The operator welcomes participants to the DuPont Specialty Products USA LLC Third Quarter 2023 Earnings Conference Call and reminds them that the call is being recorded. Chris Mecray, CEO Ed Breen, and CFO Lori Koch are present on the call. Slides are available on the company's website and a forward-looking statement disclaimer is included. The company will make forward-looking statements and risks and uncertainties may cause actual performance to differ. Historical financial measures are presented on a continuing operations basis and non-GAAP measures will also be referenced. CEO Ed Breen begins the financial review.

Despite facing challenges such as channel inventory destocking and weak demand in China, the company reported a 5% growth in operating EBITDA and 140 basis points margin improvement in the third quarter. They also prioritized working capital improvement and saw a 50% increase in adjusted free cash flow. However, their organic revenue declined by 10% due to lower volumes in semiconductor and construction end markets. The Interconnect Solutions business saw a 8% sales increase, but the Water Solutions and Safety Solutions lines of business were affected by channel inventory destocking. The company plans to implement additional restructuring actions to drive operational and financial performance and expects to see recovery in electronic submarkets by 2024.

DuPont expects moderate growth in PC and smartphone shipments, as well as an increase in demand for servers and high-performance memory chips due to the growth of AI and new product launches. Despite current challenges, the company is confident in its key markets and is focused on creating long-term value for shareholders. They recently acquired Spectrum and are in the process of selling their ownership interest in the Delrin business for $1.8 billion.

The company's sale of Delrin provides upfront cash and potential future returns, while also allowing for share repurchases and maintaining a strong financial position. Despite a softer volume backdrop, the company's teams have executed well and shown strong financial discipline and operational excellence, resulting in sequential margin improvement and strong cash flow. This is attributed to efforts to lower input costs, rightsize inventory, and improve productivity through operational excellence initiatives.

In the third quarter, DuPont's net sales decreased by 8%, with a 10% decline in organic sales offset by a 2% portfolio benefit. This was due to a decrease in volume, primarily in the semiconductor and construction markets, as well as channel inventory destocking. The company saw declines in all regions, with Asia Pacific, North America, and Europe down by 12%, 10%, and 2%, respectively. However, operating EBITDA decreased by 9%, driven by lower volumes and production rates, but partially offset by lower costs and portfolio benefits. The company expects to see improved margins in 2024 as end markets, particularly electronics, recover.

During the quarter, operating EBITDA margin decreased by 50 basis points due to volume pressure and reduced production rates, but was partially offset by cost benefits. Sequentially, operating EBITDA and margin improved. The quarter's decremental margins were 31%, thanks to cost deflation and cost-cutting measures. Cash flow also improved, with adjusted free cash flow increasing by 47% compared to the year ago period. Adjusted EPS also increased by 12%, driven by below-the-line benefits such as a lower share count and lower net interest expense. Other below-the-line benefits, including a lower tax rate, contributed to the improvement in adjusted EPS. The tax rate for the quarter was 24.6%, lower than the year ago period and our previously communicated guidance. The expected full year 2023 base tax rate remains unchanged at 24%.

In the third quarter, the E&I segment of the company saw a 9% decrease in net sales, with a 13% decline in organic sales. This was driven by a 12% decrease in volume and a 1% decrease in price. The semiconductor technologies business saw a high teens decline in organic sales due to inventory destocking and weak end market demand. The Interconnect Solutions business also saw a decline in organic sales, but showed improvement in the third quarter. Industrial Solutions saw a decline in organic sales due to destocking and lower demand, but this was partially offset by increased demand for OLED display materials. Operating EBITDA for E&I was down compared to the previous year, but margin increased in the third quarter.

In the third quarter, W&P's net sales decreased by 8%, primarily due to volume decline and channel inventory destocking. Sales for Safety Solutions and Shelter Solutions were down high single-digits, while Water Solutions saw a mid-single digit decline. Operating EBITDA decreased but margin increased. In the fourth quarter, consumer electronics demand is expected to be similar to the third quarter, with some improvements in semiconductor technologies. However, channel inventory destocking and slower industrial demand in China are expected to continue affecting Water Solutions.

