DuPont de Nemours Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Chris Mecray, Investor Relations
• Ed Breen, Executive Chairman and Chief Executive Officer
• Lori Koch, Chief Financial Officer

Analysts

• Unidentified Participant
• Scott Davis, Melius Research
• Steve Tusa, J.P. Morgan
• Michael Leithead, Barclays PLC
• John McNulty, BMO Capital Markets
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Joshua Spector, UBS Group AG
• Vincent Andrews, Morgan Stanley
• Frank Mitsch, Fermium Research
• Arun Viswanathan, RBC Capital Markets

Presentation

[Operator]

Good day and welcome to the DuPont Specialty Products USA, LLC Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you.

I'd now like to welcome Chris Mecray, to begin the conference. Chris, over to you.

[Chris Mecray, Investor Relations at DuPont de Nemours]

Good morning and thank you for joining us for DuPont's third quarter 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer and Lori Koch, Chief Financial Officer. We have 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 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, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning and thank you for joining our third quarter 2023 financial review. This morning we announced third quarter results and delivered solid earnings accomplished through strong operating execution by our teams, despite ongoing volume headwinds, including channel inventory destocking and continued weak demand in China. We reported sequential operating EBITDA growth of 5% and margin improvement of 140 basis-points in the third quarter. We also produced strong cash-flow during the quarter with adjusted free cash flow, almost 50% higher than the year-ago period, highlighting our efforts to prioritize working capital improvement in a challenging global business environment and normalizing after last year's global supply-chain difficulties.

Compared to third quarter 2022, organic revenue declined 10% due primarily to the impact of incremental channel inventory destocking, along with lower volumes from semiconductor and construction end-markets. Within our electronics portfolio, our Interconnect Solution business recorded a second straight quarter of sequential sales lift, as underlying demand improvement and normal seasonality contributed to an 8% sales increase. We also saw signs of stabilization with the semiconductor markets and expect some sequential sales improvement from semiconductor technologies in the fourth quarter.

Third quarter volume was lower-than-expected, primarily due to incremental channel inventory destocking including with our distributor customers which was evident in the Water Solutions and Safety Solutions lines of business. In this environment, we remain focused on controlling discretionary spending and we're also planning additional restructuring actions to continue to ensure we can drive sound operational and financial performance, targeting at least $150 million in annualized run-rate cost-savings, which we expect to begin seeing later in the first quarter of 2024.

It's always difficult to precisely time marketing collections, the current industry forecast within electronics submarkets also recovery during 2024. This includes forecast for PC shipments to grow at mid single-digits, driven by replacement demand, smartphone shipment growth in the mid single-digit, also driven by replacement demand and new product launches and for server demand to gradually improve next year. This growth is supported by the rapid surge in-demand for AI servers, as well as replacement for traditional servers.

In general, demand for high-performance and high-density memory chips is accelerating, supported by AI growth, as well as overall growth for new global product launches. This directly correlates with DuPont's product strengths within the semiconductor and consumer electronics markets. Despite the near-term headwinds we are experiencing, we are confident that our key end-markets are well-positioned for long-term growth and we expect the structurely attractive markets will provide the foundation for DuPont's value-creation looking ahead.

Turning to slide four, we significantly advanced our strategic and capital allocation priorities during the quarter to drive shareholder value. First, we closed the acquisition of Spectrum on August 1, which fits nicely alongside our Liveo healthcare related product-line within our industrial solutions line-of-business within E&I.

We are pleased with Spectrum's operating results to date, which are aligned with our modeled estimates. We are excited to welcome the Spectrum team, which is currently focused on executing new revenue growth opportunities, stemming from significant customer wins earlier in the year.

Second, I am pleased to announce that we are in the process of closing today the previously announced sale of our roughly 80% ownership interest in the Delrin business, the remaining piece of a former MNM segment held-for-sale to the private-equity firm TJC in a transaction value in the business at $1.8 billion. This deal was structured to maximize value for our shareholders, it provides significant upfront cash proceeds with a minimal expected tax impact, which can then be deployed in-line with our strategic priorities. It also provides an opportunity for us to participate in future upside returns upon the exit of our retained interest in Delrin.

TJC has an excellent track-record of creating value and we look-forward to leveraging their talent and focus to continue to grow the high-quality Delrin business. Regarding share repurchases in September, we completed the $3.25 billion accelerated share repurchase transaction launched last November. We then launched a new $2 billion ASR which we expect to complete during the first quarter of 2024. Combining these two ASR transactions, we have repurchased approximately 15% of our outstanding shares when complete, reflecting our continued commitment to returning capital to shareholders as part of our balanced financial policy.

Including these ASRS and the proceeds from the Delrin sale, we anticipate finishing the year close to our target net leverage ratio of about 2.1 times. Further, we anticipate using a significant portion of excess cash during 2024 for incremental share repurchases once the ASR is complete.

