The operator introduces the DuPont Fourth Quarter 2023 Earnings Call and reminds participants that the call is being recorded. Chris Mecray, CEO Ed Breen, and CFO Lori Koch are present and prepared to discuss the company's financial results. A disclaimer regarding forward-looking statements is provided, and the presentation slides are available on DuPont's website. Ed Breen begins by thanking participants and discussing the company's performance for the fourth quarter and full year 2023.

The earnings release for this morning is consistent with the preliminary results announced earlier and includes more details on the company's 2024 financial forecast. While there are still some challenges in certain markets, there are signs of stabilization and a pickup in orders, leading to a positive outlook for sales and earnings in 2024. The fourth quarter saw a decline in net sales and operating EBITDA, but the company remains focused on managing costs and implementing restructuring actions to improve margins. They expect to see $150 million in annual cost savings starting in the first quarter of 2024.

The company is pleased with their strong cash generation and prioritization of working capital improvement. They had a conversion rate of 100%, exceeding their target of 90%. They also announced the completion of a $2 billion share repurchase program and a new $1 billion program, as well as a 6% increase in their quarterly dividend. They have a favorable balance sheet and liquidity position with no long-term bond maturities due until 2025. They also repaid $300 million of debt during the fourth quarter.

DuPont is committed to investing in innovation and operational excellence to support long-term organic growth. They plan to spend 5% of sales on capital and 4% on R&D in 2024. They are pleased with the progress in their electronics, water, industrial, and adhesives businesses, with new products and facilities being launched. They expect demand to gradually recover in their electronics and semiconductor businesses, with utilization rates increasing throughout the year. They also anticipate stabilization in end market consumption for smartphones, PCs, and tablets, driven by replacement demand and growth in the AI-driven data center market.

DuPont is experiencing positive trends in the electronics materials industry, with an expected increase in volume in both semi and ICS during 2024. The industrial-based businesses are also expected to see a positive order inflection as the year progresses, despite continued inventory destocking impacts. The shelter and safety markets are expected to see a recovery in sales, while the water and Kalrez businesses are anticipated to improve in the second half of the year. Overall, DuPont is confident in their key end markets and is focused on operating discipline and execution to accelerate growth as inventories normalize. The financial results and outlook will be covered in detail by Lori Koch.

In 2023, our financial results were affected by destocking and demand pressure in China, but we maintained a focus on operational execution. Our efforts to drive productivity and operational excellence helped minimize decremental margins and improve cash flow. In 2024, we expect cost reduction from restructuring actions announced in November, with two-thirds of the benefits realized that year. We anticipate a bottoming of sales and earnings in the first quarter, followed by a steady recovery and return to growth in the second half. In the fourth quarter, net sales decreased 7% due to a 10% organic sales decline and a 3% portfolio benefit. The decline was driven by lower volume, including destocking in the safety solutions line of business and weaker demand in China. W&P and E&I segments saw organic sales declines of 15% and 7%, respectively, while Corporate declined 4%.

DuPont's sales decreased globally in the fourth quarter, with North America, Asia Pacific, and Europe experiencing declines. Operating EBITDA also decreased, but margin improved slightly due to lower input costs and discrete items. A non-cash goodwill impairment charge of $800 million was recorded for the protection reporting unit, but the company remains confident in its market-leading positions and is investing in application development and cost structure improvements.

The company is pleased with their improved cash flow in 2023, which was achieved through optimizing working capital and right-sizing inventory levels. Adjusted free cash flow increased significantly compared to the previous year, and adjusted EPS decreased due to lower segment earnings and certain below-the-line items. The tax rate for the quarter was lower than expected, and the full year tax rate was 22.8%. In terms of segment results, net sales for E&I increased by 1%, with the Spectrum sales contribution mostly offsetting a decline in organic sales. The decline in organic sales was mainly due to a decrease in volume and price for Semiconductor Technologies. However, there was sequential improvement within the semi business, with sales increasing by 2% in the fourth quarter.

