Chris Mecray:

Good morning and thank you for joining us for DuPont's second quarter 2024 financial results conference call. Joining me today are Ed Breen, Executive Chairman; Lori Koch, Chief Executive Officer; and Antonella Franzen, 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'll 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 or results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current 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 that have been posted on DuPont's Investor Relations website. I'll now turn the call over to Lori.

Edward Breen:

Thanks and good morning, everyone. As seen in our second quarter results, we are well into the recovery phase from last year's inventory corrections in most key end markets and electronics may be setting up for a prolonged positive cycle. Turning to the separations; we've received very encouraging feedback since our May announcement of our intent to separate the electronics and water businesses and the formation of 3 independent companies. We believe our investors broadly appreciate the value creation opportunity of having 3 industry-leading global companies with compelling growth opportunities and distinct investment propositions. As we shift gears to ramp up our separation activities, we have also worked to ensure our teams internally are highly motivated to remain focused on serving customers and driving business performance. That remains the top priority and I'm confident our operating teams will continue to execute. As you can see on Slide 4, we have already begun working on the rigorous project management processes necessary to ensure the separation work is executed smoothly. Our teams have plenty of experience to rely on to ensure we stay within the 18- to 24-month time line from our May announcement with all 3 companies well positioned for day 1. One key short-term milestone that has already been completed is the establishment of key work stream leaders as part of our integrated project management team under Lori and Antonella's leadership, along with myself. Key separation work streams underway include legal entity standup, IT separation and stand, our financials and talent selection. A current priority, along with our Board, is to complete executive leadership appointments for electronics and water along with corporate governance aspects including board appointments. We currently anticipate announcements in early 2025. We are also making progress towards the future capital structures of the 3 intended companies. Specifically, during June, we redeemed $650 million of our 2038 bonds and entered into new interest rate swaps that hedged the rate risk on our longer-dated maturities. To the extent that it becomes necessary to repay these bonds, the new swaps hedge the risk of higher debt repayment costs that would occur in a lower interest rate environment. So while it is still early in the process, you can see that the separation work is progressing along and we look forward to updating you as we move forward. Before I turn it over to Antonella, I'd like to mention 1 of the updates detailed in our 10-Q which will be filed later today, specifically around the South Carolina MDL. Now that the water district settlement has become final, the court has indicated a focus on the personal injury cases. Earlier this year, the court ordered cases not involving 1 of the 8 medical patients to be dismissed by August 22 unless certain evidence is presented. About half of the 6,000 cases depending on June 30 are expected to be dismissed on that basis. They can be refiled over the next 4 years if those evidence requirements are later met. We do not, however, expect any trials in 2024 in the South Carolina MDL. With that, let me turn it over to Antonella, who will provide additional details on our financial results and outlook.

Operator:

[Operator Instructions] And your first question comes from the line of Jeff Sprague of Vertical Research Partners.

Lori Koch:

Yes. Jeff, maybe to your first question. So yes, the majority of the growth that we saw within the semi and ICS business was just market recovery but there was probably about $30 million of pre-buy, especially within Asia Pacific, as some of the new fabs come online. So that drove the Q2 performance up a little bit and then it will mute a little bit the ramp into Q3 and the back half of the year. But overall, still really nice recovery in the electronic space. As we have noted, a lot of it is coming from the AI acceleration that's felt in both the semi and the ICS business. In total, AI is about $250 million of sales for us today; so a lot of improvement to be able to drive growth there. Like I had mentioned, it's felt across the board in semi as well as ICS on the packaging and the thermal management side.

Lori Koch:

Yes. So the $30 million of pre-buy was probably about $20 million in semi and about $10 million of Interconnect. So on the Interconnect side, it would be a little bit of a timing shift for some of the premium smartphone deliveries.

Scott Davis:

Lori and Antonella, it's good to have you guys leading the call here. I wanted just to dig in a little bit on price. I was expecting price to be down in E&I but maybe not necessarily in W&P. Is it mostly kind of a pass-through in like tieback? What are the -- I'm trying to picture why price would come down in Water, I guess but perhaps it's just kind of the comps and how you had to raise price into that big inflation pickup at the beginning last year? Maybe just some color there would be helpful.

Scott Davis:

Okay. That's what I thought. And just going back to Jeff's question and this is just -- I'm not an expert in electronic chemicals at all. But is it the same product mix going into AI applications? I assume it's higher volumes per purchase, et cetera but is it the same product? Or are there variations of that?

Scott Davis:

Okay, that makes sense. That's what I thought. So thank you. Best of luck.

Steve Tusa:

Congrats everyone in the room there. Just on the guidance, what is kind of normal seasonality now for EBITDA? It looks like it should be up mid-single digits quarter-to-quarter, at least that's kind of what it did last year but you're more in recovery mode, it feels like. So unclear to me why it would only be up a couple of percent like you haven't guided.

Steve Tusa:

Okay, that makes sense. And then, Ed, you mentioned the change in the PFAS item there. Where do we stand on like State AG as well as just remind us what the other major moving items around PFAS actually are and how significant this South Carolina News is in the context of what's remaining here.

Steve Tusa:

And I guess for PFAS more broadly though, does that -- I mean for the other guys that are involved, the ones with the larger exposures, I mean, is there any -- I would assume that it's kind of a similar impact to those guys as well. Now -- is there any reason why judging how injured somebody actually is, is different from company to company when it just comes to the basic injury [ph], if you will?

