On the DuPont Second Quarter 2023 Earnings Call, Chris Mecray welcomed everyone and instructed them to refer to the slides posted on DuPont's website for more information. He then handed the call over to Ed Breen, Chief Executive Officer, to review the financial results. Lori Koch, Chief Financial Officer, also joined the call. The call contained forward-looking statements and other non-GAAP measures, and a reconciliation of these to the most directly comparable GAAP financial measure was provided in the press release and presentation materials.

In the second quarter, the company reported organic revenue decline of 4% and mid-teens organic declines in the Interconnect Solutions and Semiconductor lines of business. Despite the decline, operating EBITDA, operating EBITDA margin, and adjusted EPS were all up sequentially from the first quarter. The company also announced the completion of the Spectrum acquisition, which is expected to increase topline growth and expand their Industrial Technologies growth pillar, while adding to their current offerings in the high-growth healthcare market.

Spectrum has been integrated into Industrial Solutions, increasing total revenue in healthcare markets to 10% of the portfolio with expected growth rates above the company average. The operating EBITDA margin is estimated to be 22%. The Delrin business divestiture is expected to close around year-end 2023 and the $3.25 billion accelerated share repurchase transaction is expected to be completed within a month, followed by a new $2 billion ASR. The settlement with the water district is expected to be finalized shortly, with a portion of the settlement being $400 million. This completes the deployment of excess cash from the M&M divestiture.

Ed discussed the company's capitalization and its lack of debt maturities until 2025, and the growth that is expected in the semiconductor industry, desalination, and electric vehicles. Lori then reported the company's financial results, noting that net sales decreased 7% as reported and 4% on an organic basis, with a 1% headwind from dollar strength and a 2% headwind from portfolio changes.

In the second quarter, organic sales declined by 4%, with a 6% volume decline partially offset by a 2% pricing gain. Europe sales were up 4%, while North America and Asia Pacific were down 3% and 8%, respectively. Operating EBITDA decreased 11% due to lower volumes and reduced production rates, while operating EBITDA margins were down 110 basis points. Adjusted EPS was down 3%. Decremental margins for the quarter were 40%, excluding the impact of absorption headwinds.

This paragraph discusses the cash performance of the company and the changes made to improve visibility into cash flow generation. It reports that adjusted free cash flow was $277 million and associated conversion was 73%, which reflects significant improvement versus last year. It also mentions that optimizing cash flow is a top priority and that adjusted EPS for the quarter was $0.85, which decreased 3% compared to the year-ago period. Lastly, it mentions that net sales for the E&I segment decreased 14% and organic sales declined 12% due to lower volume, currency headwinds, and an unfavorable portfolio impact.

Semiconductor Technologies and Interconnect Solutions both saw a decrease in volume from the year ago period, with Semi Tech's decrease being due to weak end market demand and inventory de-stocking, and Interconnect's decrease being driven by weak demand for smartphones, PCs, and tablets. Industrial Solutions saw flat organic sales due to pricing and strength in broad-based industrial markets being offset by lower demand for consumer-driven areas. W&P's second quarter net sales were flat, with organic sales growth of 1% being offset by currency headwinds, and a 4% decrease in segment volumes due to declines in shelf care solutions.

In the second quarter, Water Solutions saw mid-teens growth due to demand for water filtration, carryover pricing, and volume strength in Kevlar and Nomex. Shelter Solutions saw a 12% decline due to softness in construction markets and de-stocking. Operating EBITDA for W&P was up 6% and operating EBITDA margin increased 140 basis points. For the third quarter, Electronics Solutions is expected to see mid-single-digit sequential growth, while Water Solutions is expected to see slower demand in China. Consumer electronics demand headwinds in China have tempered the rate of second half growth.

The Water business in China is experiencing softness due to a slowdown in the industrial economy. The company expects growth to be slower in the second half of the year compared to the double-digit growth seen previously. However, they believe there will be an improvement in the growth rate in the future.

Ed Breen explains that the Interconnect Solutions business started to decline and destocking began around the middle of 2022. He states that the bottom was hit in the second quarter, and they are expecting mid-single-digit growth in the third quarter. He also mentions that the semiconductor industry is expected to hit its inflection point in the fourth quarter, although it is difficult to predict when exactly that will happen.

Ed Breen and Lori Koch discussed how they are in a better position than last year in terms of market share for cell phone models, with their Kapton technology for 5G antenna being a key component. They also revised their expectations for the second half of the year, expecting smartphones to be down 5% and PCs to be down low double digits.

Ed Breen stated that the Water Solutions business is consistent, growing at mid to high single digits, but can be lumpy. The third quarter is expected to have growth, but lighter than the second quarter. China activity is expected to pick up and there may be some excess inventory. Overall, the business is expected to have 6%-8% growth when smoothed out for the year.