The company is adjusting their sales and operating EBITDA guidance due to incremental volume softness. They expect a decline in net sales for the fourth quarter, primarily due to inventory destocking in the Safety Solutions line of business. They also expect full year adjusted EPS to be at the midpoint of their prior guidance range. The company has analyzed their sell-in versus sell-through and believes that about 50% of their volume goes through distribution while the other 50% is sold directly to customers.

The company has conducted a thorough analysis of its distributor network and found that they are destocking at a higher rate than direct customers. This trend is seen across various business segments and is expected to continue into the first quarter. The company also expects to see a similar level of absorption headwinds in the second half of the year. The restructuring plan is on track to achieve a $150 million run rate by 2024.

During an earnings call, Ed Breen and Lori Koch discussed the restructuring plan for the company. They expect to see annual savings of $150 million, which will begin to show in the first quarter of 2023. This plan has been in the works for over a year and will not affect R&D costs. As volumes increase, some of the savings may come back, but not all of it. Scott Davis asked a follow-up question about destocking inventory, which could be due to shorter lead times or other factors.

The CEO of a company is discussing the reasons behind the recent inventory destocking in the industry. He believes that two-thirds to three-quarters of the destocking is due to the supply chain returning to normal after the disruptions caused by COVID-19. He also mentions that companies may be trying to get their inventory levels in line for the coming year. Additionally, some companies may be worried about a potential recession, but the CEO believes the destocking is primarily due to excess inventory built up during COVID-19. He gives an example of medical device companies pleading for more packaging material during the pandemic, but now they have overshot their demand.

The speaker discusses the impact of destocking on the medical packaging industry and how it is not related to the recession. They also mention their strategy for managing price in the future, with a goal to hold onto as much pricing as possible in 2024. They have seen a significant benefit from price/cost spread in the third quarter and hope to continue managing it well. They may give up some pricing in the shelter business to avoid losing market share, but will closely manage it in other businesses.

The speaker discusses their plans for pricing and volume in the coming years, with a target of 1.5% to 2% price increase in 2025. They also mention holding electronics prices flat and expecting a volume lift. A question is asked about the price/cost spread for the quarter and the speaker responds that they expect a $225 million deflation benefit for the full year, with $100 million in the fourth quarter. The deflation benefit is expected to continue into next year, but the speaker notes that they cannot predict future prices. A question is asked about revenue growth for next year, and the speaker responds that they can still grow revenues despite a negative exit rate and destocking in the second half of the year.

The speaker predicts that the first quarter will be light due to destocking, but there will be a lift in the following quarters. The electronics part of the business is expected to see a nice lift, and the semiconductor industry is expected to reach 80-90% utilization. The speaker also mentions that the ICS sector has been growing and will continue to do so. When asked about a potential recession, the speaker states that they have been preparing for it and are managing conservatively.

Ed Breen discusses the recent sale of Delrin and explains that it was the best outcome for the company in a tougher environment. They received $1.2 billion upfront and retained a 20% equity in the business. Breen is confident that this will provide upside for the company in the future. The sale aligns with their capital allocation strategy and will allow them to redeploy the cash.

The company plans to do more share repurchases after the ASR ends next year due to a strong balance sheet and expected free cash flow. They also gave a $350 million loan with an eight-year term to a venture, which is expected to monetize quicker. The Corporate and Other segment, which includes the auto adhesives business, saw mid-single-digit volume growth and strong earnings growth in the third quarter, with expectations for continued growth in the high single-digits for the full year. However, there may be some headwinds in the fourth quarter due to the recent strike in the U.S. automotive market.

The article states that car builds from IHS are expected to be down, but the overall trajectory of the business is strong with a great 2023 and expected strong 2024. The electronics end markets are starting to stabilize, with semi technologies expected to be up slightly. The ICS business will be down due to normal seasonality, but less than usual due to continued recovery. The industrial part of E&I will see some destocking, with biopharma destocking picking up during the quarter. The opt-out period for PFAS should be completed by mid-December.

The speaker is unable to provide any updates on the water district settlement at the moment. The deadline for opt-outs is December 4 and there will be a final fairness hearing on December 14. The company is feeling confident about the settlement and is in talks with other key water districts. In regards to the restructuring, the $150 million in savings will primarily come from plant fixed costs and general and administrative expenses. The company is looking at reducing costs in various areas such as contractors and adjusting the cost structure to align with the current volume environment. They are also working on cleaning out functional costs.