Steve Tusa:

And then any update on [indiscernible]?

Steve Tusa:

Any update?

Steve Tusa:

Yes. You're always working hard. So we appreciate that. Thanks a lot.

Josh Spector:

I wanted to ask on W&P. Just within the guidance in the context the year-on-year comps get easier, so you're clearly expecting some growth there in the second half. But it kind of seems like you're guiding things somewhat flattish from a sales and EBITDA perspective. So I'd be curious, are you seeing continued improvement from destocking? Are you not? And what are your assumptions around that?

Josh Spector:

And I guess what about margins? Kind of the same line of thought there. I mean that was a bright spot in the quarter here, getting back to kind of a year ago margins and volumes still down. Is there something incremental negative on the margin sequentially? It seems like you're assuming that's a little bit lower versus what you did in 2Q.

Operator:

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

Edward Breen:

Yes. Yes. So your last point, no, we wouldn't do anything where we bolt something on the asset. I don't want to get out in front of ourselves on any speculation of what's going on. But as I said on the last earnings call, John, if there is interest in the water business, we obviously will look at it and study it hard if there's a better path to creating value for our shareholders, we would clearly do that. And I'll just leave it at that for now.

Edward Breen:

Yes. So it kind of goes back to the whole superfund circle issue. And to make it very clear, manufacturers of products are not responsible under circle. There's kind of 4 key categories, if you don't mind me telling you these for a minute just to clarify this issue. The responsible parties are current owners and operators of facilities where substances are located, [indiscernible] owners of facilities where hazardous substances were disposed, aggregators and generators, persons who arrange for disposal has a substance at a site and transporters who transported it to those sites. So by the way, there's a Supreme Court case on this, just to clarify it more. An entity will not be held liable as an arranger merely for selling a new and useful product if the purchaser of that product later and unbent to the seller dispose of the product in a way that led to contaminate it. So I think it's pretty darn clear, as we've said all along that we don't have responsibility under this

Operator:

Your next question comes from John Roberts of Mizuho.

Lori Koch:

Yes. We intend to report in the new structure prior to the Form 10 detailed filings would go out. So we're targeting sometime early next year to have leadership appointments and then ultimately report on the new segments would be the future spin.

Lori Koch:

Yes. So we will most likely have three reportable segments for Remainco, one of which is health care which would be the combination of Tyvek, Spectrum, the Liveo Biopharma business and now Donatelle given that acquisition closed. And the other two reportable segments would be a next-gen mobility which would help all of our EV automotive exposure. And then the remaining would be generally the safety business and the shelter business and the rest of the printing businesses and industrial businesses, industrial solutions that aren't semi related.

Chris Parkinson:

Just two quick questions on E&I. The first is, do you mind just kind -- as we enter into the second half, can you just offer a little bit more color on Semi tech just given some of your commentary around the broader strokes. But if we dig in to pad slurries, you mentioned older materials in your PR as well as the PowerPoint. Can you just help us conceptualize how we are trending into '25, '26 and perhaps into a larger upcycle?

Chris Parkinson:

Got it. And Lori, I have to bring it back a couple of years, because the follow-up is on ICS and specifically, Laird. When you originally did that transaction, you kind of mentioned AI as an optionality. And obviously, you're kind of -- at the time talking about the shielding the thermal management portfolio there. Can you just kind of help us think about the ICS business as it stands today versus kind of the legacy way of thinking around handsets. It seems like there's perhaps a lot more going on under the hood there in terms of how we should be thinking about sustainable growth rates?

Operator:

Your next question comes from the line of David Begleiter of Deutsche Bank. Please go ahead. All right. Our next question comes from the line of Mike Leithead of Barclays.

Lori Koch:

No. No, there's no competitive dynamics. It's really just the destock from the 2023 high volumes that went on. So there's nothing competitively. We did see sequential improvement in Kalrez as we had expected. We actually do forecast of return to volume growth in Industrial Solutions in total in the back half. So it was really just getting through the destock in Kalrez and also in the biopharma which are both in Industrial Solutions.

Antonella Franzen:

Yes. So keep in mind, as Ed mentioned earlier, we did have the settlements. So really, that's predominantly all the cash out of about $408 million related to the MOU settlement.

Frank Mitsch:

Nice result. If I could stay on the cash flow side of things, Laurie, when you were wearing your prior hat, as CFO. There was an expectation that the second quarter cash flow conversion might be lower than the first quarter in part with interest payments. And obviously, it came in materially above or nicely above, I should say. So can you speak to the factors behind that as well as what the outlook is in terms of cash flow generation?

Frank Mitsch:

All right. Terrific. And then maybe just a second or two in terms of the corporate line. Sales were relatively flat sequentially, yet EBITDA picked up materially. Can you talk about the factors there and what your outlook is?

Operator:

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

Lori Koch:

Yes. We expect volumes to be up low single digits in the third quarter year-over-year for Industrial Solutions and then more in the low double-digit range for the fourth quarter. So we saw a nice inflection sequentially and then we'll see a return to year-over-year volume growth in the second half.

Lori Koch:

Yes. So we haven't had any conversations on selling the water business. So our intent is still to spend. Each of the 3 spins will pick up their pro rata share of the of the PFAS liability per the trailing 12-month EBITDA underneath the sharing agreement with Corteva.

Laurence Alexander:

Can you give a little bit more detail on the sequential momentum in Water & Safety Solutions sort of into Q3 and how much visibility here is the visibility improving in those 2 businesses or lead times improving?