In the fourth quarter, the company saw a slight recovery in the semiconductor market with sequential sales expected to increase in the first quarter and continue to improve throughout 2024. While Interconnect Solutions and Industrial Solutions experienced declines, there was some growth in volume and strong demand for certain products. Earnings were affected by lower volumes and operating rates, but partially offset by the contribution from Spectrum. In the Water and Protection segment, sales declined due to lower volumes and distributor inventory destocking, but the company believes channel inventory levels have returned to normal.

In the first quarter of 2024, W&P's operating EBITDA decreased by 13% due to lower volumes and production rates, but was partially offset by lower input costs and discrete item benefits. The company expects net sales of $2.8 billion and operating EBITDA of $610 million for the first quarter, with a sequential decline in EBITDA due to the absence of discrete items and certain costs related to new capacity and safety. However, the second quarter is expected to see a mid single-digit sales improvement and a 10% increase in operating EBITDA, driven by volume growth and restructuring cost savings. For the full year 2024, W&P expects net sales between $11.9 billion and $12.3 billion and operating EBITDA between $2.8 billion and $3 billion.

The company expects sales growth in the second half of the year to be driven by improvements in the electronics market and cost savings. They also anticipate a neutral impact from price and cost, with slight price declines being offset by lower input costs. The company's adjusted EPS for the year is projected to be between $3.25 and $3.65 per share. The operator then opened the line for questions, with the first one coming from Scott Davis of Melius Research. Davis asked about the company's cautious commentary on price versus cost, and the company responded that it was a combination of weaker demand and mix, particularly in China.

The company has seen a 1% price decline for the full year, but expects offsetting benefits from raw materials, logistics, and energy savings. They have been holding price across the platform and do not anticipate any material changes. The company has also seen a significant destock in China, but has had high single-digit growth in January. They expect certain sectors to pick up later in the year.

The water business declined in the fourth quarter, but orders in January were up 13%, mainly due to an increase in orders from China. This increase in orders started in May and is expected to continue in the first and second quarter. The safety orders, including medical packaging, also increased by 10% in January, indicating a positive trend for the first and second quarter. In China, E&I saw a 1% volume growth in the fourth quarter, while the water business saw a decline. However, the water business is expected to improve in the second quarter. Overall, the company is seeing a positive trend in orders and volumes, especially in China.

During a conference call, Mike Leithead from Barclays asks Ed Breen about the inventory dynamics in W&P. Breen explains that in the fourth quarter, they were hit harder than expected due to fiscal year-end inventory reductions by customers. Additionally, 50% of their business goes through distribution, and some orders were delayed. However, in January, there was an improvement and many distributor orders were turned around, indicating a potential bottoming in the market.

The company expects slight growth this quarter and more throughout the year. Their water division has seen a 40% global increase through distribution, mainly due to delayed orders from distributors. The company is a short cycle company, so changes in demand can happen quickly. The CFO expects strong cash flow in 2024, with no major changes in cash needs for restructuring or pension. The company will continue to focus on inventory management to maintain gains.

The company expects to see a 15% increase in EBITDA in the second half of the year, driven by increased utilization rates in the semi fab and PC business, completion of destocking, improved factory absorption, and cost savings from restructuring. The first quarter may see a headwind due to additional inventory actions, but overall the increase in earnings will be driven by destocking and volume.

Ed Breen discusses the value of the company's electronics business, stating that it is currently undervalued by the market. He believes that the business will see improvement as they work through a destocking period and that there is potential for significant growth in the future, particularly with the advancement of AI technology and their new facilities. Breen acknowledges the strength of the company's position in the market and is optimistic about its potential for success.

Ed Breen discusses the company's valuation and expectations for improvement on PFAS issues this year. He mentions that the judge is close to finalizing the water district issue and that there may be a settlement before any trials for personal injury cases. He also mentions the sales process for new fabs and the potential for share wins or shifts.