With that, I'll turn it over to Lori. Thanks, Ed and good morning. Our team continued to execute well in a softer volume backdrop, driven by broad-based inventory destocking, demonstrating strong financial discipline and focus on operational excellence. I am most pleased with the sequential margin improvement registered by each of our segments in third quarter, as well as our strong cash performance in the period, given volume headwinds [Indecipherable] stronger margins and better cash-flow are attributed to execution around lowering our input costs, coordination with the operating teams to right-size our inventory position, as well as overall progress with productivity by operational excellence initiatives. We are very focused on operating disciplines and pleased that site level operating execution at positively positioning us for solid margin upside as volumes recover. We expect to see evidence of this in 2024 given expected recovery in key end markets including electronics. Turning to our financial highlights on slide five, third quarter net sales of $3.1 billion decreased 8% versus the year-ago period, a 10% organic sales decline was slightly -- slightly offset by a 2% portfolio benefit due primarily to revenue contribution from Spectrum acquisition. The organic sales decline reflects a 10% decrease in volume, resulting primarily from semiconductor and construction end-market, as well as the impact of channel inventory destocking. E&I and W&P organic sales declined 13% and 8% respectively, while the retained businesses and corporate reported 1% organic sales growth including mid single-digit growth in adhesives portfolio. From a regional perspective, consolidated DuPont sales decreased on a organic basis globally versus the year-ago period with Asia-Pacific, North-America and Europe down 12%, 10% and 2% respectively. China sales were down 16% on organic basis versus the third quarter of 2022, so E&I sales in China increased sequentially in the quarter, in fact, smaller year-over-year declines in each of the last three quarters. Third quarter operating EBITDA of $775 million decreased 9% versus the year-ago period, driven by lower volumes and the impact of reduced production rates, primarily within E&I to realign inventory with demand, partially offset by lower input costs related to raw-material, logistics and energy along with the portfolio benefit from Spectrum. Operating EBITDA margin during the quarter of 25.3% was down 50 basis-points versus the year ago period driven by volume pressure in the high-margin semi business and reduced production rates, primarily within the E&I segment, offset partially by cost deflation benefit which increased somewhat from second quarter level. On a sequential basis, operating EBITDA was up 5% and operating EBITDA margin improved 140 basis points. Decremental margin for the quarter was 31%, enabled by cost deflation and aggressive actions taken year-to-date to reduce spending. As I mentioned earlier, I'm pleased with our cash flow improved during the quarter, optimizing working capital performance continues to be a top priority for us. On a continued operations basis, cash flow from operations of $740 million less capital expenditures of $119 million resulted in adjusted free-cash flow of $621 million in the third quarter, a 47% increase versus the year-ago period. Adjusted free cash flow conversion during the quarter was 151%, an increase versus last year and much improved compared to the first-half of this year. We currently expect to finish the year with conversion around our targeted level of 90%. Turning to slide six, adjusted EPS for the quarter of $0.92 per share increased 12% compared to $0.82 in the year-ago period. Below-the-line benefits including combined $0.16 benefit-related to a lower share count and lower net interest expense more than offset lower segment earnings. Other below-the-line benefits including a lower tax-rate and lower foreign-exchange losses contributed $0.06 to adjusted EPS improvement versus the year-ago period. Our tax-rate for the quarter was 24.6%, down from 26.2% in the year-ago period, driven by the impact of a rate true-up in the year-ago period and lower than our previously communicated modeling guidance, as discrete tax headwinds were lower-than-expected. Our expectation in the full-year 2023 base tax rate of 24% remains changed. Turning to segment results, beginning with E&I on slide seven. E&I third quarter net sales of $1.4 billion decreased 9% as organic sales declined 13%, offset partially by a portfolio benefit of 4% from the Spectrum acquisition. The organic sales decline reflected 12% [Phonetic] decrease in volume and a 1% decrease in price. At the line-of-business level, organic sales for semiconductor technologies were down high-teens, versus the year-ago period resulting from a continuation of inventory destocking across the channel and to a lesser extent ongoing weak and market demand and the impact of China trade restrictions. On a reported basis, semiconductor technology sales were flat sequentially in the third quarter. Within Interconnect Solutions, organic sales declined 11% year-over-year due to both volume and price declines, driven by the pass-through of lower metal pricing. Volume continued to be impacted by weak smartphone, PC and tablet demand, particularly in China, along with more moderate inventory destocking, which we believe is margin complete. On a sequential basis, the Interconnect business reported a second straight quarter of sales improvement with sales up 8% driven by seasonality, as well as some underlying demand present within PCB market. Organic sales for Industrial Solutions were downsizing low digits versus the year ago period due primarily to destocking within biopharma applications for Liveo product volume and continued lower demand in electronics related end-markets. These declines were partially offset by increased demand for OLED display material. Operating EBITDA for E&I of $383 million was down versus the year-ago period, primarily due to volume declines and lower operating rates to better align inventory with demand, slightly offset by portfolio benefit-related to Spectrum. Operating EBITDA margin increased 140 basis-points sequentially during the third quarter. Turning to slide eight, W&P third quarter net sales of $1.4 billion declined 8% versus last year as volume decline of 9% was slightly offset by a 1% increase in price due to the carryover impact of actions taken last year. Within Safety Solutions, organic sales were down high single-digits due primarily to channel inventory destocking. Shelter Solutions sales were down high single digit on organic basis, driven by continued demand softness and construction markets and ongoing channel inventory destocking. On a sequential basis from the second quarter, Shelter sales increased slightly and we expect year-over-year declines in fourth quarter. Organic sales for Water Solutions were down mid single-digits versus the year-ago period, due primarily to inventory destocking including with distributor customers and lower industrial project demand in China maybe impacting reverse osmosis. We expect generally flat sequential volumes in the fourth quarter versus the third quarter. Operating EBITDA for W&P during the third quarter of $362 million decreased versus the year-ago period due to lower-volume, partially offset by the impact of net pricing benefit. Operating EBITDA margin, a 25.6%, increased 70 basis-points year-over-year and 100 basis-points sequentially from the second quarter. Turning to slide nine, I'll close with a few comments and what we are seeing in the fourth quarter and how that translates to our full-year 2023 guidance. Underlying consumer electronics demand in the fourth quarter is expected to be generally similar to the third quarter, with some sequential sales was expected in semiconductor technologies. As mentioned earlier, we saw additional channel inventory destocking and slower industrial demand in China mainly impacting Water Solutions compared to prior expectations and we assume these same trends to continue through the end-of-the year. As a result of this incremental volume softness, we are adjusting our net sales and operating EBITDA guidance and now expect full-year net sales to be about $12.17 billion and operating EBITDA to be at about $2.97 billion, which is at the low-end of our prior range. For the fourth quarter, we expect net sales of approximately $3 billion as a sequential decline versus third quarter driven predominantly by additional inventory destocking in the Safety Solutions line of business and to a lesser extent by the impact of seasonality and incremental currency headwinds. We expect full-year 2023 adjusted EPS to be approximately $3.45 per share, which is the midpoint of our prior guidance range. With that, we are pleased to take your questions and let me turn it back to the operator to open the Q&A.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from line of Jesperk [Phonetic] of Virtual Research Partners -- Vertical Research Partners. Your line is open.