Operator:

Your next question comes from the line of Mike Sison of Wells Fargo.

Edward Breen:

I'll just say it this way. We are going to work at for. The electronics is very clear where that should be and we will work that issue. I mean there are pure-play comps in those industries that there's only a couple of key competitors against some that have their marking in the water business is the same way; so that will be worked.

Operator:

Your next question comes from the line of Arun Viswanathan of RBC Capital Markets.

Antonella Franzen:

Actually, I would say, our ways in our guidance, when we kind of take a look at it is not only adding in the Q2 beat but actually a bit more than that as well. So kind of the way to look at it is if you look where our previous guidance was and to your point, kind of at the beat that we had in the second quarter of around $150 million on the top and $90 million on the bottom, I think you need to keep in mind that incremental headwind from when we previously gave guidance to the tune of $75 million. And clearly, there's an EBITDA impact associated with that as well. That is only partially offset by the Donatelle acquisition that's going in. So on a true underlying basis, if you put FX and acquisitions aside, in addition to the Q2 beat, we are raising the top line close to $100 million in the bottom line, around $30 million or so.

Lori Koch:

Yes. I think we'll end the year overall in utilization in the high 70s that will be different between advanced nodes and more legacy nodes. So the advanced node should be in the low 8s and the more mature notes with would not quite be at the average. So it sets up well for 2025 to get back to the more normal utilization patterns that exist in the semi space. As I had noted earlier, we overall probably see high single-digit growth in E&I in total in 2025 with a lot of growth coming from continued acceleration with AI on both the data center side as well as on the ICS side.

Patrick Cunningham:

Just on the Donatelle acquisition, first, maybe talk about the strategic fit there and even potential cross-selling opportunities where it's complementary in the portfolio? And then can you also help us size the transaction and how much earnings contribution we should expect in the second half?

Antonella Franzen:

Yes. The only thing I would add is the $75 million is a full year number, just to clarify.

Lori Koch:

Yes. So I would say in the second quarter, in addition to the timing of expenses, we did have a good strong margin performance in terms of the retained businesses as well. As we shift into the second half of the year, as I mentioned earlier, we do expect the overall earnings in corporate to come down there is a little bit of pressure that we have in terms of our solar business that we have within the retained businesses. So we have a little bit of earnings headwind related to there. And I mentioned earlier, a little bit of timing related to actual corporate expense.

Vincent Andrews:

Could I ask quickly on electronics. The timing differences that you called out in the quarter that were favorable to the quarter, are you seeing in your 3Q order book that those are indeed shifted to 2Q? Are you just assuming that? And then we'll see how the quarter plays out. And then separately, Ed, if I could ask you on the PFAS on the personal injury cases, just a little bit of clarification in terms of it sounds like we'll go from 6,000 to 3,000 cases. But has that case count been increasing? Or has it been static around those levels, firstly? And then secondly, on your comments that DuPont is sort of, I think you said 3% to 6% or 3% to 7% sort of the assumed liability. Is that to mean that, that would be your sort of exposure to any payout should there be any? Or is that your exposure to the amount of cases? And lastly on that, how do you expect this to proceed in terms of will something actually go to trial? Will it be the typical MDL where you pick 1 and they pick 1 and you see what the outcomes are and then maybe you try to settle? Or is there a path to settling ahead of time? Or just sort of what you think the process is going to be?

Lori Koch:

Yes. And maybe on your order question. So our order book is trending alongside the guide that we had given. So we feel like we're in good shape there.

Steve Byrne:

Yes. Your cost of goods were down 2% in the quarter. Can you provide a little more detail on that, such as were raws down more than that? Your volumes being a little higher might suggest that raws were down more than that. But more importantly, where do you think that cost of goods year-over-year is likely to go as we move forward?

Steve Byrne:

And then you mentioned on Slide 14, a lot of products in development. And you mentioned your water business has some DLE opportunity. Just a question on that. Is this 1 lithium project at a temperate later to that could be many, many years from now? Or is there some breadth to this opportunity that you see in lithium?

Operator:

I will now turn the call back over to Chris for closing remarks.

Operator:

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Christopher Mecray:

Good morning, and thank you for joining us for DuPont's First Quarter 2024 Financial Results Conference Call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer.

Lori Koch:

Thanks, Ed, and good morning. Our first quarter results were clearly encouraging with further signs of electronics recovery matched with bottoming across our industrial-based end markets. Additionally, our commitment to drive productivity and operational excellence has minimized decremental margins and has helped to produce significant cash flow improvement in recent quarters. Our results have and will continue to benefit from the restructuring actions announced last November.

Edward Breen:

Yes, Jeff. So the cost actions we took, the bulk of them will stay in place. I would say, out of the $150 million we did and we announced in November, we'll get about $100 million of that cost savings this year. And I would say out of the $150 million though, as you get into 2025, and we're really cranking along in all our end markets, we'd probably bring back about $30 million or $40 million of cost, which is kind of on the factory footprint side, where it will be a little bit of cost there, so that would be it.

Lori Koch:

Yes, and the 56% is first half, second half. If you look at our margin profile in the second half versus the first half in the implied guide, it is up almost 200 basis points in the low 25% range, which is a nice tailwind as we head into 2025.

