from what we said before is our biopharma business looks more like the back half of the calendar year and our business looks like a second half recovery. So pretty much in-line. By the way, the one other bright spot I liked, we had been negative on growth in China through last year and we had 3% growth in China. So that market has been slowly turning back up for us. And by the way, that 3% was predominantly because the electronics business turned, we were up 15% in E&I in China in the first quarter. So that's turned nicely for us. And our semi customers in China were ordering at about that -- was about that same rate, sales rate, about 15% growth including the local China semi customers, not the multinational. So that was good to see.

Yeah, we did have a little more favorability than what we thought in Q1 that we believe will hold for the year that contributed partially to the Q1 beat. So if you look at the -- the Q1 beat, it was about $110 million or so on revenue and then about $70 million on earnings. So obviously, we got some upside there outside of volume and that was primarily better price-cost spreads.

Thanks, Steve.

Good morning, Scott.

Yeah. So the AI -- so the data center size for us is about $700 million of our revenue and $250 million of that, a ballpark, it's kind of hard to tell exactly, Scott, but about $250 million is AI specific and that is growing north of 20% right now that base. And I do think it's skewed -- look, I think we're going into a super-cycle in semiconductor here over the next decade because of all this AI. And remember, the AI now everyone is going to push it down into your devices. So it's going to be a pretty broad-based growth market. My gut is in next year, I don't want to get into the forecast yet for 2025, but I got to imagine the E&I business is going to grow high-single-digits in 2025. And, you know, were expecting fab utilization to exit -- starting the year in the low 70s, exiting the year in the low 80s. And I would think we're probably in the low 90s by the middle of next year and that would give us that high single-digit growth rate. And then the AI chips, by the way, really help us because it's our -- it's a higher-margin business in our mix. So it should tee up for a really nice 2025. But that market is going to continue to grow north of 20% here and it's -- it's got a long-cycle coming up.

Yeah. So it wasn't one customer, Scott, just to clarify, I don't know if you meant it that way. We have many distributors, but four main distributors in China that do the bulk of our business that we don't do direct, by the way. We do a lot of direct business too. And I think what -- I mean, what they verbalized us obviously and again, our team was just there with them this past week is industrial production slowed down, they were ordering at a higher rate and they had to go through a destock. And the destock by is not as long as some of the other destocks. It looks like if it's ending here at the end of this quarter, it was about five, six months of kind of working their inventories back down. So we think we're in pretty good shape going into the third quarter here. And again, we expect orders to start coming in kind of in the June timeframe to start picking up there. So it's more of the macro more of the macro, I guess, I would say, Scott.

Thank you.

Okay. Thanks.

Yeah. So we continue to see strength on the EV side of auto. So as you had mentioned, overall auto builds are weaker right now, but there's still a lot of upside within the EV side. So that was up double-digits in the quarter and we expect that to stay for the year. A lot of the upside in the volume in the quarter came from Tedlar, which is in the photovoltaic space. So we had really nice volumes within Tedlar that gave us the 1% organic for the quarter.

What do you -- Chris, maybe just high-level that if you go back to the middle of last year, the PCB utilization rates were kind of all the way down in the mid 40s. In the first quarter, they're kind of in the mid-50s. We think, we exit the year in the low 60s. And so in the second half of the year will kind of be in the low 60s. And normal, by the way, for PCB utilization rates is kind of low 70s. They never run in the 90s like the 70s do. So you can kind of see the progression of that plan out here kind of over the next year.

Yeah, we continue to see wins within the metalization space more on the circuitry side. So we've seen a nice volume lift in the -- in the first-quarter and we expect that to be maintained for the rest of the year. We have had some share gains outside of that in the premium smartphone space on both the phone side and then the other device side as well with PCs and others.

Yeah, we still see the entitlement for W&P margins in that 27% range. And so as you know, they've been challenged in the first quarter, really a function of the lower volumes. There's a lot of heavy assets in that business that take a hit when the volumes are down. We've done a nice job controlling cost to minimize the decrementals to low levels, but that is impacting it. And then the larger impact comes from just the mix side. So the tieback business is down primarily because of the medical packaging destock that's going on that we expect to start to see resolution here at the end of this quarter and then improvement as we head into the back half. And so when you start to see those two items weighing, we do see nice margin improvement first half, second half. So the first half margins will probably stay at that 23% level and then we see them ticking up about 100 basis points as we get to the back half of the year.

Thanks, Chris.

Yeah. David, no change on our thinking on the back half. It's just -- as I said earlier, I feel good we've derisked the ramp in the year. So I don't feel any different about it. And hopefully, it ends up being a little bit conservative, but...

Yeah, nothing significantly new there, David. My -- the next thing coming up is the -- that we would want to settle is the state AG cases. I don't think that will be a 2024 event. I think it's more of a 2025 event. And then there's probably a couple of states that we will settle separately from the class action. It's where we had locations set. And so I think you might potentially see one or two of those get settled maybe during this calendar year. So that's where it's at. I think, David, the good news that with the settlement -- by the way, the other settlement is done now, the water districts is totally done signed off by the judge. And I think the nice thing about that when it comes to all the firefighting film is that it became very clear in that litigation and in what was written about it that the exposure of the consortium of Corteva, DuPont, and Chemours is 3% to 7% of the total exposure. And then remember, DuPont is a third of the 3% to 7%. So I think that helps box in what these numbers are going to be as we settle the other cases.

