DuPont de Nemours, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to the DuPont First Quarter 2024 Earnings Call. [Operator Instructions]
Good morning, and thank you for joining us for DuPont's First Quarter 2024 Financial Results Conference Call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer.
Good morning, and thank you for joining our First Quarter 2024 Financial Review. Our results for the period exceeded our expectations, driven by better-than-expected volumes in all segments. Broadly, the first quarter confirmed that we are past the bottom in electronics and on the road to recovery. Our Semiconductor Technologies business reported sequential sales growth of 8% in the first quarter and 10% year-over-year, driven by a pickup in the underlying chip demand and normalization of customer inventory levels, both slightly earlier than expected.
Thanks, Ed, and good morning. Our first quarter results were clearly encouraging with further signs of electronics recovery matched with bottoming across our industrial-based end markets. Additionally, our commitment to drive productivity and operational excellence has minimized decremental margins and has helped to produce significant cash flow improvement in recent quarters. Our results have and will continue to benefit from the restructuring actions announced last November.
Thanks, Lori. I'd like to note that we published our annual sustainability report earlier this week, highlighting the work of our global team to meet our commitments across all aspects of ESG, and I'm pleased with the progress and speed with which we are advancing our 2030 goals. There are 3 dimensions to our sustainability strategy: innovation; protecting people in the planet; and empowering employees and communities. I'd like to mention just a few recent accomplishments.
[Operator Instructions]
Ed, good to see the bottom is apparently in here. And really, the nature of my question is you did a lot of hard work trying to protect margins and minimize decrementals through this protracted period of volume declines. Now that we're heading the other way, I just wonder if you could give us any perspective on, I don't know, costs that need to come back or how you feel about structural costs. And maybe the punch line is just a little bit of guidance on your incrementals as we think about volumes going the other way in E&I.
Yes, 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 and 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, as you get into 2025, and we're really cranking along in all our end markets, we'd probably bring back about $30 million or $40 million of cost, which is kind of on the factory footprint side, where it will be a little bit of cost there, so that would be it.
Yes, and 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 almost 200 basis points in the low 25% range, which is a nice tailwind as we head into 2025.
Yes. And Jeff, maybe just one other because the electronics is bouncing back nice. We've always consistently, quarter in, quarter out, brand that business at like 31% to 32% EBITDA margins. Going forward, with Spectrum in there, we'd pressed the EBITDA margins 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.
Great. And actually, the follow-up question that's going to play into the margin calculus also, you just think about kind of electronics over time, parts of it sort of being a price down market naturally -- nature of the business. But when we think of some of the more sophisticated things going on in Semi and the like and maybe other places in the E&I portfolio, how do you feel about your ability to get price or to avoid price down over time in these businesses?
Yes. Well, Jeff, usually, the price down is at 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. And as you know, we're advantaged there. That's how we always outgrow MSI by 200 to 300 basis points.
Your next question comes from the line of Steve Tusa of JPMorgan.
I think you guys had said you expected like a 10% sequential bounce off the first quarter. This is a little -- the EBITDA -- I mean, good first quarter, but the EBITDA quarter-over-quarter is a little bit lower than that, more like 4%, 5%, I guess on your guide. And anything that changed that view? Was there anything pulled forward in the first quarter that kind of takes out of the second quarter or just conservatism?
Yes. No, I think it was more a reflection of the overdelivery of Q1. So originally, when we said a 10% sequential lift, we were guiding to Q1 of $610 million so would have got you roughly to $670 million. So delivering the $682 million mutes the ramp a little bit, but we still are now at $710 million versus the original $670 million, so no, actually some upside to the expectations that we had back in February when we gave that number.
Okay, that makes sense. And is there anything that is a little worse than you would have expected? It seems like obviously, electronics is coming along really nicely. The other stuff may be a little more sticky on the Industrial side. And anything that is kind of standing out as just not coming along as you would have expected on the Industrial businesses recovery?
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 to water. By the way, we just had our manager of our Water business over in China in the last 2 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.
Okay. And then just last quickly, any updates on price raws spread for you guys? I know it's less important these days but any update there?
Yes, we did have a little more favorability than what we saw in Q1 that we believe will hold for the year that contributed partially to the Q1 beat. So if you look at 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 spread.
Your next question comes from the line of Scott Davis of Melius Research.
This may be hard to define explicitly, Ed, but you've mentioned a couple of quarters in a row the AI chip and data center benefit in E&I. Help us understand materiality when you think about new chip designs and such and the content of your product that's going to be needed. Does it structurally raise the growth rate, do you think, over, call it, a 5-year period? Or is there enough stuff get cannibalized and it kind of nets out to a slight positive? But perhaps, I don't know, I just have no idea so I'll ask you.
Yes. So the AI -- so the data center size for us is about $700 million of our revenue and $250 million of that ballpark, it's kind of hard to tell exactly, Scott, but about $250 million of that is AI-specific. And that is growing north of 20% right now, that base. And I do think it's -- 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.
Okay, so material for sure. So just to back up a little bit in Water Solutions in China. I know it's not -- it's a little minutia. But was there a prebuy or some sort of, I don't want to call it channel stuffing, because that's not what I mean? But was there some sort of weird behaviors that, that customer ended up with so much excess inventory? Is it purely just the macro turned a little sideways or down on the folks in there caught with extra inventory?
Yes. So it wasn't one customer, Scott, just to clarify. I don't know if you meant it that way. We have...
No, I didn't mean it that way.
We have many distributors, but 4 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. I think what -- I mean, what they verbalized to us, obviously, 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.
Your next question comes from the line of John Roberts of Mizuho.
Just one for me. Maybe Lori, you could give us an update on adhesives multi-base in Tedlar. I would have thought they'd be down like your Industrial segment and they've got some auto exposure there, which was probably weak. But actually, corporate sales were up 1% year-over-year. What's going on there?