Jeffrey Sprague:

Great. And actually, the follow-up question that's going to play into the margin calculus also, you just think about kind of electronics over time, parts of it sort of being a price down market naturally -- nature of the business. But when we think of some of the more sophisticated things going on in Semi and the like and maybe other places in the E&I portfolio, how do you feel about your ability to get price or to avoid price down over time in these businesses?

C. Stephen Tusa:

I think you guys had said you expected like a 10% sequential bounce off the first quarter. This is a little -- the EBITDA -- I mean, good first quarter, but the EBITDA quarter-over-quarter is a little bit lower than that, more like 4%, 5%, I guess on your guide. And anything that changed that view? Was there anything pulled forward in the first quarter that kind of takes out of the second quarter or just conservatism?

C. Stephen Tusa:

Okay, that makes sense. And is there anything that is a little worse than you would have expected? It seems like obviously, electronics is coming along really nicely. The other stuff may be a little more sticky on the Industrial side. And anything that is kind of standing out as just not coming along as you would have expected on the Industrial businesses recovery?

C. Stephen Tusa:

Okay. And then just last quickly, any updates on price raws spread for you guys? I know it's less important these days but any update there?

Operator:

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

Edward Breen:

Yes. So the AI -- so the data center size for us is about $700 million of our revenue and $250 million of that ballpark, it's kind of hard to tell exactly, Scott, but about $250 million of that is AI-specific. And that is growing north of 20% right now, that base. And I do think it's -- look, I think we're going into a super cycle in semiconductor here over the next decade because of all this AI. And remember, the AI now, everyone is going to push it down into your devices. So it's going to be a pretty broad-based growth market.

Scott Davis:

Okay, so material for sure. So just to back up a little bit in Water Solutions in China. I know it's not -- it's a little minutia. But was there a prebuy or some sort of, I don't want to call it channel stuffing, because that's not what I mean? But was there some sort of weird behaviors that, that customer ended up with so much excess inventory? Is it purely just the macro turned a little sideways or down on the folks in there caught with extra inventory?

Scott Davis:

No, I didn't mean it that way.

John Ezekiel Roberts:

Just one for me. Maybe Lori, you could give us an update on adhesives multi-base in Tedlar. I would have thought they'd be down like your Industrial segment and they've got some auto exposure there, which was probably weak. But actually, corporate sales were up 1% year-over-year. What's going on there?

Operator:

Your next question comes from the line of Chris Parkinson of Wolfe Research.

Edward Breen:

Well, I'd give you, Chris, maybe just high level that if you go back to the middle of last year, the PCB utilization rates were kind of all the way down in the mid-40s. In the first quarter, they're kind of in the mid-50s. We think we exit the year in the low 60s -- in the second half of the year, we'll kind of be in the low 60s. And normal, by the way, for PCB utilization rates is kind of low 70s. They never run in the 90s, like the semis do. So you can kind of see the progression of that plan out here kind of over the next year.

Christopher Parkinson:

Got it. Lori, you know my favorite question as a follow-up is on W&P margins. I mean, obviously, over the last few quarters, there have been a bunch of put and takes, inclusive of the destocking. But with that progressively improving throughout '24, can you help us just give us the latest and greatest on how you're thinking about the long-term margin optionality in terms of op efficiencies, leverage, mix, so on and so forth?

David Begleiter:

Ed, you only raised the full year guidance by the amount of the Q1 beat. Is that because it's still early in the year or are you a little more cautious on the back half demand environment?

David Begleiter:

Very good. And can you just provide us another update on PFAS right now?

Michael Leithead:

First question I wanted to ask on W&P, I wanted to ask about price. It seems like it's holding in, I'd say, fairly well despite double-digit volume declines in the past few quarters. So what's your expectation for price? Should we expect this to stay relatively flat as we move through the year?

Michael Leithead:

Got it. That's helpful. And then bigger picture, Ed, how is Spectrum performing relative to your initial expectations?

Joshua Spector:

I was wondering if you could talk about your expectation on buybacks versus M&A. I know you talked about no M&A in 2024 kind of through the September period. Can you extend that through the rest of this year and maybe think about '25 in terms of your total capital allocation?

Richard Garchitorena:

This is Richard on for Mike. So I just wanted to ask in terms of the guidance for the full year and what you're seeing in terms of demand and destocking coming to an end, should we expect year-over-year volume growth starting in the third quarter? Or how are you looking at volumes in the second half of the year?

Richard Garchitorena:

Okay, great. And then just in terms of your comments on China recovery, was that more specific to E&I? Or maybe if you can talk about what you're seeing on the Water Solutions side because you do find that industrial demand remains weak in China, but I guess you're saying it's recovering better than you thought?

Operator:

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

Lori Koch:

Yes. I think we'll be at or near our target of greater than 90%. So I was really pleased with the Q1 performance of 86%. That's a sizable improvement from where we were last year, which was around 45%. I do expect to take a little bit of a dip down in Q2, really reflecting the payment of our biannual interest expense. So that's about $200 million. We pay it in May and in November. So we'll see a headwind in Q2. But overall, I expect it to deliver nice free cash flow conversion for the year really around the target.

Lori Koch:

Yes. We expect overall China to be both price and volume and currency headwinds about flat for the year. So as you had mentioned in the Q1 numbers, we were up in volume. But overall, it was about flat with the currency headwinds. So yes, an improvement in volume that we expect to see and some currency headwinds as the year goes on.