The company is focused on running an efficient organization and will not be making changes to R&D and marketing. They believe the current destocking period is temporary and are preparing for the future. They have seen share gains in both the semi and interconnects business, with growth in advanced nodes and a new application with a smartphone producer. In the Shelter Solutions business, they are currently in a destocking cycle and have limited visibility into 2024.

In the third quarter, the company saw less of a year-over-year headwind in Shelter compared to the first half, indicating a normalization. The company expects less volume declines in the fourth quarter. There is a disparity between the resi and commercial markets, with most growth in the commercial side coming from data centers. The company believes the significant downturns are nearing an end and destocking is behind them. The impact of China trade restrictions on the semiconductor technologies business is estimated to be around $60 million for the year, with no changes to the current view. The restrictions mostly affect the advanced node spaces, in which the company has a small footprint.

During the Q&A session, an analyst named Josh Spector asked about the fourth quarter performance of the company. He noted that while there seemed to be some destocking in different areas, the sales guidance for different segments was expected to be flat. Spector asked what would drive EBITDA down by $20-$25 million, when there were factors such as increased sales in the semiconductor segment and benefits from raw materials. In response, Lori Koch explained that the company expects a $100 million decline in organic revenue, with half of it being due to seasonality and currency fluctuations, and the other half from a pullback in medical packaging. She also mentioned that there would be a net benefit from additional spreads, but this would not be enough to offset the decline in revenue. Spector then asked about the utilization rates in the electronics and semiconductor segment, to which Ed replied that they were in the mid-70s.

Ed Breen, CEO of a company, discusses the current state of the semiconductor market. He mentions that the fabs (fabrication plants) have been running in the high 60s, but projections show that this will increase to over 80% by the end of 2024 and reach over 90% in 2025. This is expected to result in a nice lift for the industry, especially for advanced nodes. However, the lift may not be dramatic at the beginning of the year. Breen also notes that the lift will vary for each customer, but overall, it seems that the industry has reached its bottom and is starting to improve.

The speaker discusses the impact of COVID on the supply chain and inventory levels, noting that there was an overstocking and destocking period. They believe this was due to an overshoot in demand and that things are now normalizing. They do not anticipate any changes in terms with distributors.

Lori Koch, speaking on behalf of the company, stated that they will continue to target a minimum cash level of $1.5 billion and plan to return a significant portion of their cash flow to shareholders through share repurchases next year. The company will be done with their existing ASR in the first quarter and will use the Delrin proceeds to make additional share repurchases when the market is open. A question was then asked about Spectrum, to which Lori responded that the company is performing in line with their projections, with expected EBITDA of $45 million for the rest of the year and $20 million in synergies. She also mentioned that Spectrum has seen growth in their medical device business due to key wins with large producers.

Lori Koch, CFO of the company, is pleased with the performance and synergy delivery of the company. The synergy delivery is expected to be $60 million over a couple of years, mainly from overhead consolidation and procurement and site-related synergies. The company's semiconductor business is expected to grow mid- to high-single-digit, with 200 to 300 basis points above the market growth due to AI enablement. The company's data center business has a $700 million portfolio, with one-third of that being direct to AI, which is expected to drive growth above overall market projections.

Lori Koch, a representative from Spectrum, discusses the potential for cross-selling to medical device companies and revenue synergies with biopharma. She also mentions the potential for share gains and new product introductions in the semi and general consumer electronics space, as well as growth in the water industry.

The company expects to see significant growth in the near future due to the utilization of added capacity in the Tyvek and Kevlar markets. They also anticipate a return to pre-pandemic levels in the electronics industry, which will contribute to long-term earnings growth. In the short term, the company expects headwinds from the normalization of destocking in the electronics market.

The company expects to see tailwinds from deflation and restructuring actions in the first quarter, as well as a lower share count and EPS benefit from a share buyback program. However, there will be headwinds from industrial destocking and potential price moderation in the shelter business. The company also expects a normalization of compensation and a decrease in interest income in 2024.

The speaker thanks everyone for joining the call and informs them that a transcript of the call will be available on the company's website. The call is now concluded and the operator thanks everyone for participating and instructs them to disconnect.

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