The company focuses on application engineering and development with 10 major customers in the semiconductor industry, and the location of production is not a major concern. The shelter solutions side of the business has seen a slight increase in volume and is expected to continue to improve throughout the year. There is not a significant absorption headwind in this area, but there will be some benefits from increasing volume.

In this paragraph, John McNulty thanks the speaker for their previous comments and then the operator introduces Steve Tusa from JPMorgan for the next question. Tusa asks if the company's business will decouple from broader electronics trends, to which Ed Breen responds that they are very coupled to it and that the demand for advanced chips in data centers will play to their strengths. Lori Koch adds that around $700 million of their $2 billion semi business is from data centers and that their revenues are not impacted by the price of the chips.

The speaker clarifies that any lift seen in OEMs is likely due to price, with their portfolio consisting of 30% memory and 70% logic foundry. They mention that $700 million of their revenue is from data center related customers and that overall semi volumes were down in the high single-digits due to OEMs destocking. The speaker also provides insight into the water filtration market in China, stating that true demand is down 3-4% and that distributor customers were down over 30%.

The company saw an increase in water orders in January, particularly from China, which is expected to bottom out in May or June. The logistics perspective is that there will be a 60-day lag between shipping and revenue recognition. The growth rate for the water business is expected to be in the mid-single digits in the next two to three years despite the temporary downturn in China due to resolving higher inventory levels.

The speaker is discussing the performance of the water business, stating that there is still room for growth above GDP levels. They also mention a question from an analyst about their expectations for the retained businesses in the corporate segment, specifically in the auto and EV industry. The speaker responds by saying that they expect to outperform in the EV space, but overall, they see volume being flat in 2024. They also mention the performance of Spectrum, stating that it is in-line with expectations and has been integrated with another business for commercial synergies.

Vincent Andrews from Morgan Stanley asks Ed Breen about the company's sales and profit growth in the second half of the year. Lori Koch clarifies that the growth will start in the third quarter and be greater in the fourth quarter. Vincent then asks about the company's strategy for managing shipments and demand in order to avoid another supply chain oversupply situation. Ed Breen explains that this situation is rare and mostly due to COVID-19, and that it has happened only twice in his 26 years in the industry. He also mentions that it can recover quickly and does not see it happening again.

In response to a question about the impact of the current economic downturn on their business, the speaker explains that their company is primarily involved in short-cycle business and has seen a significant decrease in demand across their portfolio. They also mention that they made the proactive decision to reduce inventories, which will result in absorption headwinds in the fourth quarter and 2023. However, they do not expect significant absorption tailwinds in 2024, as their volume is not expected to improve significantly. The speaker also mentions that their guidance for 2024 does not include significant benefits from price cost, but they did see some benefits in the fourth quarter.

The company saw a benefit of $50 million to $75 million in the fourth quarter and expects further tailwinds in the first quarter due to the release of inventory. They anticipate a $100 million benefit on a full-year basis in 2024, with a 1% price increase, mainly in the shelter business. They are not concerned about China's lower structural growth rate as it is coming off a low base, and they have confidence in the electronics and water markets. The company is not being overly aggressive in their expectations for the electronics market, with projected utilization rates in the low 80%s.

During an investor call, the CEO and CFO of W&P discussed the potential for continued growth in their business until 2025 and the reduction of cyclicality in their portfolio. They also addressed concerns about competition in China and stated that they are closely monitoring their distributors and do not see any issues with competitors.

The speaker discusses the potential for growth in the company through new technologies and applications, specifically mentioning the opportunities in lithium extraction and artificial intelligence. They also mention the expected earnings power of the company in the second half of 2024 and beyond, with a target EBITDA margin of 27-28%. They note that the company is currently on track to reach this margin in the fourth quarter of 2024 and that their peak earnings in late 2022 were around $850 million without the inclusion of Spectrum.

The company sees potential for continued growth beyond the expected run rate for the end of the year. In the long term, half of the company's portfolio is expected to outgrow GDP and the other half to grow with GDP. However, the semi industry still needs to recover and utilization rates are expected to decline until 2025. The call has now ended.

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