[Unidentified Participant, at DuPont de Nemours]

Thank you. Good morning, everyone.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Hi, Jeff.

[Unidentified Participant, at DuPont de Nemours]

Good morning, Ed. A lot going on in these channels obviously. Do you have any kind of sense or how do you measure kind of your sell-in versus sell-through, trying to kind of understand kind of what that incremental headwind is from inventory versus just kind of general demand trends. And maybe just a little bit of color on how much more you might have to do on inventory or production to kind of get things where you need them to be balanced out?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, Jeff, so we did a pretty detailed analysis of it and I think a good way to look at it is what is our distributor customer is doing versus our direct end customers. So maybe just to give you a couple of numbers on the W&P side of our business, about 50% of our volume goes through distribution and the other 50% we sell direct to customers. And so we did a whole analysis obviously because the distributors you can see quick what's going on with them and almost across-the-board the distributor network is destocking pretty broadly. And it's on a percentage basis down significantly more than our direct customer.

So, I would just one because it hit us this quarter. Our water business in China, which is mostly reverse osmosis was down at 36% of it goes through distribution, the rest we sell direct to customers. But the 36% -- the third of our sales that go through distributors in China, it was down 36% through distribution was down about 12% direct to the customer base. So if you do that analysis on our safety business, you get very similar trends going on. So clearly, the distributors are going through a destocking. I'm sure as we are approaching year end, everyone is trying to get their inventories, kind of where they want them. Now by way, having said that, my take is that the destock obviously goes into the first quarter that we just started to see it in some of these W&P businesses, but I would think the distributors work it down fairly quickly after we're kind of exiting the first quarter.

But that same trend applies almost across-the-board when you do that analysis. It's the distributors are way, way down vis-a-vis the direct customer channel.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

And on the absorption question, we're still in the same general ballpark in the second-half is where we were in the first-half, there is a little bit of a mix and will be taking a little less absorption headwinds in E&I and a little more in W&P as we see the destock continue as we head into the fourth quarter, but in total the number is about equal to the first half.

[Unidentified Participant, at DuPont de Nemours]

Right. And I just wonder if you could give us a little color on restructuring also and I think you mentioned $150 million run-rate. Wasn't sure if that was full-year 2024, but maybe just give us a sense of how much restructuring tail you have in 2023, the incremental benefit you expect in 2024 and as volumes kind of hopefully improve into 2024, there's some of that just kind of discretionary temporary stuff that kind of comes back into the P&L.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so -- on an annual basis, Jeff, would be about $150 million of savings, kind of spread between plant fixed cost and functional cost mostly G&A expense not touching R&D and all, by the way just to back up on that, Lori and I have been looking at this kind of how we can do some restructuring for over a year. So we're not doing adjusting response to what's going on. I think I've said on other earnings calls, we started looking at it actually a summer ago, how could we streamline a little bit more? So we're ready with that, we'll start seeing the benefits of the restructuring in the -- towards the tail-end of first quarter, we'll get going on it by the middle of December.

So by time it hits we get things built on it, you'll start to see the benefit, then so you'll kind of get three of the benefit for a big chunk of that in 2024, a little bit of that would potentially come back on the fixed costs, the planned fixed-cost side as volumes pick-up, but not all of it. So you get a little bit of it coming back-in as we see the volumes lift, but that's basically the program.

[Unidentified Participant, at DuPont de Nemours]

Great. Thank you.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks, Jeff.

[Operator]

Your next question comes from the line of Scott Davis at Melius Research. Your line is open.

[Scott Davis, Analyst at Melius Research]

Hey, good morning, everybody and Lori.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Hey, Scott.

[Scott Davis, Analyst at Melius Research]

Chris, good morning.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Good morning.

[Scott Davis, Analyst at Melius Research]

Good morning. Couple of things, I mean, just to follow-up on Jeff's question because it just seems like it's so important and topical for you guys. I mean, there's two reasons why people destock inventory, right? I mean, one is maybe lead times come down, they feel like they can get it fast. And two is they're really worried about their customers not wanting product and I'm talking to the distribution level, not your direct. What -- what do you think -- what do you think are the main drivers of this kind of incremental because we've been talking about the inventory destock for several quarters now and this quarter seemed like it almost got a little bit worse, particularly in water and protection.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, you know, Scott, I just gave you a ballpark my shrink and I think two-thirds of it, there are 75% something like that is really that the supply-chain healed itself, it's pretty darn normal for everybody again. So everyone sat on excess inventory. I mean, look, we're doing the same thing, we had 151% cash conversion. We're lowering our inventory levels because we have built-up more than we normally would during COVID. And every other CEO I talk to is doing the same thing. So and finally I think as the pressure you're getting near the end of year, you're really trying to get things in-line for 2024, so I think a big part of it's that, but there certainly as a percent of people just more worried is a recession coming, you got a inverted yield curve for 18 months, people start getting nervous, there's always been a recession.

