Appreciate everybody who's coming or who's joining us today. My name's Mike Leithead. I head up US Chemicals and Packaging at the Barclays . Really happy to have the DuPont team here with us. Ed Breen, Chairman. Thank you, Lori. Head of the CFO role as well. So before we get started and dig into the Q and A we're gonna run through some of the audience response questions fairly quickly. So if we could flip to number one. Do you currently own the stock? Yes. Overweight? Market weight? Underweight? No. Okay. A lot of opportunity here I think to get some new investors. Next question. What is your general bias towards DuPont stock right now? Positive? Negative? Neutral? Okay. A little bit of a mix right now. Next question. In your opinion through cycle EPS growth for DuPont will be above, in line, or below peers? Okay.
Most people say in line. Next question. In your opinion what should DuPont do with excess cash? Bolt-on M&A? Larger M&A? Repos? Divvies? Debt paydown? Internal investment? Okay. Seems like share repurchase is the biggest with Bolt-on M&A and internal investment. 2. Next question. In your opinion on what multiple of 2024 earnings should DuPont trade? You gotta range from less than 6 through higher than 21. Fortunately we don't give Lori one with peers so she can't press the 6. 5 times in a row.
She would.
Chris will do it down there. All right. Sounds like 16-18 is sort of the quorum there. Last question I believe. What do you see as the most significant share price headwind facing DuPont? Core growth? Margin? Cap deployment? Or execution strategy? Okay. Seems like core growth is the winner there. The biggest focus for investors I should say. So look we'll go ahead and get started. Ed, Lori, appreciate you guys joining as always again this year. Ed, maybe let's just kinda start off the big picture kinda level set where things are. DuPont's obviously in a lot of end markets. Touch a lot of different regions. Can you maybe just do a quick tour around the world? What are you seeing? What are you hearing? As we enter 2024 here.
Yeah. I'll let Lori go through some detail in a minute if you wanna dig in more. But I'd say overall general theme and by the way that last question core growth. You know we really had a year in 2023 where we had a lot of destocking going on and accelerated in the back half of the year in our W&P business. So you know the electronics went into the destock first and that's well over a year ago. Both our ICS business and our semi business are now coming out of the destock and we're starting to see growth there as we talked about on the earnings call. What was interesting in the fourth quarter again we're a lot of short cycle businesses. We saw order rates decline in some of our W&P businesses on the safety side, the water side.
It was all destocking going on there. What was really interesting about it on the earnings call the other week, we talked about our orders pretty much across the board accelerated throughout January. I would add that two weeks now into February our orders since January 1 through the middle of February are up below double digits.
Mm-hmm.
We continued to see lift in the first and second week of February. The only two end markets and by the way it was very broad which was interesting.
Yeah.
The only two markets we did not see significant lift in were our Biopharma business and our Kalrez business. And both of those we think destocked in the second half of the year more towards the fourth quarter. But across our safety like Nomex, Tedlar our water business a little bit on the medical packaging they all started lifting for six weeks now. So I think we're by and large mostly out of the destock that we were seeing last year and getting worse at the end of the year, except for those two end markets that I mentioned. And I think on the Biopharma side there's six or seven other customers out there that have said the same thing. We think it's a second half recovery. So we're hedging and staying fourth quarter.
Yeah. Okay. That makes sense. Maybe let's start with electronics 'cause you mentioned obviously it feels like we kinda went through that first. A lot of buzz around those topics like AI data centers. But you don't always see that in quarter-to-quarter numbers or there's just so much volatility. So can you just remind us high level just what are the biggest volume drivers for your electronics business? And sort of near term how you're thinking about that recovery.
Yeah. So within semi, which is about a $2 billion segment within electronics, the largest key driver is gonna be MSI growth. For 2024 our current expectation is about 6%-7% MSI growth. And we'll outperform that metric by about 200 to 300 basis points at this point. So a key driver of that, not only the 6%-7% market growth but our outperformance, is that exposure to data centers and AI and more advanced chips. So we've got about a $700 million business in data centers. About $250 of that is AI. Small but growing at a very nice clip for us. So that's gonna be the key driver for semi coupled with the fact that we expect the fabs to get back to more normal utilization levels as you head into 2025.