Steve Byrne:

The 3-year stack on volumes in your Water & Protection segment is flat. The losses over the last 4 or 5 quarters essentially offset the gains in 2021 and you had kind of flat volumes in '22. So just a question about that. Do you see that as suggesting just modest underlying volume growth? Or do you think that there might be some losses to generic products in that segment? And did you have visibility on those inventory levels that were -- that have been destocked now?

Lori Koch:

No. I mean, in fact, in Tedlar, we're actually seeing some questions around. It is a PFAS-free, so there's some opportunity there to maybe pick up some share on the Advanced Materials side or the PV side and be opportunistic. And I know directly back from customers, and obviously, we published our sustainability report earlier this week. There's a lot of examples in there around our commitments to that as well as just overall water key drivers around the sustainability footprint.

Laurence Alexander:

Just a quick one on the electronics side. How far do you see the growth trajectory for that business? Or how much can you expand it before you need to do a significant round of CapEx additions?

Christopher Mecray:

Okay. Thank you, everybody, for joining the call. We appreciate your interest. And as always, we'll post a copy of the transcript on the DuPont IR website. This concludes the call. Thank you.

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.

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.

Scott Davis:

Hey, good morning, Ed, and Lori and Chris.

Scott Davis:

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.

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.

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.

Scott Davis:

Okay. Helpful. Thank you. I'll pass it on. Good luck this year. Bye, guys.

Operator:

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

Ed Breen:

Good morning, Mike.

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.

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.

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.

Operator:

Your next question comes from Josh Spector with UBS. Please go ahead.

Ed Breen:

Good morning.

Ed Breen:

Yeah. So, by the way, just a few bullet points on kind of first half, second half ramp there, obviously, the increased semi fab and PC utilization rates, remember, semi is a very high-margin business for us. So, we see that coming back. And we've already started to see, as we just commented slightly, we're seeing an improvement. It was about 2% in the quarter. So, we clearly bottomed out there and we'll now lift. Destock will be mostly complete in the second half of the year. The only ones that might slip into the fourth quarter and we've taken that into account as biopharma and Kalrez, although many in biopharma think that's going to lift by the inflection point at the middle of the year, we're a little more cautious than it's -- maybe more of a fourth quarter, and then clearly improved factory absorption from the hits we've been taking there to keep inventory in line. And then we'll have more of the cost savings from the restructuring program. So, I'd say that's the big items that kind of build first half, second half. And obviously, just volume ramp in general because of destock ending.

Lori Koch:

Yeah. So sequentially, a lot of it is volume driven. So, we see about $150 million of revenue ramp first quarter to second quarter. That's primarily volume. We also see a little bit of a build in the cost savings program. So, we had mentioned it will really kick in at the end of Q1. So you'll see some ramp as you head into Q2. Those are the biggest items. The largest improvement is going to be the volume increase, though, first quarter to second quarter.

Operator:

Your next question comes from John Roberts with Mizuho. Please go ahead.

Lori Koch:

We would expect normal. So normally, 2Q and 3Q are the best quarters for shelter within 1Q and 4Q being lower than those averages.

Ed Breen:

Thanks, John.

David Begleiter:

Thank you. Good morning. Ed, you were very...

David Begleiter:

Good morning. You were very valuable electronics business as not being valued by the market, what are the options in your mind to unlock or have that value being realized?

David Begleiter:

Very good. And just on PFAS, Ed, what's your expectation for improvement on that issue this year?

David Begleiter:

Very good. Thank you.

Operator:

Your next question comes from John McNulty with BMO Capital Markets. Please go ahead.

Ed Breen:

Good morning, John.

Ed Breen:

Yeah, sales process works. We do a lot of application engineering and development directly with the top -- really, it's about 10 major customers in the semi side. So, it's really the win we get there, where it's processed at a fab is somewhat irrelevant to us. Although we like the fact that these fabs are coming on because the world thinks there's a lot of demand coming over the next cycle here in the semi world, which there should be because everything needs to chip nowadays and more of its advanced chips. But our win rate is really at the design stage with these 10 large customers around the world. And again, where they make it doesn't really matter that much to us, but still a very good sign. And I'd say, overall, market share does not shift much in this business. There is a couple of key players, especially on the higher-end chips and market share is pretty steady across the board year in and year out.

Lori Koch:

Yes. So, we had mentioned we saw an improvement in volume as the year went on. The volumes in shelter were kind of down about 4% in the fourth quarter, and we expect them to be slightly up in the first quarter and then build from there to about 4% by the time we close out the year. So, the utilization rates will definitely improve. This is not a high fixed cost business. So when we talked about the absorption headwinds that we saw throughout 2023, that was primarily in the E&I side, and then it started to kick in a little bit on the safety side with the heavy assets in that portfolio. So there isn't a huge absorption headwind within shelter, but we will see some benefit from volume that would have a little bit of benefit absorption as the year goes on.

Operator:

Your next question comes from Steve Tusa with JPMorgan. Please go ahead.

Ed Breen:

Good morning, Steve.

Ed Breen:

I think we're very coupled to it because the big -- one of the big demand drivers next year is data center and that's a lot of advanced chip applications. I won't say the customer's name, but there's one that's been out there very steadily that is requiring a lot of advanced chips that is a key customer of ours. So, that whole drive towards AI data center and the need for advanced chips plays right to the sweet spot of our portfolio. So no, we won't decouple at all. There's no area that's going to grow faster in the semi side that we won't participate in. That truly is our sweet spot as we go forward here. Remember, in a typical times, we've consistently outgrown the market to 300 basis points because of that dynamic.