So I can't say that's not -- that's in there, but I think the bigger part of it is, we just don't build excess inventory. We got where we could get during COVID, but I'll give you one example, because we're seeing some destocking on the metal packaging side. A year-ago, I had most of the CEOs of the medical device companies personally call the -- pleading that we could ship more Tyvek material for packaging, so they could ship their products out. And I remember telling them all fact by -- I sent a letter to the trade industry, I said our shipments to you are up 18% so far this year, I mean, I can't do much more. And that was everyone scrambling to get it and they overshot and now I probably shouldn't be surprised. We're seeing some destocking on the medical packaging side, so I think that's just a great example, that has nothing to do with the recession that's just everyone had too much.

[Scott Davis, Analyst at Melius Research]

Yeah, that's great color and makes -- makes a lot of sense. Now I know -- I want to ask about price and I know the two segments are just way different E&I you kind of manage price versus cost and W&P, maybe there's a little bit of a different price strategy. But when you think about like this, this new normal of higher inflation, wages, other costs not explicitly material costs, but other costs. How do you think about price in kind of a future construct meaning maybe entering into 2024. It's probably more of a valid question for W&P, but maybe you can address for both -- both segments and give us a little bit sense of what...

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, I don't think, yeah, Scott, I don't think 2024 will be what you would consider a normal year even in a normal environment a few years in a row just normal things, which we haven't had in four years for anybody. We would always get like 1.5% to 2% price lift in the W&P business. Our goal in 2024 is the hold-on to as much pricing as we can and you obviously you see us and others we're getting benefit from price cost spread and we saw it in the third quarter which helped us obviously see it in the fourth quarter. So our goal is to really manage that well for 2024, because there is still quite a bit there. Now, we're not going to get all the costs back by renegotiating contracts. Everyone's trying to hold price, our vendors are trying to hold it too, but we're still up to about 225 million that we've gotten back that we, so I mean that's pretty significant for us. And so we're hoping to hold that for next year. My gut is we're going to give up some pricing in the shelter business because we don't want to lose market-share, but a lot of the other businesses we'll really be managing that tightly.

But then if we ever get, we get back to normal times, hopefully 2025 we would look at that 1.5% to 2% price increase. And then, electronics, we just try to hold-up about flat and usually we're flat-to-down 1% but you get nice volume lift.

[Scott Davis, Analyst at Melius Research]

Yeah. Good color. Thank you, I'll pass it on. Appreciate it.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, Scott, good talking to you. Thank you.

[Operator]

Your next question comes from the line of Steve Tusa of J.P. Morgan. Your line is open.

[Steve Tusa, Analyst at J.P. Morgan]

Hi. Good morning.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning.

[Steve Tusa, Analyst at J.P. Morgan]

Can you just update us on what you actually expect for what was the price-cost spread this quarter and what you expect now for the year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so our full-year number, we take that to $225 million versus the -- last quarter we had expected about $140 million. So we're seeing that deflation benefit through in the back-half. So in the third quarter, we saw net $75 million benefit. We'll see that tick-up to around the $100 million in the fourth quarter.

[Steve Tusa, Analyst at J.P. Morgan]

And so does some of that carry into next year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yes.

[Steve Tusa, Analyst at J.P. Morgan]

Okay. And then I guess...

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Just a [Speech Overlap]. Yeah, that spread will continue into next year with the caveat that we don't place as earlier comment what the price is going to do, but we do expect that deflation benefit to continue because if look at the time they get through inventory this year.

[Steve Tusa, Analyst at J.P. Morgan]

Got it. And then just kind of a philosophical question on how you think about next year, I mean your exit-rate now on some of these businesses just from a revenue perspective is more negative, you're taking revenue down. You talked about some of it being destock, which is effectively an easier comp next year in the second-half of the year. I mean, do you think with this profile that you guys can still grow revenues next year?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, yeah, I think the first quarter, Steve, to your comment will be why more similar to the fourth quarter because I don't think the destock will end, but that work, but the distributors will move very fast, they just stop ordering for a while. Literally we talk directly to them and their like just don't shoot me something for a few months and then we'll be back on-track. So, yeah, I think first quarter will be on the light side, but I think after that we'll see some nice lift. I would certainly by then the electronics part of our business, which you know is highly profitable. I think we'll be back to a really nice lift. Just on the semi side, the fabs are running a little below 70% utilization. I think if we do the math on what the industry is thinking, they're going to trying to get up as the year goes more to 80% utilization the following year, more like the 90% where you would run of that. So you'll start to see some on a percentage basis some pretty nice lift and we've had two quarters in a row of ICS lifting. So it's clearly off the bottom that will I think continue to grow as we go through next year.

So, I think you're kind of through the electronics one, although we're kind of now doing a destock on the W&P side and remember we're mostly short-cycle. So, we'll see it first and then I think by the second quarter, you will see a lot of that destock over within -- you'll see the volume lift.