Thank you.

Good morning.

Yeah. So yeah, we delivered flat price overall in W&P in the quarter. We still have some expectation to give back 1% or 2% primarily in the shelter business as we go throughout the year, but we have done a really nice job, as you had mentioned, holding on -- holding on to price.

Yeah, right, right on what we told our Board. It's nice to see that they are basically not going through a destock, which is good. And they -- I think we've told you this before, we -- the business is growing nicely, but there's also a major ramp going on with one key medical device company and that ramp is -- by the way, it was a very significant ramp. So we were -- that was the one area we've been watching really close and they are ramping very nice with that customer more -- it's more of a manufacturing ramp we had to go through that was pretty significant and that's on track also. So feeling good about that. And it's clearly an area we like, you know, between -- it's between Tyvek medical packaging of the Spectrum business and the Liveo business, it's a really nice percentage of our portfolio now as we mentioned in our prepared remarks. So it's 10% of the company and it's just a nice end market, stable end market to be in with a very solid steady growth rate. So we're really liking that business.

Yeah, I would say -- so we're not planning on any acquisition this year. But if we -- if when we do one, I would think it's more in the tuck-in size. We're not looking at anything big. We would love to add to the healthcare platform. And there's a fair amount of what I call tuck-in opportunities there. So I mean, it's possible we could do one this year, but it's not really in our plans. Our team, Lori and I have said that the team is all hands-on deck operationally as we were going through the destock and that was our focus area. We still have an outstanding ASR for -- we just completed the $1500 million ASR. We have one more to do. So we would plan on doing that obviously this year. And then after that, I think will it be a nice mix of some tuck-in acquisition. And depending where our stock price is, you know, I've always been a pretty big share repurchaser when I feel our stock or multiple is not where it should be. So I don't think you'll see any change in our thinking there.

Thanks, Josh.

Yeah. In the guide that we gave, we do see a return to volume growth in the second half. It ramps as you go from 3Q to 4Q, really just a comp because 4Q was our weakest quarter last year, but yet we will be returning to growth from both a volume and an earnings perspective in the second half.

Yeah, no change there. So the volume uptick that we saw in China in the first quarter was primarily E&I, as Ed had mentioned, we are up kind of mid-teens for volumes in China. We still do see industrial weakness that's impacting W&P, primarily in the water space. So no change to our expectations. But we will get the orders in from the key distributors towards the end of this quarter and be able to ship those to see a ramp sequentially in water and then a further ramp as you head into the second half.

Yeah, I think we'll be at or near our target of greater than 90%. So I was really pleased with the Q1 performance of 86%. That's a sizable improvement from where we were last year, which was around 45%. I do expect to take a little bit of a dip down in Q2 really reflecting the payment of our biannual interest expense. So that's about $200 million. We pay it in May and in November. So we'll see a headwind in Q2. But overall, I expect us to deliver nice -- nice free cash flow conversion for the year really around the target.

Yeah. We expect overall China to be both pricing, volume and currency headwinds about flat for the year. So as you had mentioned, the Q1 numbers, we were up in volume, but overall, it was about flat with the currency headwinds. So yes, improvement in volume that we expect to see, and then some currency headwinds as the year goes on.

Thanks, Frank.

Let's go to the next one.

Yeah. I mean, I think the history has been impacted a lot by COVID. So we saw a unwind of the garments that were a sizable benefit during the 2020 time frame than you saw an unwind -- not unlike most of the peers out there that saw a run-up from the garment perspective. And then once we move through that, then we transitioned into the general industrial destock. So I think we need to look into 2025 to really get a good read on the volumes in that business. And right now, we're expecting low to mid-single digit volume growth in 2025 off of a more normal macro. So no concerns overall around the efficacy of those products in the market. It's really just getting beyond those chunky one-timers around COVID and then the broader industrial destocking to be able to see the true growth profile of that business.

No, I mean, in fact, in Tedlar, we're actually seeing some questions around it is a PFAS free. So there's some opportunity there to maybe pickup some share on the Advanced materials side or the PV side and be opportunistic. So no direct feedback from customers. And obviously, we published our sustainability report earlier this week. There's a lot of examples in there around our commitments to that as well as just overall water -- water key drivers around the sustainability footprint.

Thanks, Steve.

Yeah. The good news on the E&I side, by the way, which is very different than the W&P side is they're not heavy assets. More of our CapEx on the electronics side, Laurence, actually goes into our testing equipment. We have to have very state-of-the-art testing equipment in the key regions where our customers are. And so that's where we'll add some CapEx over time. But we kind of modularly upgrade the electronics manufacturing locations. So that's not going to be a big capex spend for us. But my gut is we'll be looking at some expansion work here as we see this kind of super cycle coming on the semi side. So that's -- if by the way, if this were like our business, as you know, we're launching line 8 over in Luxembourg. We've already done our first test runs of product, by the way, which is going very well. Well, but that project was $450 million. We don't have anything like that on the electronics side. So that's good and it's quicker to upgrade the manufacturing capacity also in the electronics side. So we'll stay on top of that as we see this growth over the next 30 years come.

Thank you, Laurence.

Okay. Thank you everybody for joining the call. We appreciate your interest and as always, we'll post a copy of the transcript on the DuPont IR website. This concludes the call. Thank you.