So they're definitely gonna ramp through 2024 starting in the low 70s probably ending in the low 80s and then get back into that low 90 utilization rate as we head into 2025. It's similar dynamics on the ICS side which is primarily PCB and layered. We do see improved utilization on the PCB side versus where we were you know it was the first business to go into the downturn in the third quarter roughly of 2022. So no it's it was the first business to come out. We saw positive volume growth in ICS in the fourth quarter of about 2%. And we'll look for continued recovery throughout 2024. So it feels like the ICS and the semi businesses have definitely normalized and are on a growth trajectory path.
Those businesses E&I in total should get back closer to their normal margin profile as you head into the back half of the year and it'd be kinda more in a much normal position.
Yeah. Okay. No, that makes a lot of sense. And then circling back to W&P, it seems like obviously inventory dynamics surprised a number of folks in the fourth quarter. Can you just talk about, I mean, is it more just around the visibility given so much goes through distribution? That kinda caught people off guard. And then to your point around the first quarter is sort of this low double digit trend this six weeks now of more buying sort of what gets you comfortable that sort of that destocking is behind us now?
Yeah. I look, I think six weeks is pretty telling now. And as I said, it when we did our earnings call we were up 8%. Now we're saying low, you know, kinda low double-digit. But I think it verifies the ramp that we said we're gonna see from first to second quarter. You know, I think that solidifies, you know, that that's occurring. The do the on the W&P side a lot of it was what you said. It was not our end customers as much. They were doing some destocking. But the numbers that were really down were with our distributors. And about 50% of our business in W&P goes through distribution. So for instance in China a third of our water businesses in China we have four we have more than this but we have four main distributors over there. But they were down 30%.
Yeah.
You know it's when they just stop buying from you until they get their inventory back in order. So you know we saw that pretty rapidly. Now just to give you the rest of the story on the China distributors, they're about halfway through their destocking. In January, beginning of February we saw them start to place orders for delivery in May and June. So which kinda verifies again starting to see some of that sequential ramp in the second kinda the end of the second quarter into the third.
Yeah.
Quarter. And you know we're tracking those four distributors very closely. And we can literally see they're about halfway down. They'll be where they need to be in May and June. And then you know it takes them 60 days to get product over to them.
Yeah.
So, it's they're ordering about what we thought they would.
In some ways, and again, I don't wanna mischaracterize, but visibility in some ways is getting a little bit better here as we're going into the year.
Yeah. Well, and look, it's just in my whole career doing this I've never used the word destock except one other time in 2008-2009 which was mostly the economy went. But there wasn't destocking because the economy went so much.
Yeah.
But this was COVID related. It was supply chain buildup. We all had too much inventory. We all did.
Yeah.
When you're a short cycle business and you also go through distribution.
Yeah.
You know that that was the surprise that it was as severe as it did. But you know now six weeks bouncing back.
Somebody earlier was talking about a normal year and they can't remember what a normal year was. 'Cause it's been a while.
You gotta go back to 2018 or so before normal was closer on. Yeah. I said in the 26 years I've been the CEO I said the last four have been the most unusual. It also makes it fun.
Yeah. No, exactly. It keeps you going. And then, maybe just to round out the portfolio, I think investors maybe sometimes underappreciate what you guys have in the retained business. Because it's kinda in there with the corporate line. But it's done quite well, I think, the past year or so. Can you just remind us kinda what the key businesses are there and kinda what the growth algorithm?
I'll let Lori do it 'cause Lori actually besides being the CFO she's the head of those businesses. And also doing an awesome job by the way. But.
Thank you. Yeah. So there are 3 main businesses in that portfolio. There is adhesives, which is the largest, which we'll talk most about. And then there is Multibase and Kevlar. The largest end market for both adhesives and Multibase is automotive. And so obviously driving the automotive story for us is the EV. So we've got a really nice position with all the key OEMs not only on the structural and body side of the adhesives but more importantly on the battery side, which is what's really driving the growth. So adhesives is about an $800 million business this year. Almost 30% of it is EV. And about a third of that 30% is battery. And growing in a much higher clip than where auto builds are. So that's really what's driving the opportunity there.
Ed and I will actually be in China next week visiting a new facility that we built in outside of Shanghai to address the Chinese automotive market. So that's really the piece of that. They've done a really nice job driving margins as well to be able to deliver really nice productivity as we saw 2023 ends of.
Okay. Great. Then, on the portfolio, Ed, obviously there's been a lot of changes the past three or four years. You got Delrin across the finish line. As you sit here today, I mean, is there any major changes left? Or do you think the underlying businesses and the pieces are sort of kinda where they should be for the next, I don't know, two or three years?