[Steve Tusa, Analyst at J.P. Morgan]

Then one last one for you. I mean you've been through a few cycles, DuPont having I guess high single-digit and double-digit organic volume declines. I mean are we -- are we already in a recession here in your mind?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

I'm trying -- one foot in, yes, I've been there for a while by the way. I track a lot of economic indicators, I said earlier, when you see the yield curve where it's been in all, there's always been a recession. So I like the management, I guess conservatively, so I've been telling the team for a long-time, just prepare for a softer environment and if we're wrong, great. We'll have done all the right actions to position ourselves. But I think -- this quarter just reading all the results from companies I saw they were, they were pretty mixed.

[Steve Tusa, Analyst at J.P. Morgan]

Right. Great, thanks a lot.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

And people were mostly missing on the volume that not on their EBITDA.

[Steve Tusa, Analyst at J.P. Morgan]

Right, yeah. Thanks a lot.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Okay, Steve.

[Operator]

Your next question comes from line of Michael Leithead of Barclays. Your line is open.

[Michael Leithead, Analyst at Barclays]

Great, thanks, good morning, guys. Ed...

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning.

[Michael Leithead, Analyst at Barclays]

On the Delrin sale, can you maybe speak to why this monetization structure was sort of the best ultimate outcome? And then relatedly, maybe for Lori, when should we expect a note receivable to accrue or I guess when you get that $350 million in cash?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so we like that -- look, we sold Delrin in a tougher environment than when we sold the rest of MNM. So this optimized what we could get for the asset over a few year period. We're getting $1.2 billion some upfront, we're riding 20% equity in it. TJC has a phenomenal track record. So my gut is we have some nice upside coming from the retained interest that we have in the business, that's to be proved out, but I'm highly confident in that. It is a good business, it should do well over the next few years. So we think that optimizes our position. So we sold it at $1.8 billion in value. My gut is we can end-up nicely above that with the equity that we have. So and by the way, it just goes to our whole capital allocation strategy. It was not a business we wanted to be in long-term even though it's a good business. We've taken the volatility out-of-the portfolio and we'll redeploy that cash and as we said in our prepared remarks, we will actually do more share repurchase after the ASR ends next year because we're in a great balance sheet position and we'll have good free-cash flow and we plan to buyback more shares.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, and Michael on the debt. So we gave them $350 million loan. It's an eight-year loan if that venture were to go that long, so like normally they would monetize quicker than that and then we would get the repayment until though. And so if it went to the longest pole, it would be eight years, but most likely not the reality.

[Michael Leithead, Analyst at Barclays]

Great. That's super helpful. And then second, I was hoping maybe you could give us a bit more color on the moving pieces within the corporate and other segment, I assume the retained businesses are doing fairly well on the auto backdrop. So, can you speak to what's kind of the moving pieces there and should we expect that business to continue to deliver some level of double-digit millions of EBITDA?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so the business is just for a refresher that are in corporate are primarily the adhesives business and then we have Tedlar multi base, but the largest end-markets served is automotive and there's a large EV exposure there. So we saw a nice mid single-digit volume growth again. We expect for a full-year from a volume growth perspective that the auto adhesives to grow up in the high-single-digits. And we continue to expect really great things from that business with the EV penetration that we've seen. So, from an earnings perspective, they were up very nicely as well. We saw a nice earnings growth and margin appreciation in the third quarter.

In the fourth quarter, we have a little bit of a deceleration, just a lot of their exposure is in the US with automotive, so there is some headwind from the strike that fortunately is now over, but there will be a little bit of a headwind from the October impact. And then the US car belt right now for my -- just are expected to be down, but overall the trajectory of this business is really strong. They had a great 2023 and we expect a really strong 2024 again.

[Michael Leithead, Analyst at Barclays]

Great, thank you.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thank you.

[Operator]

Your next question comes from the line of John McNulty of BMO Capital Markets. Your line is open.

[John McNulty, Analyst at BMO Capital Markets]

Yeah, thanks for taking my question. So it looks like the electronics end-market seem like they're starting to stabilize a little bit, you expect semi technologies to be up quarter-over quarter. Can you add some color on what you expect from the other two sub sectors in the E&I division, do you see normal 4Q seasonality is there may be a little bit of destock in the Industrial Solutions side. I guess, can you help us to think about to think about the trends there?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so, semi will lift a little bit, I'm sorry, would still say bouncing along the bottom, but getting through the destocking. When I say a little bit a few percentage point sequentially up in the business. The ICS business will be down some, but that's all seasonality, if you look at it just the normal drop you see in seasonality, it's less so the business continues maybe a few more points to improve after the last two quarters of improvement. So kind of less seasonality, because the business is recovering. And then on the industrial part of E&I, we'll definitely see a little bit of destocking there. The biopharma destocking which is in that business picked-up some during the quarter. So I expect that to continue into the fourth quarter and hopefully be kind of done by them with that and there is just a little bit of other destocking going on, but some of our distributors in that business.

So nothing significant, but I think that we'll see a little bit of softness.

[John McNulty, Analyst at BMO Capital Markets]

Got it, okay. Thanks. And then maybe just as a follow-up. I think as we get to kind of mid December, the opt-out periods to be kind of done on the PFAS side. I guess, can you give us any update on the Water District, Water District settlement, is there anything that you can speak to at this point, it seems like that should put a lot of -- lot of kind of the pressures behind you, but I guess any update there would be -- would be helpful?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, so we the day that's coming up here is the deadline for the opt-out is December 4th and then we will see a list of who the opt-outs bar on December the 6th. And then there's a final fairness hearing in South Carolina on December the 14th, so it's all kind of happening that first two weeks of December. And I really can't add any other color, I just don't have any other facts in front of me. We're feeling obviously very good about it, highly confident that this will get signed off and get down. And by, I'll just add, obviously people are talking to the key water districts around the country. So, we're feeling good and hopefully we're close to getting that cemented.