Yes. 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.
Your next question comes from the line of Chris Parkinson of Wolfe Research.
Just want to turn on the ICS side. You've seen a bit of a market share shift between Chinese OEs versus the Americans and the Northeast Asians. And I know you have exposure everywhere. And at the same time, you've also seen an increase in the sophistication of Chinese handsets. So can you just kind of parse through that in terms of where the market is right here, right now and how the Street should be thinking about your relative content exposures and how we should think about that business recovering throughout '24 and perhaps '25?
Well, I'd give 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 -- in the second half of the year, we'll 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 semis do. So you can kind of see the progression of that plan out here kind of over the next year.
Yes. We continue to see wins within the metallization space more on the circuitry side, so we've seen a nice volume lift in the first quarter, and we expect that to be maintained for the rest of the year. And we have had some share gains outside of that in the premium smartphone space on both the fulfillment side and then the other device side as well with PCs and others.
Got it. Lori, you know my favorite question as a follow-up is on W&P margins. I mean, obviously, over the last few quarters, there have been a bunch of put and takes, inclusive of the destocking. But with that progressively improving throughout '24, can you help us just give us the latest and greatest on how you're thinking about the long-term margin optionality in terms of op efficiencies, leverage, mix, so on and so forth?
Yes. 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 costs to minimize the decrementals to low levels, but that is impacting it. And then the larger impact comes from just the mix side.
Your next question comes from the line of David Begleiter of Deutsche Bank.
Ed, you only raised the full year guidance by the amount of the Q1 beat. Is that because it's still early in the year or are you a little more cautious on the back half demand environment?
Yes, 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 no, I don't feel any different about it. And hopefully, it ends up being a little bit conservative.
Very good. And can you just provide us another update on PFAS right now?
Yes, nothing significantly new there, David. The next thing coming up is the -- that we would want to settle is the Stade 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. 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.
Your next question comes from the line of Mike Leithead of Barclays.
First question I wanted to ask on W&P, I wanted to ask about price. It seems like it's holding in, I'd say, fairly well despite double-digit volume declines in the past few quarters. So what's your expectation for price? Should we expect this to stay relatively flat as we move through the year?
Yes. So yes, 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 to price.
Got it. That's helpful. And then bigger picture, Ed, how is Spectrum performing relative to your initial expectations?
Right on what we told our Board. It's nice to see they are basically not going through a destock, which is good. And the -- 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. 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.
Your next question comes from the line of Josh Spector of UBS.
I was wondering if you could talk about your expectation on buybacks versus M&A. I know you talked about no M&A in 2024 kind of through the September period. Can you extend that through the rest of this year and maybe think about '25 in terms of your total capital allocation?
Yes. I would think -- so we're not planning on any acquisition this year. If we -- 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 health care platform. There's a fair amount of what I'd 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.
Your next question comes from the line of Michael Sison of Wells Fargo.
This is Richard on for Mike. So I just wanted to ask in terms of the guidance for the full year and what you're seeing in terms of demand and destocking coming to an end, should we expect year-over-year volume growth starting in the third quarter? Or how are you looking at volumes in the second half of the year?
Yes. 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 yes, we will be returning to growth from both a volume and earnings perspective in the second half.
Okay, great. And then just in terms of your comments on China recovery, was that more specific to E&I? Or maybe if you can talk about what you're seeing on the Water Solutions side because you do find that industrial demand remains weak in China, but I guess you're saying it's recovering better than you thought?
Yes. No change there. So the volume uptick that we saw in China in the first quarter was primarily E&I. As I 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 that 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.
Your next question comes from the line of Frank Mitsch of Fermium Research.
Lori, if I could follow up on a free cash flow question. What are your expectations? You did 86% free cash flow conversion in 1Q. What is your expectations for 2024?
Yes. 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 it to deliver nice free cash flow conversion for the year really around the target.
Terrific. And Ed, you commented multiple times on how progress -- that you're seeing the progress in Asia, especially in China. The year-over-year negative deltas has been lessening down to 4% organic decline in 1Q. Are you anticipating that to be flat or up in 2Q and beyond in terms of the year-over-year comp?
Yes. We expect overall China to be both price and volume and currency headwinds about flat for the year. So as you had mentioned in the Q1 numbers, we were up in volume. But overall, it was about flat with the currency headwinds. So yes, an improvement in volume that we expect to see and some currency headwinds as the year goes on.
Your next question comes from the line of Stephen Byrne of Bank of America.
The 3-year stack on volumes in your Water & Protection segment is flat. The losses over the last 4 or 5 quarters essentially offset the gains in 2021 and you had kind of flat volumes in '22. So just a question about that. Do you see that as suggesting just modest underlying volume growth? Or do you think that there might be some losses to generic products in that segment? And did you have visibility on those inventory levels that were -- that have been destocked now?
Yes. I mean, I think the history has been impacted a lot by COVID. So we saw unwind of the garments that were a sizable benefit during the 2020 timeframe when 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 moved 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 then Kalrez and Tedlar, these are both
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 pick up some share on the Advanced Materials side or the PV side and be opportunistic. And I know directly back 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 key drivers around the sustainability footprint.
And our last question comes from the line of Laurence Alexander from Jefferies LLC.
Just a quick one on the electronics side. How far do you see the growth trajectory for that business? Or how much can you expand it before you need to do a significant round of CapEx additions?
Yes. The good news on the E&I side, by the way, which is very different than the W&P side, 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 can kind of modularly upgrade the electronics manufacturing locations. So that's not going to be a big CapEx spend for us.
There are no further questions at this time, so I'd like to hand the call back to Chris Mecray.
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.
That does conclude our conference for today. Thank you for participating. You may now all disconnect.