Well, I think we've got to where we wanna be. It kinda dissects the portfolio. You know, again with destocking allowed away kinda normal time. About half the portfolio should outgrow GDP. The other half should grow either COVID GDP or industrial production stuff depending what it is. So I think that's a pretty nice mix. And by the way if you go back and look before the destocking you know we had three years if you just took M&M out of the portfolio and looked at the new DuPont portfolio we were growing around 5% organically. So I think we have a nice mix of businesses. And so the portfolio is where we want it.
Yeah. And getting or maybe just following up on sort of that organic growth piece 'cause obviously it's it's a key focus or a key question for a lot of people in the room. What is the right kinda growth algorithm for this business for the portfolio over the next again 2-3 years? You've got quarter-to-quarter oscillations. But just how should we think about the organic EPS algorithm if you will of DuPont over time?
Yeah. I mean, I think we have kind of again, it depends what the economy's doing. But if the business is growing 5% top line, you get 1.5 times leverage on the P&L. And then your EPS growth can be double-digit, you know, whether it's share buyback or, you know, bolt-on M&A and all that. So it should be a pretty consistent model year in and year out. And then we'll our cash conversion, which this year was 100%. But we should be north of 90% on a pretty consistent basis.
Yeah. Okay. Then on the balance sheet side, I think you ended the year 2.2 times net leverage. What is the right leverage portfolio you think about this business if we look out again 12-18 months?
Yeah. We reset our leverage target early last year for two times. So that's where we're comfortable. So we'll be nearly there at the end of 2023. So we'll look to be in that two times range. We don't have the debt principal repayments on November of 2025. So we've got you know a fair amount of time before we hit that next milestone. And then after that it's 2028 and then 2038, 2048. So they're pretty you know pretty far apart with respect to debt paydown. So we're comfortable with the two times. It allows us to be very shareholder friendly with returning cash to shareholders. And also opportunistic with using it on the bolt-on M&A side. But right now obviously the focus has been on share repurchase with where it's located.
How should we think about the cadence of share repurchases? Obviously I think you guys talked about a potential for another ASR coming here. Just maybe remind folks about sort of obviously you guys have done a lot the last 12 to 18 months. What do you guys have over the next say 12 there?
Well, high level, we just took out 15% of our shares.
Yeah.
Over the last year and a half. We just announced another $1 billion, and Lori wanted to walk through the ASR.
Yes. We already launched the first $500 million ASR shortly after earnings. So that probably will take until the end of the first quarter to complete. And so you can expect us on the other side of the earnings announcement in late April early May to get started on the other $500 million. Even though we had authorization from the board into mid-2025 we commented on the call that we would look to wrap it up this year. So we've found the last several rounds we've done with an ASR and we found that to be a very efficient model. There's a lot of bidding to get the program that gives us a nice discount. And it's also just very efficient. You get 80% out day one. And then you get the remaining 20% at close.
Maybe just following on to that, as you just mentioned, I mean, you guys have been very active in the market buying back your shares. I think implied in that is you feel that DuPont's probably undervalued and your shares are a bargain to scoop up. What do you think investors or the market is missing? Or again, if you look at your share price, I mean, what do you think one or two areas you think people don't fully appreciate with where DuPont's trading today?
Well, I think, by the way, short term, I think the destock has not been helpful, obviously. And you know, coming through that, you can see the numbers really crank. But I think, look, we made a lot of moves the last five years. I mean a lot of moves.
Yeah.
to get the portfolio to where we have it. So a lot of people are just studying it just getting to know it. What's in it. And then of course we had you know kinda this year with you know the destock and the electronics downturn. But generally they're all great businesses. I think people have to learn the portfolio. They gotta study what's this top line is like 5% in a normal economy doable. It was we did it three years in a row before the downturn. So very doable. But I think it's just a learning process for people. And, look, we clearly feel we're very undervalued. And most of you that own the stock can look at it say the same thing. We're at a basically a 12x multiple.
You got businesses in the electronics portfolio and water, just to name two of them, which are 18 multiple businesses. We like buying our shares back at this point.
Yeah. No, that makes a lot of sense. One area I do wanna touch on a little bit: medical. Now, obviously right now it's a little choppy. But I mean, you guys have expanded your exposure there a little bit with the recent acquisition. Can you maybe just talk about kinda what makes that attractive? Why do you think that's an interesting kinda avenue for what you already had in the portfolio? And then maybe moving forward.