[John McNulty, Analyst at BMO Capital Markets]

Great, thanks very much for the color.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, thanks.

[Operator]

Your next question comes from the line of David Begleiter of Deutsche Bank. Your line is open.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you, good morning. Ed, Lori...

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Restructuring anymore -- any more color you can provide some more concrete examples of where that 150 is going to come from?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so we had mentioned that it will primarily come from plant fixed costs and then the G&A or the functional costs, the overhead structure of the company. So the plant fixed costs is really a function of the destocking and what we can do from a volume perspective. So looking hard at contractors, looking hard at the plant fixed-cost, then looking hard at making sure that we can temporarily adjust our cost structure to align with the volume environment that we're seeing. And then on the kind of the stock side or the functional costs, general administrative that shift continued leaning out. So, as Ed had mentioned, we're constantly looking to make sure that we're running as lean and an efficient organization spot, so that's where the focus will be.

We really won't be touching R&D and marketing and sales. So we believe that's this destocking period as temporary, ancillary revenues to be prepared when it comes back on the other side be able to take advantage of the upside. So that really won't be the focus to be more on the plant cost and functional spend.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Understood. And just on Interconnects and semis, did you gain any share this year or is there any new technology products pipeline that you think can grow share this year or next year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so there is examples in both. So within semi really around the packaging side, we've seen some nice share gains. And also just in general, we've seen an uptick on the advanced node components. And so if you actually look at our performance in the quarter, we had nice growth with TSMC as they continue to expand their advanced nodes and take advantage of the AI -- AI revolution. So we saw a nice growth on the semi side. And then within ICS, we had a new application within the large smartphone looking service, which took advantage of a material that crossover our metallization business to be able to have a key win there. So that was part of the sequential growth that we saw in the quarter and will be continue to be -- it's on every single model of the pound, but the one producer, that was a nice bench for us.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

Your next question comes from the line of Alex Yefremov of KeyBanc Capital Markets. Your line is open.

[Unidentified Participant, at DuPont de Nemours]

Thanks and good morning, everyone. This is Ryan for Alex.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning.

[Unidentified Participant, at DuPont de Nemours]

My first question comes around the Shelter Solutions business. Just in terms of where do you think we are in the destocking cycle there and demand. And then, how good is your visibility into 2024 here?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so we saw less of a year-over-year headwind in Shelter in the third quarter versus what we saw in the first-half that we feel like things are starting to normalize a little bit and then our expectations for the fourth quarter are to see less volume declines we see year-to-date. So feels like things are normalizing a little bit. Obviously, there is a little bit of disparity from a market perspective between the resi and the commercial side. A lot of the roof that was on the commercial side is more in commercial applications where we don't have a big footprint, like for example around the data centers. Our exposure in commercial was more around education and healthcare and government where there hasn't been that step-change, but that's really been more on the datacenter side, but in general it feels like we're nearing the end of the significant downturn, we expect that volumes in the fourth quarter to be more down in the mid single-digits versus the double-digits that we're seeing all year. So it feels like it's starting to normalize and we do believe the destock is now behind us. So now it's just a function of when that demand returned.

[Unidentified Participant, at DuPont de Nemours]

Okay, very helpful. Thank you. And then just a question from me on, you mentioned China trade restrictions and the impact it had on the semiconductor technologies business. Wondering if you might be able to quantify that impact there? And then just any updated view on the recently-announced restrictions there? Thank you.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so no change to our current view about $60 million of a revenue headwind from the exposure. So a lot of...

[Unidentified Participant, at DuPont de Nemours]

For the year?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

So, for the year, so it's about $15 million of order. So, a lot of the restrictions have more in the advanced node spaces. We don't have a huge footprint with the Chinese players from that perspective. So it's only about $60 million perhaps.

[Operator]

Your next question comes from line of Josh Spector of UBS. Your line is open.

[Joshua Spector, Analyst at UBS Group]

Yeah, hi, thanks for taking my question. So I just wanted to ask on fourth quarter, I mean it kind of seems like the prox moving around the different areas in terms of destocking, but if I heard you right, your sales guidance is kind of flattish in the different segments sequentially semi is ticking up, which has the highest drop-through and you're expecting from higher raw-material benefits. So what would drive EBITDA down sequentially $20 million, $25 million versus flat-to-up?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so we see the underlying revenue down about $100 million once you -- on an organic basis. So we will get another quarter of the Spectrum business versus third quarter. But if you take that out, we see underlying organic revenue down about $100 million. So it's about split between seasonality and currency being about half of the headwinds with the seasonality being within that primarily the smartphone and consumer electronics business in ITS and Shelter, if they shrink throughout the summer months and then currency we do see as a bit of a headwind sequentially.

And then the other half of it is from the medical packaging piece that Ed had mentioned earlier. So we do see some medical packaging pullback in the fourth quarter as those device makers destock from the over buy that happened through the recent quarters. So it's really just and then the EBITDA, you have a net benefit from additional spread. We have mentioned, there's about $25 million of additional benefit from spread, but that $100 million impact from the volume declines and net you out to be surrounding that we guided to at for the fourth quarter versus the $775 million because the third quarter revenue.

