DuPont de Nemours, Inc. (NYSE:DD) Q4 2023 Earnings Call Transcript

DuPont de Nemours, Inc. (NYSE:DD) Q4 2023 Earnings Call Transcript February 6, 2024

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Operator: Good morning, and welcome to the DuPont Fourth Quarter 2023 Earnings Call. Please note that this call is being recorded. All participants are now in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Chris Mecray. You may begin your conference.

Chris Mecray: Good morning, and thank you for joining us for DuPont’s fourth quarter and full year 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer, and Lori Koch, Chief Financial Officer. We’ve prepared slides to supplement our remarks, which are posted on DuPont’s website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements.

Our Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and have been posted to DuPont’s Investor Relations website. I’ll now turn the call over to Ed.

Ed Breen: Good morning, and thank you for joining our fourth quarter and full year 2023 financial review. This morning’s earnings release is consistent with the preliminary results announced on January 24th, and we have added our customary segment detail and end market color while also providing incremental detail on our 2024 financial forecast. Broadly, we continue to see encouraging stabilization within electronics markets. Our Semiconductor Technologies business reported sequential sales growth of 2% in the fourth quarter as expected as the first sign of getting past the bottom at chip production. In Interconnect Solutions, we saw a return to year-over-year volume growth with volumes up 2% versus the prior year after sales bottomed earlier in 2023.

However, as we finished 2023, we did see additional channel inventory destocking within many of our industrial-based businesses as well as continued weak demand in China with incremental weakness in our China water business. This resulted in fourth quarter net sales, which declined 7% year-over-year, falling below our guidance expectations. We have already noted that we see a continuation of similar volume trends into the first quarter, and I will come back to this, but we are encouraged that we see signs of market stabilization, bottoming of customer inventories and a pickup in orders in the month of January that support a view of recovering sales and earnings through 2024. Fourth quarter operating EBITDA of $715 million was down 6% year-over-year, reflecting continued pressure across many of our largely short cycle businesses.

We remain very focused on managing what we can control, including discretionary spending levers, and also executing the restructuring actions announced last November. This focus helped to contain margin impact in the period despite a 9% drop in volume. Looking into 2024, we continue to target annualized cost savings of $150 million, which we will begin to realize later in the first quarter and which should further bolster our go-forward margin profile. I am pleased we finished the year with strong cash generation as we continue to prioritize working capital improvement and discipline following the inventory build seen during the supply challenge 2022 period. For the full year, adjusted free cash flow was $1.6 billion with conversion at 100% versus our target of greater than 90%.

This included fourth quarter adjusted free cash flow of $501 million, which represented 133% conversion. Adjusted EPS for the year of $3.48 per share increased over last year as benefits from our ongoing capital allocation and share repurchases more than offset substantial volume decrements. Turning to Slide 4, we continue to execute on our capital allocation priorities. First, this morning, we announced that we completed the $2 billion accelerated share repurchase transaction launched last September. At the conclusion of the ASR transaction, we retired an additional 6.7 million shares with the true-up, bringing its total to 27.9 million shares retired under the $2 billion ASR. Completion of this ASR wraps up the $5 billion program that we announced in November 2022, enabling the repurchase of approximately 15% of our outstanding shares over this time period.

We also announced that our Board approved a new $1 billion share repurchase program, and we intend to launch a new $500 million ASR transaction imminently. We expect to complete the full $1 billion program by the end of this year. Finally, today we also announced an increase in our quarterly dividend to $0.38 per share or a 6% increase. We will continue to target a dividend payout ratio of 35% to 45% over time and expect to increase our dividend annually in-line with earnings growth. We exited 2023 on a favorable balance sheet and liquidity position with an adjusted net leverage ratio of 2.1 times and with no long-term bond maturities due until November of 2025. We also repaid $300 million of debt due during the fourth quarter with cash on hand.

Finally, we also continue to invest in innovation and our operational excellence program to support long-term organic growth. In 2024, we expect capital spending at about 5% of sales and target R&D spend at about 4% of sales for total DuPont. Regarding our innovation and growth pipeline, we were pleased during the fourth quarter with our electronics portfolio to be selected by a leading US OEM for our Microfill metallization product, which offers improved plating uniformity for advanced computing. In water, our team significantly advanced commercialization of the Oxymem membrane products for wastewater biological treatment. Within industrial, our Kalrez business opened a new facility in Delaware to support growth for its global semiconductor products.