Yeah. That's also an 18x multiple business by the way. Just add another one. If you just, you know, do the benchmarks on the one or two.
Yeah. We've got about 10% of portfolio in healthcare today. So it's the combination of the existing Tyvek healthcare as well as the Liveo business which was in the E&I portfolio. And now the incoming $500 million business roughly from Spectrum. So those combined are not an insignificant portion of our portfolio that's at partial trades at much higher than where we trade today. So we have a lot of affinity for the combination of the Liveo business with the Spectrum business. There's already been a lot of customer engagement around how can we broaden our toolkit to be able to bring more solutions to our customers. So you know the Liveo business was primarily a biopharma bioprocessing, and the Spectrum business was more medically right side. And we were each kinda in those places and not really looking beyond that.
Now with the combination we can cross-fertilize and look beyond that. And like I had mentioned we've already had a lot of inbound from the customers on the Spectrum side about hey how can you help me on the biopharma side with your Liveo business. So.
We have one large customer, existing customer with Spectrum, [that's] asked us to bid on two new projects we would have never been able to bid on because they saw the combination of what we could do between the Liveo and the Spectrum business. By the way, Spectrum is performing very well up to the business model that we put together. They're doing a major ramp with this one customer I just mentioned. That's going very well. The Liveo business is the biopharma one that's going through destocking. Spectrum is not going through any destocking in that end market. But biopharma, that's the one we think will kinda come out end of third beginning kinda fourth quarter.
That cross-pollination or what have you? I mean, is that just because of the breadth of the portfolio?
Yeah.
The R&D efforts that you guys already have? I mean just all of the above?
Correct.
Yeah.
Yeah.
Okay.
We've recently put them together under the one leader as well. So the former CEO of Spectrum underneath the private equity firm now heads up not only the Spectrum but the Liveo business as well. So we have, there's part of the benefit to be had from that combination.
And then maybe just shifting gears a little bit. On the price cost side of things, obviously you guys have done a good job pushing price through the entire inflationary cycle. Not too, we're seeing that much deflation. But it seems like inflation at least is moderated a little bit. Can you talk about your ability or or comfort in holding that price? Or I mean again how you guys are thinking about managing price cost spreads here as we go through 2024?
Yeah. For 2024 we've got a net neutral spread position right now. So we believe we will have further deflation benefits primarily just coming from the procurement cycle. So as we went through 2023 and we saw deflation kick in, a portion of that was sitting in inventory. And we'll continue to come out throughout 2024. Our expectation on the top line side of the price is that we will have to give back about 1% that will neutralize what we believe we'll see on the raw material, energy and freight side. But we'll see how that plays out. So you know there's pockets where we'll probably be a little bit heavier than others.
Just given the dynamics that are involved whether it's the you know the level of customer engagement or primarily when there's raws that are visible that are made in the products and you go track them with what they're doing from a pricing perspective. It's a different concept. But in general we will still maintain net price spread over the three-year period. So in 2022 when we were in the crux of it all driving up and we had almost $100 million inflation we offset with price. And then in 2023 we actually saw about a $25 million net benefit from price this year. Net neutral as well. So we're to the good over the total time.
We actually haven't given up price yet. We thought we would in one business to maintain market share. We actually haven't done it yet. We're just, it's in our plan. We're going to give a little.
You couldn't name that business when it opened up.
Nahla Azmy. That's one of my second. I will say it in a private session.
Yeah. Obviously you guys have moved on or a lot different than petrochemicals and the like. But natural gas is down about almost $1. In the past month or so. Is that beneficial to you guys on the energy side? Is it small? I mean just how should we think about energy overall?
Yeah. It is a benefit. So we actually had the procurement meeting yesterday before we came down. And we saw an improvement in the natural gas and general utility flows cycle-over-cycle. However, it was offset by cycle-over-cycle degradation in the distillates primarily from the Red Sea to the Algeria. So we're still net neutral from where we believe we will be from a deflation perspective. But definitely we won't be super low here at the natural gas natural gas spread.
Yeah. See. That's something different for management teams just in the craziness of the way I treat your team. That sounds kinda granular. Lori and I sit all the time in procurement meetings. You didn't have to do that in the past. You did it a couple times a year. And now it's like every month.