[Joshua Spector, Analyst at UBS Group]

Okay, thanks. No, Appreciate that. And I mean, just if you kind of come back to electronics and semis, I think Ed you said utilization rates in the mid-70s I think we maybe troughed in the high-60s, so you guys haven't really felt as much of that pickup. I guess as you look at things improving, how much is semi reconnecting your business year-on-year just from a reconnection to where the rate is now. I mean is that mid single-digits or higher just on where we're run rating now past inventory or it would be a different math to get to a different level. Thanks.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Well, the fabs have been to your point have been running kind of if you lump them all together. I think you would average out in the high 60s and I think if you go through all the projections out there and I was talking to our customers that high 60s is going to ramp through 2024 up to by the time you get maybe end of third quarter, beginning of fourth quarter, up to maybe a little over 80%. So you still won't be back according to projections kind of over 90%, so you enter into 2025, but again going from high 60s to 80% is a nice lift or in a year. And then more of that production will be advanced nodes, which back to Lori's point a minute ago, plays to our string if that's usually why we outgrow 200 to 300 basis-point, what the market is doing. But it's also by the way, you also got to look customer-by-customer on the semi side, because some we're shipping out of inventory, but all the signs I saw from all their reporting publicly they started they've seen their bottom. It looks like pretty much across-the-board, but I don't think the lift will be dramatic in the -- at the beginning of the year, but I think as the year sequences, we'll see nice lift occurring in that business.

[Joshua Spector, Analyst at UBS Group]

Okay, thank you.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yep, thanks.

[Operator]

Your next question comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Couple of questions here, first on the distributor part of the supply-chain, not just-for-you, but for pretty much everybody seems to have taken it more on the churn with the overstocking in the and then the destocking. Do you have a sense of whether that was just they were little too over zealous with principal risk loading up. And then on the way back-down, is the issue just that they don't have the same access to credit or just the higher the higher rates and I guess what I'm getting at is, do you think over-time you're terms with distribution and maybe some of your other customers are going to need to change in a way that might require you to hold more working capital or to give them incentives to move it along because I'm just sort of asking what's going to -- what's going to -- what's going to ultimately break the logjam of the game of hot potato of nobody wanting to hold inventory?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Yeah, I don't think it's -- I really think it's just we all over build inventory direct vendors and distributors through the COVID period. I mean, we all talked about it. And I go back to my example on the medical packaging side, customers yell on for us to get more to them and usually when that happens, you see an overshoot happen, then some of them probably even double order. I've been through that before in my career and then you get the snapback. So I think that's all we're going through is they're adjusting their inventory back to appropriate levels, they don't have to worry about carrying excess inventory because supply chains are normalized again. And again, we're doing the same thing, we're feeling confident about been able to get supply while our different components. And so we're working our inventory levels down from what were elevated levels because of the COVID stuff.

So I don't think you have to worry about different terms or anything with our distributors.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay, good to hear. Lori, can I just ask you, what's updated thoughts on minimum cash levels that you want to keep, just as we think about next year and you're free-cash flow generation versus what you might do from a share repurchase perspective?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so we'll start still target about $1.5 billion of minimum cash levels, as we had mentioned on the call, we'll look to return a significant portion of our cash flow to shareholders extra through share repurchases. So we'll be done with the existing ASR at some point later in the first quarter and then that will give us the ability to get back into the market underneath a new program. As Ed had mentioned, we have the Delrin proceeds coming in at some point today and so had that cash come in the door and then when we're in an open window, again, we'll be able to do more share repurchase.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay, great, thanks so much.

[Operator]

Your next question comes from the line of Frank Mitsch of Fermium Research. Your line is open.

[Frank Mitsch, Analyst at Fermium Research]

Good morning. I wanted to...

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good morning, Frank.

[Frank Mitsch, Analyst at Fermium Research]

Hey, Ed. How are you doing?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Good, good.

[Frank Mitsch, Analyst at Fermium Research]

I wanted to follow-up on Spectrum, you indicated that financially it was performing in line with your projections. I was just curious -- I think you indicated that you expected like something like $45 million of EBITDA for the balance of 2023 since you closed on August 1 and also I think you guys indicated, you get about $20 million of synergies, are those numbers still accurate. What's your -- what's your take on Spectrum so far?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, so, Spectrum is performing according to plan. They've got nice growth on a year-over-year basis, especially within the Medical Device sites, the majority of the business with medical device there is the piece that goes into industrial and it's really based on some nice key wins that they had with some of the large medical device producers. So we're pleased with the performance that we've seen that the numbers that you had cited earlier are still on-track and then the synergy delivery, it's $60 million in total, it's over a couple of year timeframe for us to realize the synergies, but that continues to remain on-track as well. Obviously, the initial synergy delivery will come from some overhead consolidation that will get after that procurement related synergies and maybe some of the site-related synergies over-time.

[Frank Mitsch, Analyst at Fermium Research]

Very helpful. Thank you, Lori. And I -- and if I could follow-up on semiconductor technologies, you indicated that AI growth is going to help this business in the future. Can you give us an idea of the -- of the size that you anticipate AI to grow to over 2024, 2025 in terms of your semiconductor business?

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Well, I'll go Frank to more high level, I think a lot of the growth will get will allow the semiconductor business again, once we get through this the downturn here and all that, that this business can grow kind of mid to high single-digit, which by way, it was doing before all the destock hit. Again, up the market grows 5 to 6 to 7 points will grow 200 to 300 basis points above that. And that 200 to 300 basis-points is mostly because of that high-end chip because of AI enablement and all that and that plays to our sweet-spot, so that's how we get that outsized growth usually over the market and AI plays right into that.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, maybe just to help devise that for you to, so within our semi portfolio, we have about a $700 billion business in datacenters overall and about a little more than a third of that is direct to AI. So that's the nice portion of growth that we continue to see above the overall MSI projections.