Lori Koch:

Yeah. I think, Steve, too, so on semi, it's around a $2 billion business for us, about $700 million of that is data center. So it's a pretty large chunk. If you look at the results and the forecast that the OEMs are providing, it's oftentimes skewed by the price of the chip, which it has no impact on our volumes and our revenues. So that's one thing maybe just to clarify to make sure that if you're seeing lift in some of the OEMs, it's probably right now more coming from price, especially on the memory side. Our portfolio is about 30% memory, 70% logic foundry from a disposition perspective as well.

Ed Breen:

Yes.

Steve Tusa:

And how fast did that grow in like the fourth quarter? Or did it grow in the fourth quarter?

Steve Tusa:

Okay, great. All right. Thanks a lot for the color. Appreciate it.

Lori Koch:

You're welcome.

Aleksey Yefremov:

Thank you. Good morning, everyone. I wanted to come back to water filtration in China. Do you have visibility into the underlying demand? Apparently, you do have destocking, but what data points are you tracking to understand how healthy the actual market is?

Lori Koch:

And just from a logistics perspective...

Ed Breen:

Yeah, go ahead, Lori.

Aleksey Yefremov:

So, what is the sort of two to three year growth rate for the water business? Will it step down you think because China is slower, or this is temporary?

Aleksey Yefremov:

Thanks a lot.

Operator:

Your next question comes from Patrick Cunningham with Citi. Please go ahead.

Lori Koch:

Yeah. So, 2023 was very favorable for the auto industry, kind of up in that high single-digit range, and we would outperform that in the EV space just by about 25% to 30% of our portfolio is now EV. On a full year basis, though, for 2024, we do see it about flat from a volume perspective, in-line with where auto builds are. So, obviously, China is going to slow down a bit in 2024 off of a really strong 2023, especially tail end of 2023. But longer term, we're still very confident in the EV expansion opportunity and the pace of the EV growth, and we have a really nice position to continue to benefit from that, not only in the corporate retained businesses primarily with adhesives, but also within the W&P portfolio, Nomex. We've got a really nice opportunity on the e-motor side of the house with using Nomex as an insulator.

Lori Koch:

Yeah. It's in-line with our expectations. It's ramping nicely with the new customer win that we highlighted when we acquired the business, that's going very well. We've actually integrated the business within the company and combined it with our Liveo healthcare business to further take advantage of those commercial synergies that continues to be a nice opportunity for us.

Ed Breen:

Thanks, Patrick.

Vincent Andrews:

Hi. First, can you just clarify on the full year remarks? When you talk about sales and profit growth in the back half, are you talking 3Q and 4Q? Or maybe not 3Q, but definitely 4Q?

Vincent Andrews:

Okay. And then, Ed, can I ask you the destocking is what it is and it's going to be what it's going to be. But thereafter, in managing these businesses and investing in them and presenting them to the investment community, how do you think about shipments versus demand and making sure that we don't get into another situation where the supply chain lines up with more products than we'll ultimately want? Or is that not something that you can really have the visibility on to control and that, too, will just be what it's going to be?

Vincent Andrews:

Okay. Thanks very much...

Vincent Andrews:

Okay. Thank you again.

Frank Mitsch:

Yes, hi. Good morning. Ed, you indicated that, obviously, you made a proactive decision to work down your inventories. And you've mentioned a couple of times the negative impact of factory absorption in 4Q and in '23. I was wondering if you could size that for us. And obviously, the expectation is that, that's not necessarily going to continue in '24, so that should be a nice tailwind for you?

Frank Mitsch:

Okay. Got you. So, perhaps there's some conservatism built in there, which I kind of got the sense when you're talking about price cost for '24 being neutral, I would assume that you saw some benefits from price cost in the fourth quarter. Could you size that for us?

Frank Mitsch:

Okay. Great. Thank you.

Operator:

Your next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Lori Koch:

Yeah. I mean even if China potentially is at a lower structural growth rate year-over-year, it's coming off a pretty [indiscernible]. So, full year volumes in China were down in the mid-teens. And so, it's not a high hurdle to jump off of as you head into 2024 to deliver growth. We still have a lot of confidence longer term in those markets that are highly rooted in China, especially on the electronics side, and on the water side, we expect improvement.

Arun Viswanathan:

Right. And then, given that we have experienced a fair amount of volatility here in cyclicality, one of the transformation kind of strategies was to reduce that peak to trough cyclicality. Do you feel still the same way about the current portfolio as far as lowering that cyclicality post transformation...

Arun Viswanathan:

...or other businesses that would qualify for disposition at this point?

Arun Viswanathan:

Got it. Thanks.

Steve Byrne:

Yeah, thank you. Your businesses within W&P heavily relying on distributors. I'm curious how much visibility do you have, not just on your own products in inventory at these distributors, but competitor products. And the reason I ask is I'm just wondering whether or not you're seeing the potential for a shift to competitor products perhaps in water in China. Anything that you're seeing there that is a concern on the competitive front?

Steve Byrne:

Okay. And how would you look at your businesses and highlight any opportunities for a new technology or a new application of your products that could really drive growth? Anything that you would highlight? An example would be like water moving into lithium extraction. Do you see any meaningful...

Steve Byrne:

Thank you.

Operator:

Our final question comes from Mike Sison with Wells Fargo. Please go ahead.