And finally, within adhesives, we launched a new structural epoxy adhesive specific for larger scale energy storage system. Before I turn it over to Lori, let’s review our expected demand outlook by business based on active conversations that we have had with customers recently. For electronics, our ICS business serving printed circuit boards already bottomed in mid-2023 and continues to gradually recover alongside global electronics demand. We expect utilization for our customers in this area to increase this year into the 60s on a percentage basis from the mid-50s in the first quarter. For semiconductor, industry forecast for chip production, that were pushed out several times in 2023, are signaling a firmer 2024 recovery, and our outlook assumes chip fab utilization increasing through the year to exit at a run rate around the low 80s on a percentage basis from the low 70s in the first quarter.

This inflection also includes stabilization for end market consumption in smartphone, PC and tablet markets, driven in part by replacement demand as well as improved data center demand bolstered by AI-driven growth. These trends bode well for DuPont’s strength within electronics materials, and our customers are pointing to improve volume in both semi and ICS during 2024. Within our industrial-based businesses, while inventory destocking impacts have continued into the first quarter, customer feedback indicates a positive order inflection as the year progresses. Let’s review specific end markets. First, shelter, which saw notable destock in 2023, now sits with inventory back to normal levels and we expect a slight positive volume compare in 2024 beginning in the first quarter.

In safety, we believe our customers’ inventory is also close to normal at this point for Tyvek medical packaging, and we expect sales to recover during the second and into the third quarter. Further, we expect reduced destock impact within safety solutions across the couple of industrial end markets in the second half. In water, we have communicated with our distributor customers in China and we expect a sequential pickup in sales towards the end of the second quarter. Distributor inventories have declined substantially from the peak last year. Finally, I would mention that we expect to see order improvement over the next several quarters in our Kalrez business with Industrial Solutions. Our Liveo biopharma business is anticipated to recover later in the second half.

So, we have firm signals from a wide range of businesses within the DuPont portfolio that support a sales bottom in early 2024. This is reflected in stronger orders during the month of January after continued weakness in December. To wrap up, we remain confident that our key end markets are well positioned for long-term growth and our teams are extremely focused on operating discipline and site level execution, which positions us well to accelerate growth as inventories normalize. With that, I’ll turn it over to Lori to cover the financial results and outlook in detail.

Lori Koch: Thanks, Ed, and good morning. Our financial results in 2023 were clearly impacted by significant destocking and demand pressure in China, but our focus has remained on sound operational execution across the business. I’m very pleased that our team’s effort to drive productivity and operational excellence clearly minimize decremental margins and help drive substantial cash flow improvement. In 2024, our continued proactive approach to managing the business will yield impactful cost reduction beginning later in the first quarter and building from there from the restructuring actions announced last November. We anticipate yielding at least two-thirds of the total $150 million in restructuring benefits during 2024, with the balance realized next year.

Like Ed, I’m also encouraged by the expected trajectory of demand and volume based on direct customer feedback and data supporting the bottoming of channel inventory in key end markets. Our current forecast assumes a bottom for total company sales and earnings in the first quarter, followed by steady recovery as the year progresses with the return to year-over-year growth in the second half. I’ll come back to the outlook later, but first I’ll cover our results. Regarding our fourth quarter financial highlights on Slide 5, net sales of $2.9 billion decreased 7% versus the year-ago period, as a 10% organic sales decline was partially offset by a 3% portfolio benefit due primarily to the Spectrum acquisition. The organic sales decline reflects a 9% decrease in volume and a 1% decrease in price.

Lower volume included the impact of channel inventory destocking within W&P’s safety solutions line of business, most notably for Tyvek medical packaging. We also saw accelerated volume decline within water solutions in China, driven primarily by distributor destocking and weaker demand. On a segment view, W&P and E&I organic sales declined 15% and 7%, respectively, while organic sales in Corporate declined 4%. From a regional perspective, DuPont sales decreased on an organic basis globally versus the year-ago period, with North America, Asia Pacific and Europe down 13%, 11% and 9%, respectively. China sales were down 14% versus the prior year. Fourth quarter operating EBITDA of $715 million decreased 6% versus the year-ago period as volume declines and the impact of reduced production rates to better align inventory with demand were partially offset by lower input costs, discrete items, which benefited earnings by about $40 million, and Spectrum earnings contribution.