[Frank Mitsch, Analyst at Fermium Research]

Very helpful, thanks so much.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks, Frank.

[Operator]

Your next question comes from the line of Steve Byrne from Bank of America. Your line is open.

[Unidentified Participant, at DuPont de Nemours]

Hi, everyone, [Indecipherable] calling on for Steve Byrne. Just going back to the Spectrum business now that you've had the business for a couple of months. Do you see any opportunities for cross-selling to these medical device companies?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, that was one of the large species for the revenue synergy upside was that, they are very strong and have great relationships on the medical device side and we're very strong and have great relationships on the biopharma side and how can we bring this to two pieces together to generate revenue synergy. So it's been a couple of months and that's the thesis that we initially seen it continues to play-out and we'll and we don't have the revenue synergies on the handbrake now, but we see nice opportunities as we continue to integrate these two businesses together.

[Unidentified Participant, at DuPont de Nemours]

That's fair, that's fair. And then which of your businesses do you see the most potential for share gains and a new product introduction versus volumes that are driven primarily by cyclical recoveries?

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah, I mean I think, we see -- if we take it by segment within E&I, we've mentioned that we should see 200 to 300 basis-points of outsized market growth in semi and that's a combination of share gain, just where our exposure is in advanced nodes in the areas that are growing faster than others. We also see a step-change opportunity within the general consumer electronics space. We have seen some nice share gain on the metallization side. It will continue to show in the top line is that as the PCB provider start to ramp-up their utilization rates to more normal levels that we have seen. And we have seen our performance versus some of the peers in the metallization space be better.

And then within the W&P portfolio, we continue to expect nice growth within water obviously we're in destock right now, but we'll see nice growth more from a secular basis, so just that water industry is generally growing in mid single-digits, which is a nice market for us. And on the safety side, it's really going to be -- we've added capacity now and we acted -- we'll get step-change growth from utilizing that capacity. So we're nearing the completion of a additional line for Tyvek, we've constrained the Tyvek market for years and so we'll -- we'll see some nice lift there as we fill-up that asset and we recently expanded some capacity within the new technology in the Kevlar space, so it's a -- it's a new opportunity for us to bring a lighter-weight Kevlar to the market and look for good things from that business as well. I mean and Shelter generally should be more along that GDP type grower.

[Unidentified Participant, at DuPont de Nemours]

Understood. Thank you.

[Ed Breen, Executive Chairman and Chief Executive Officer at DuPont de Nemours]

Thanks.

[Operator]

And our final question today comes from the line of Arun Viswanathan of RBC Capital Market, your line is open.

[Arun Viswanathan, Analyst at RBC Capital Markets]

[Speech Overlap] question. Hey, just wanted to take quick try at maybe kind of mid cycle or longer-term earnings growth. If you think about volumes kind of maybe double-digits below normal in electronics and then some leverage on a recovery there. You're exiting the year at around $3 billion of annualized EBITDA. Would that imply something in the 3 to 3, 3.3 to 3.6 kind of range as far as when you take a look at longer-term or mid cycle where you want to get to? Thanks.

[Lori Koch, Chief Financial Officer at DuPont de Nemours]

Yeah. I mean, longer-term, you should get back into that we were running the E&I portfolio, I think if where your focus was in more of a clear issue percent margin range and we should see the volume kind of return there over-time as the utilization raise at the large PCB guys and semi guys which are. But if we look more near-term, as far as headwinds, tailwinds that we head into 2024, there is definitely tailwinds from volume growth, from the electronics recovery and normalization of the destock. And there's obviously incremental tailwinds from the deflation we have mentioned as we go-forward. And then the benefit of the restructuring actions that we are now taking and we'll start to see the benefit of at some point there in the first quarter. And then just from an EPS perspective, we do continue to lower our share count that what we'll see lower fourth quarter share count versus the full-year, which will carry us into 2024 and then we'll have the incremental benefit of the $2 billion program that will complete in the first quarter and then advance new shares, new share take-out as well. So, we see a nice EPS benefit that we've seen as we took shares out throughout 2023.

The headwinds though are I think we will continue to see the industrial destock impact the water and safety businesses primarily in the first quarter. So that will be a headwind to the first quarter. We will see most likely some price modernization or get back primarily in the Shelter businesses as Ed had mentioned, so we'll try and maintain that as long as we can, but we will be cognizant of potential share potentially has to be giving some back there. And then just we have taken some aggressive actions on the compensation side in 2023, so we are paying a below target, variable compensation payout this year and so we would most likely see normalization of that as we head into 2024. And so those are the big puts and takes with the one extra exception from a below-the-line perspective around interest income. So we did see about a $145 million of interest income this year just that we help that the proceeds from them -- from them a lot from the Celanese transaction in the first half before we get deploy them to Spectrum and then the full share repurchase program. So we would -- we would see a step-down in 2024 from interest income from about 120 -- $145 million this year to probably $20 million next year.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Thanks.

[Operator]

I would like to hand the call-back over to Chris Mecray for closing comments.

[Chris Mecray, Investor Relations at DuPont de Nemours]

Okay, thank you all for joining our call this morning and for your reference the copy of our transcript will be posted on our website. This concludes our call. Thank you.

[Operator]

[Operator Closing Remarks]