Lori Koch:

Yeah. I mean we, obviously, exited a higher margin than where we started the year. So, our current expectations is we would exit butting up against 26% EBITDA margin in the fourth quarter. We've always said that we think the EBITDA margin profile for the total company should be in that 27%, 28% range, and we don't have a change to that with E&I being in the low 30%s and W&P in the kind of mid-20%s. So, we exit the year, as I had mentioned, butting up against 26% kind of in the low $800 million range. If you look back to our peak earnings in late 2022, they were more in that $850 million range, and they didn't have Spectrum in them. There's still a clearly opportunity for us to see to continue to expand beyond that run rate that we'll expect to see at the end of this year.

Mike Sison:

Got it. Thank you.

Operator:

This concludes our Q&A session. I will now turn the call back to Chris Mecray for any closing remarks.

Operator:

This concludes today's conference. You may now disconnect.

Chris Mecray:

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 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.

Lori Koch:

Thanks, Ed, and good morning. Our teams continue 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 the third quarter as well as our strong cash performance in the period. Given volume headwinds, the delivery of stronger margins and better cash flow are attributed to execution around lowering our input costs, coordination with the operating teams to rightsize our inventory position, as well as overall progress with productivity via operational excellence initiatives. We are very focused on operating discipline and pleased that site level operating execution is 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 5. Third quarter net sales of $3.1 billion decreased 8% versus the year ago period, a 10% organic sales decline was 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 markets 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 the adhesives portfolio. From a regional perspective, consolidated DuPont sales decreased on an 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 an organic basis versus the third quarter of 2022, though E&I sales in China increased sequentially in the quarter and saw 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 as we align inventory with demand, partially offset by lower endpoint costs related to raw materials, logistics and energy along with the portfolio benefits 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 equation benefits, which increased somewhat from second quarter levels. On a sequential basis, operating EBITDA was up 5% and operating EBITDA margin improved 140 basis points. Decremental margins for the quarter was 31%, enabled by cost deflation and aggressive actions taken year-to-date to reduce spending. As I mentioned earlier, I am pleased with our cash flow improvement 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 6. Adjusted EPS for the quarter of $0.92 a share increased 12% compared to $0.82 in the year ago period. Below-the-line benefits, including a 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 of a full year 2023 base tax rate of 24% remains unchanged. Turning to segment results, beginning with E&I on Slide 7. The 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 a 12% 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 end 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 largely 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 improvement within PCB markets. Organic sales for Industrial Solutions were down high single-digits versus the year ago period, due primarily to destocking within biopharma applications for our Liveo product line, and continued lower demand in electronics related end markets. These declines were partially offset by increased demand for OLED display materials. 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 a portfolio benefit related to Spectrum. Operating EBITDA margin increased 140 basis points sequentially during the third quarter. Turning to Slide 8. 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 digits on an organic basis, driven by continued demand softness in construction markets and ongoing channel inventory destocking. On a sequential basis from the second quarter, shelter sales increased slightly, and we expect narrow 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 key distributor customers and lower industrial project demand in China, mainly 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 of 25.6% increased 70 basis points year-over-year and 100 basis points sequentially from the second quarter. Turning to Slide 9, I will close with a few comments on 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 is 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, with 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.

Jeff Sprague:

Thank you, good morning, everyone.

Jeff Sprague:

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?

Lori Koch:

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's a little bit of a mix and we'll 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.

Ed Breen:

Yes. So, on an annual basis, Jeff, we'll be about $150 million of savings, kind of spread between plant fixed costs and functional costs or mostly G&A expense, not touching R&D at all. And 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 it just in response to what's going on. I think I would have 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 on 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 going, and you'll start to see the benefit then. So, you'll kind of get three quarters 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 plant fixed cost side as volumes pick up, but not all of it. So, you'll get a little bit of it coming back in as we see the volumes lift, but that's basically the program.

Ed Breen:

Thanks.

Scott Davis:

Hi, good morning everybody, Ed and Lori, Chris.

Lori Koch:

Good morning.

Ed Breen:

Yes. Scott, I'd just give you a ballpark in my thinking. I think two-thirds of it, or 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 what normally would during COVID, and every other CEO I talk to is doing the same thing. And by the way, I think as the pressure you're getting near the end of your year, you're really trying to get things in line for 2024. So I think a big part of it is that. But there's certainly as a percent of people just more worried is there a recession coming. You got an inverted yield curve for 18 months. People start getting nervous. There’s always been a recession. So I can't say that's not - if that's in there. But I think the bigger part of it is we just all build excess inventory. We got what we can get during COVID. And probably 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 me, pleading that we could ship more Tyvek material for packaging so they could shift their products out. And I remember telling them all, in fact, 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 then 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.

Ed Breen:

Yes. Scott, I don't think 2024 will be what you'd consider a normal year. In a normal environment, a few years in a row just normal things, which we haven't had in four years for anybody, I would - we would always get like 1.5% to 2% price lift in the W&P business. Our goal in 2024 is to hold on to as much pricing as we can. And you, obviously, see us and others were getting benefit from price/cost spread that we saw in the third quarter, which helped us out. We'll obviously see it in the fourth quarter. So our goal is to really manage that well for 2024 because there's 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 of 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 will really be managing that tightly. But then if we ever get - we get back to normal time, hopefully, 2025, we would look at that 1.5% to 2% price increase. And then electronics, we just try to hold about flat. And usually, we're flat to down 1%, but you get nice volume lift.