About $25 million of the discrete item benefits were reported within the W&P segment, reflecting a land sale and other credits, with the remainder reflected in Corporate. Operating EBITDA margin during the quarter of 24.7% increased 30 basis points versus the year-ago period. In the fourth quarter, driven by continued challenging construction market conditions, coupled with ongoing channel inventory destocking, we recorded a non-cash goodwill impairment charge of about $800 million. The charge relates to our protection reporting unit which consists of the shelter and safety solutions lines of business within W&P and is excluded from our adjusted operating results. As a reminder, the carrying value of the legacy Dupont assets and liabilities were marked as fair value and significant goodwill and intangible balances were recorded in connection with the DowDuPont merger.

Despite the write down, we maintained long-term confidence in the Protection brand offerings and our market-leading positions remained strong. We continue to invest in and expand our application development expertise in these markets and we have taken actions to improve our cost structure to enhance our competitiveness with destocking ends. Regarding cash flow, we are very pleased with our continued cash flow improvement as we worked hard in 2023 to optimize working capital performance and especially to right-size our inventory levels following the supply chain disruptions of 2022. On a continuing operations basis, cash flow from operations of $646 million, plus capital expenditures of $145 million, resulted in adjusted free cash flow of $501 million in the fourth quarter, a significant increase versus $188 million in the year-ago period.

Adjusted free cash flow conversion during the quarter was 133%, significantly ahead of last year. Turning to Slide 6, adjusted EPS for the quarter of $0.87 per share decreased from $0.89 in the year-ago period. Lower segment earnings and certain below-the-line items, including a $0.05 headwind from foreign exchange losses led by devaluation of the Argentinian peso, more than offset an $0.08 benefit from a lower share count and a $0.03 benefit from a lower tax rate. Our tax rate for the quarter was 19.2%, down from 22.2% in the year-ago period and lower than our previously communicated modeling guidance driven by certain discrete tax benefits. Our full year tax rate for 2023 was 22.8%, and our 2024 outlook assumes a base tax rate of 23% to 24%.

Turning to segment results beginning with E&I on Slide 7. E&I fourth quarter net sales of $1.4 billion increased 1%, as the Spectrum sales contribution of 8% was mostly offset by an organic sales decline of 7%. The organic sales decline reflects a 5% decrease in volume and a 2% decrease in price. At the line of business level, organic sales for Semiconductor Technologies were down high single-digit versus the year-ago period resulting from reduced semi fab utilization rates as customers work to reduce finished inventories. We did see sequential improvement within semi as sales increased 2% in the fourth quarter, signaling stabilization for the business. Our customer interactions and reduced channel inventory levels point to continued recovery expected in semi during 2024 with sequential sales up slightly in the first quarter and increased lift from the second quarter onwards.

Within Interconnect Solutions, organic sales declined mid single-digit as low single-digit volume gains were more than offset by price decreases, driven by lower metal pricing. Demand continues to stabilize, and this is the first quarter since the downturn started where we saw year-over-year volume growth. Organic sales for Industrial Solutions were down mid single-digit due primarily to channel inventory destocking within our Liveo product lines for biopharma markets. And for products, such as Kalrez O-rings, which are primarily used in semiconductor equipment. These declines were partially offset by continued strong demand for OLED display materials. Operating EBITDA for E&I of $378 million was down versus the year-ago period due to volume declines and lower operating rates to better align inventory with demand, partially offset by Spectrum earnings contribution.

Turning to Slide 8. W&P fourth quarter net sales of $1.3 billion declined 15% versus the year-ago period due to volume decline. Within safety solutions, organic sales were down 20% on lower volumes, driven mainly by channel inventory destocking, most notably for Tyvek medical packaging products. Within water, organic sales were down high-teens, driven by distributor inventory destocking and lower industrial demand in China. Shelter solutions sales were down mid single-digit on an organic basis. The year-over-year decline has continued to improve, and we believe channel inventory destocking for construction has been completed based on distributor inventory now being back at normal levels. Operating EBITDA for W&P during the quarter of $314 million decreased 13% due to lower volumes and reduced production rates, partially offset by lower input costs and certain discrete item benefits of about $25 million.