Yeah.
But it's that important.
Well, it's been a while, like we said earlier, too here specifically. If we maybe just turn over again and I'll open up questions after this. If there's any questions we'll come around with Mike. But on the liability side PFAS you just finalized the water district settlement. Have that all taken care of? If we look over the next 12-18 months are there any other sort of big items on the horizon that investors should be focused on? Is it more smaller settlements from here? I mean just how do you think about the landscape the next year or so on that?
I think there'll be a couple smaller settlements over the next year without getting into details.
Yeah.
Remember it gets split three ways. You know, the You mentioned, Corteva, and us. There's still the MDL with, you know, the AG cases and all. I don't think, you know, I don't think that's the one in 2024.
Yeah.
But very happy with the settlement we got. But I think investors can now scope out the numbers much better. You know the judge and the plaintiff saying our consortium is 3%-7%. Of the exposure. And then DuPont's only a third of 3%-7%. And I think the water district thing played out where you know you can see the math for us was not anywhere near the articles being written and what people were speculating. So I think you can zero in on that and do the math on the rest of this.
Yeah. I mean I think anytime you can ring fence or at least kind of put another number.
That was, but that was the big one. You know, the water districts obviously was a, you know, big settlement for some other companies.
Maybe just to kinda tie a knot on it, Lori, can you just maybe just separately remind us just how the cost sharing agreement works for those that maybe don't or aren't as intimately familiar with you guys?
Correct. Yeah. So we have an MOU with Chemours and of course that roundly is for $4 billion. Our share is $1.35 billion. So as expenses come in Chemours pays 50%. And DuPont is supposed to split their remaining 50% and they pay $7 million. They pay $29 million.
Any questions in the audience? Again, I can ask Ed and Lori questions for two more hours if Chris doesn't cut me off. But I think there's a question right there. They're gonna bring you a mic right there.
I'm just getting back before we started. Chemours in February. Just from my geographic standpoint what you guys are seeing I mean we've obviously seen a lot of resilience in the U.S.. But Germany seems to be pretty flat. China has plenty of problems. Just be interested in any calls from you guys.
Yeah. I mean as we went through 2023 we saw China improve whereby it declined less. And so that's that's that's the expectation for 2024 as well. And that 2024 was in China about flat. From a volume perspective it's been tailored to the Techs again. So the first half's still weak and the second half's not seeing strength. So that's obviously the one key market that we pay attention to that was was volatile in 2023. And and we see some preservation in 2024. Generally outside of that the order position growth that Ed had mentioned really isn't very different by region. So one of the big pieces that we're seeing too that we talked about earlier when we talked about the W&P business and the the destock that was felt in Q4 was on the healthcare side.
Healthcare is about a $500 million business for us with Tyvek. We see that resolving as we get out of Q1. The expectation for revenue between Q1 or the first half and the second half for the healthcare business is about an $80 million risk. That's not insignificant. That's primarily why we're in the business for it. But so we're seeing the order start to pick up. And it would be a key top line growth driver for us as well as a margin driver for the W&P business.
Any other questions from the audience? Maybe the last one then for me. Ed, I think I ended on this last year. But you've obviously been involved in the industrial space for a number of years now. I've seen a number of different cycles. Kinda as we sit here today again maybe not as much DuPont specifically but just the broader industrial economy. What are you most focused on? What what do you think is the most pressing issue or or thing that people should be focused on this year?
Well, I think we touched on a lot of them. I think it's gonna be interesting, like, the conversation of people holding price. Everyone got a lot of price. How that's gonna play out for companies. Probably we got price across the board in every business. So I think that says something about the quality of the portfolio and the fact that we can hold them. I think just watching companies in general. How that plays out over the next year and a half for them will be interesting. Then obviously the destock was huge. I mean, the dispersion in earnings this past quarter was crazy. You know, and by the way, even within people's own portfolio.
I'm excited for us because we're coming into a major. I think everyone would agree with this, a major upturn in electronics and semiconductor. And we're in the sweet spot of the semiconductor play. So I think the next few years are pretty exciting for us to watch us. And you know, but in general, the economy you know feels pretty decent. You know, a little bit lower growth probably just globally. The Germany comment you know is off. But you know, companies perform well in that environment.
Well, look, we'll end it there, Ed. Lori, appreciate it as always. And thank you for coming.
Thanks everyone.
Take care.