Ed Breen has stated that Delrin will be a private equity transaction and that they are confident that they will close the deal by year-end. He also mentions that the 3M PFAS settlement has faced challenges, but they do not anticipate the same for their settlement. He expects to receive preliminary approval from the judge soon, and the payment will be made approximately six months after.

Ed Breen and Lori Koch discussed the raw material outlook for the year, which is a $140 million headwind between price and raws. This is an increase from the $100 million they had initially estimated. Natural gas prices have dropped from the peaks of last year, and the supply chain is stabilizing. They are expecting to benefit from deflation, but the timing of when it drops into the P&L is uncertain. Ed Breen and Lori Koch meet regularly to discuss the impact of procurement on 2024.

Ed Breen and Lori Koch discussed how Spectrum would affect their third quarter and 2023 guidance. They estimated that Spectrum would add around $200 million in sales at a 22% margin, with two months in the third quarter and three months in the fourth quarter. They also mentioned that they had to raise prices significantly in construction-related markets due to raw material prices last year, and they anticipate giving up some of that pricing in the second half of the year.

Ed Breen and Lori Koch discussed the Corporate and Retained business, which had a better performance than usual. This was driven primarily by the EV growth in the overall Auto build. Breen also discussed the production rates being reduced to manage inventory, and the potential drag this could have on earnings. Working capital is expected to finish out the year strongly.

In the third quarter, the company is planning to take an absorption of $40 million in the third quarter and $40 million in the fourth quarter. The company saw a reduction of $80 million in inventory in the second quarter and is looking to continue to reduce it in the back half of the year. The third quarter is typically the strongest quarter for cash generation due to no interest payments. The company will move to a continuing ops basis presentation in cash flow to remove the noise from the discontinued ops components. For 3Q, the company is expecting organic sales and EBITDA to remain flat, but ICS to be up mid-single digits, with raw materials potentially being better due to health.

Lori Koch and Josh Spector discuss the three biggest items that could keep EBITDA flat versus having it up sequentially on an organic basis: water deceleration, price moderation in the shelter business, and small destocking within biopharma. Additionally, Lori Koch mentions that there will be a tailwind for them in 2023 due to the absence of absorption headwinds in ICS and semis.

Lori Koch explains that the majority of the sundry expense is not related to operating investments, but rather to interest income and gains on asset sales. Koch goes on to explain that the company has been aggressive in controlling discretionary spending to minimize decrementals. This has included a small restructuring to reduce headcount, as well as reductions to annual discretionary consultations and bonuses.

Ed Breen reported that the company has been controlling their travel and entertainment budgets, and there will be no bolt-on M&A activity for the rest of the year or into next year. Frank Mitsch asked about Auto Adhesives, which is still in the corporate line item, and Breen responded that it is not a candidate for divestiture and is very core to the company.

Ed Breen is asked about the EPA's estimated several thousand water districts that need to comply with the proposed MCLs. He believes that the settlement could be approved in six months and that the water districts have the option to use carbon, RO, or iron exchange technologies. He does not comment on how the water districts are complying with the proposed MCLs.

The speaker talks about the high percentage of water districts that are willing to opt in to the settlement, and then moves on to discuss the company's go-to-market strategy in the electronics market. He explains that the company is seeing mid to high single-digit growth in the market, and that there are opportunities for sustainability and access to clean water. He then asks the company about the fraction of their water business that is sold directly to customers versus going through an intermediary service provider.

Lori Koch explains that they expect to see sequential improvement in Q3 and Q4, resulting in 10% organic growth in electronics and instruments for the full year. She also mentions that they are encouraged for 2024, due to market recovery, lapping of absorption headwinds, and deflation. Additionally, she explains that the remaining $2 billion share buyback plan will follow a similar structure to the first $3.25 billion and will be completed within a month.

Mike Sison from Wells Fargo asked Lori Koch about the restocking of Semi Technologies and Interconnect Solutions after the destocking event and Ed Breen from Citibank asked about the EBITDA margins of the business. Lori Koch said it was too early to say what the restocking pattern would be. Ed Breen said that the EBITDA margins were already over 30%, excluding the absorption, and they could get back to their usual 32-33% with price throughput as the volumes continued to come back.

Patrick Cunningham and Lori Koch are discussing the expected $20 million in synergy capture from Spectrum, and the expected cadence of the capture. Ed Breen then explains that there is some destocking in the biopharma sector, but that the Spectrum numbers are on track. He also predicts that the healthcare business will grow above company average and GDP.

Chris Mecray concluded the call by thanking everyone for joining and informing them that a transcript of the call will be posted on the website once available.

This summary was generated with AI and may contain some inaccuracies.