Turning to Slide 9, I’ll review our first quarter 2024 outlook and full year guidance expectations. For the first quarter of 2024, we expect net sales of about $2.8 billion and operating EBITDA of about $610 million. On a volume basis, we are seeing similar inventory destocking trends from fourth quarter continue into 2024, driven by water solutions in China and in several of our industrial-based businesses. Recovery timing is expected to vary by end market as the year progresses, but we expect first quarter at the bottom on a consolidated basis. The expected sequential decline in operating EBITDA includes the absence of discrete items, which benefited fourth quarter as outlined earlier. The first quarter outlook also includes certain costs that further impact period margins primarily within W&P related to new capacity and safety as well as the impact of lower volume.

For the second quarter, we expect mid single-digit sequential sales improvement and an approximate 10% increase in operating EBITDA from first quarter. This assumes volume improvement driven by reduced inventory destocking impacts in water solutions and medical packaging, continued electronics recovery, and favorable seasonality in ICS and shelter. Sequential EBITDA should benefit from this volume growth and additional realization of restructuring cost savings. For the full year 2024, we expect net sales to be between $11.9 billion and $12.3 billion with operating EBITDA expected to be between $2.8 billion and $3 billion. Year-over-year sales growth in the second half is expected to be driven by ongoing electronics market recovery, including improvement in semiconductor fab utilization rate and continued utilization improvement for PCB manufacturing within ICS, along with further abatement of channel inventory destocking in our industrial businesses.

For second half earnings, drivers include volume improvement, outlined above, alongside expected mix benefits, as well as ongoing realization of cost savings. Our current outlook also includes a neutral net impact from price cost for the year as slight price declines are expected to be offset by the carryover benefit of lower input costs. We expect full year adjusted EPS in the range of $3.25 to $3.65 per share, which assumes the benefit of a lower share count is mostly offset by lower interest income, higher depreciation and a higher tax rate as detailed on our outlook slide. With that, we are pleased to take your questions, and I’ll turn it back over to the operator to open the Q&A.

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Q&A Session

Operator: Thank you. At this time, we will open the line for questions. [Operator Instructions] Your first question comes from Scott Davis with Melius Research. Please go ahead.

Scott Davis: Hey, good morning, Ed, and Lori and Chris.

Ed Breen: Good morning, Scott.

Scott Davis: Good morning.

Lori Koch: Good morning.

Scott Davis: Good morning. Not a lot — I mean, no huge surprises here, but some of the commentary around kind of price versus cost seemed a little bit incrementally cautious. Is that just a function of kind of weaker demand in general, just sloppy demand that’s out there? Is it kind of a mix, just given how weak China is? Just level set, maybe I’m overreading this a little bit, so if we can just talk about kind of pricing power versus maybe what you’re expecting overall in ’24, that would be helpful.

Lori Koch: Yes. So, overall, full year, we have about a 1% price decline in total on the top-line, and we expect carryover benefit from further raw material, logistics and energy savings to offset that, to be neutral from a spread perspective for a year. So, I wouldn’t say it’s any material change. We had always been in that camp in the raw material side with the pricing, maybe we’re being a little bit cautious just based on where the volumes fit in the first half. But overall, no material change. And I don’t know that 1% total price is all that material to the total company.

Ed Breen: Scott, I’d also say, I think we said on the last earnings call, there’s a couple of end markets we would probably have to give up a little price to maintain our market position. I don’t want to get into the details what they are on the call. But generally speaking, we have been holding price across the platform and we continue to hold price across the platform. So, really no change there at all.

Scott Davis: Okay. That’s helpful. And guys, I think one change at the margin just we’ve seen this quarter is just China continues to be really weak and perhaps maybe even outlook for 2024 degrading a bit as we speak. But can you give us a little bit more color on your confidence in your guide as it relates to just the degradation in China being kind of over and perhaps we’re at a bottom here?

Ed Breen: Yeah. So, Scott, it was very interesting. I’ll just kind of give you an overall DuPont comment on orders and then specifically the water business in China where we’ve seen a real significant destock. And by the way, overall, it was really interesting to watch. We were still declining, as we said, in the fourth quarter on our order rates. But through the month of January, we’ve had high single-digit growth pretty much across the platform except for Kalrez and biopharma, which we expect to come back later in the year before they pick up. I’ll give you two other data points which are really interesting. And the water business declined in the fourth quarter, but through the first month of January, our orders were up 13%.

And a chunk of that was the water business in China. And interestingly there, as you look at the order pattern of that increase, most of that starts May on, which is about what our distributors have been telling us when they bottom out on their inventory. And just another data point because it was one of the other ones we saw destock as we went through the back half of the fourth quarter was our safety orders, which include medical packaging, which was another one that had a significant destock. Those orders were up 10% in the month of January. And that, by the way, is a shorter cycle book than water. Water is the only one we kind of get booked out three months, four months because people are accustomed to having the book out that far, but most of our other businesses are very short cycle.

So, the 10% up on the safety orders and medical packaging would bode well for the lift that we’re expecting to see from first to second quarter on the top-line. So, it was really interesting, we were going still negative going into the end of the year and now pretty broadly positive for the month of January.

Lori Koch: Yeah. And I would say on volumes in China specifically, they did — they are still down on a full year basis, but we did see less of a decline as the year went on and it varied by business. So obviously, E&I was kind of first into the China downturn, and they actually delivered 1% volume growth in China in the fourth quarter. And then, as the year went on, we saw primarily the water business in China decelerate per Ed’s comment. So, it is still a tough market in China, but it looks like E&I is on the upswing, and we expect further improvement in the W&P business in water starting towards the tail line of the second quarter.

Scott Davis: Okay. Helpful. Thank you. I’ll pass it on. Good luck this year. Bye, guys.

Ed Breen: Thanks, Scott.

Operator: Your next question comes from Mike Leithead with Barclays. Please go ahead.

Mike Leithead: Yeah, thanks. Good morning, guys. I just wanted to follow-up…

Ed Breen: Good morning, Mike.

Mike Leithead: Good morning. I just wanted to follow-up on the inventory dynamics in W&P. I guess can you maybe help us better understand how the fourth quarter unfolded? Did your customers just stop buying at some point? Or just kind of what caught you so off guard with the declines there? And then, around the January improvement you just talked about Ed, I guess what do you make of it? Does it seem like those just delayed orders from your end? Or do you think end demand is truly getting better there?

Ed Breen: Well, I think, there was a couple of things. I think we got hit a little harder than we were expecting in the fourth quarter, simply because it was most people’s fiscal year end, and they’re aggressively trying to work down inventories. By the way, as DuPont did, we were aggressively doing it. We accelerated it, as you could see from our cash flow and our inventory position even more in the fourth quarter. So I think it was just trended a little more than we expected. I’d also say I would add to that, remember that in W&P, specifically, 50% of our business goes through distribution. So, they can easily tell you just shut it off for two months or three months and don’t ship them yet. And that’s what we saw a little bit more of than we were expecting.

But very interesting, as I said, it is a month, it’s not a quarter yet, but most of those and those distributor orders turned around in the month of January. And again, it was pretty broad-based across the portfolio, ex a couple of these end markets that I talked about. And specifically, by the way, in safety, the distribution orders sort of coming into January, shelter were very heavy through distribution. And we know we’ve bottomed that. We actually expect slight growth this quarter and that to build a little bit more as the year goes on. And then, I mentioned the water one already, that’s 40% globally through distribution, and it was mostly our distributor customers that delayed orders, not our end customers. So that’s kind of the dynamic, but very interesting to see this January thing now.

Mike Leithead: Great. That’s super helpful. And then maybe a question…

Ed Breen: And just, Mike, just an overall comment, we’re 90% of short cycle company. It can go down pretty quickly and it can go up pretty quickly. A lot of this is hangover from COVID excess inventory, people working it off. And so, you can see the bounce back also.

Mike Leithead: Well, it makes a lot of sense. And then second, maybe just a quick question for Lori. Can you talk about your expected cash flow conversion in 2024? You gave us CapEx, but should we expect any material cash needs for restructuring, pension or just some other key items there?

Lori Koch: Yes. So, the pension should be roundly $50 million to $60 million of a cash funding. So no material difference from where it was in 2023. We had noted the CapEx, which also isn’t a material change from 2023. We would expect to be, again, around that target of 90% conversion for 2024. We’ll see how the timing of the volume lift unfolds. That could create a receivables headwind as you get into the back half of the year as you see that nice volume lift year-over-year. So, I expect it to deliver strong cash flow. We made a lot of progress on one of the areas that we really focused on with respect to inventory in 2023, and we’re not going to give back that benefit that we saw and we’ll work to hold on to those gains.