Ed Breen:

Yes, Scott. Happy talking to you. Thank you.

Steve Tusa:

Hi, good morning.

Steve Tusa:

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?

Steve Tusa:

And so does some of that carry into next year?

Steve Tusa:

Okay. And then I guess…

Steve Tusa:

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?

Steve Tusa:

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

Steve Tusa:

Right. Great. Thanks a lot.

Steve Tusa:

Right. Yes, thanks a lot.

Operator:

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

Ed Breen:

Good morning.

Ed Breen:

Yes. So, we liked it. Look, we sold Delrin in a tougher environment than when we sold the rest of M&M. So, this optimized what we could get for the asset over a few year period. We're getting $1.2 some billion upfront. We're writing 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're taking 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 on buying back more shares.

Mike Leithead:

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 in 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?

Mike Leithead:

Great. Thank you.

Operator:

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

Ed Breen:

Yes. So semi will lift a little bit. So I would still say bounce along the bottom, but getting through the destock. And when I say a little bit, a few percentage points 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's just a little bit of other destocking going along with some of our distributors in that business. So nothing significant, but I think that will see a little bit of softness.

Ed Breen:

Yes. So we - the date that's coming up here is the deadline for the opt-outs is December 4. And then we will see a list of who the opt-outs are on December 6. And then there's a final fairness hearing in South Carolina on December 14. 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, and highly confident that this will get signed off and get done. And I'd 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.

Ed Breen:

Yes, thanks.

David Begleiter:

Thank you. Good morning.

David Begleiter:

Ed or Lori, just on the restructuring, do you have any more color you can provide some more concrete examples of where that $150 million is going to come from?

David Begleiter:

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

David Begleiter:

Thank you.

Aleksey Yefremov:

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

Aleksey Yefremov:

Okay. Very helpful. Thank you. And then just a question for 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.

Ed Breen:

For the year.

Operator:

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

Lori Koch:

Yes. 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 first third quarter. But if you take that out, we see underlying organic revenue down about $100. So it's about split between seasonality and currency being about half of the headwind with the seasonality being within the - primarily the smartphone and consumer electronics business in ICS and Shelter as they strength 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 overbuy that happened over the recent quarters. So it's really just and then the EBITDA, you have a net benefit from additional spreads. We have mentioned there's about $25 million of additional benefit from spread, but that $100 million impact from the volume decline kind of net you out to the surrounding the $50 million that we guided to for the fourth quarter versus the $775 million that we posted in the third quarter.

Ed Breen:

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 also talking to our customers, that high 60s is going to ramp through 2024, up to - by the time you get maybe in the third quarter, beginning the fourth quarter up to maybe a little over 80%. So you still won't be back according to projections to kind of over 90% till you enter into 2025. But again, going from high 60s to 80% is a nice lift during the year. And then more of that production will be advanced nodes, which back to Lori's point a minute ago, plays to our strength 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 are still - we're shipping out of inventory. But all the signs I saw from all their reporting publicly, 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.

Ed Breen:

Yes, thanks.

Vincent Andrews:

Thank you. A 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 chain with the overstocking and then the destocking. Do you have a sense of whether that was just - they’re little too over jealous with principle 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 rates. And I guess, what I'm getting at is, do you think, over time, your 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? And I guess I'm just sort of asking what's going to ultimately break the log jam of the game of hot potato of nobody wanting to hold inventory?

Vincent Andrews:

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 your free cash flow generation versus what you might do from a share repurchase perspective?

Vincent Andrews:

Okay. Great. Thanks so much.

Frank Mitsch:

Good morning. I wanted to - wanted to follow up on…

Frank Mitsch:

Hi, Ed. How are you doing?

Frank Mitsch:

Wanted to follow-up on Spectrum. You indicated that financially, it was performing in line with your projections. So I was just curious, I think you indicated that you expected like something like $45 million of EBITDA for the balance of $23 million since you closed on August 1. And also I think you guys indicated you get about $20 million of synergies. So are those numbers still accurate? What's your take on Spectrum so far?

Frank Mitsch:

Very helpful. Thank you, Lori. 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 size that you anticipate AI to grow to over 2024, 2025 in terms of your semiconductor business?

Lori Koch:

Maybe just to help to size it for you, too. So within our semi portfolio, we have about a $700 million business in data centers overall and about a little more than one-third of that is direct to AI. So that's the nice portion of growth that we continue to see above the overall MFI projections.

Ed Breen:

Thanks, Frank.

Unidentified Analyst:

Hi. [Rob Hoffman] 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?

Unidentified Analyst:

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

Unidentified Analyst:

Understood. Thank you.

Operator:

And our final question today comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is open.

Lori Koch:

Yes. I mean longer term, you should get back into the - if we were running the E&I portfolio, I think, is where your focus was in the more of the 32% margin range, and we should see the volume kind of return there over time as the utilization rate at the large PCP guys and the semi guys return. But if we look more near-term as far as headwinds, tailwinds as we head into 2024, there's definitely tailwinds from volume growth from the electronics recovery and normalization of the destock. And there's obviously, incremental tailwinds from the deflation we had 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 later in the first quarter. And then just from an EPS perspective, we do continue to lower our share count. So 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 we'll complete in the first and then advance shares new share takeout 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 business as I had mentioned. So we'll try and maintain that as long as we can, but we will be cognizant of potential share loss and 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 $145 million of interest income this year just as we held the proceeds from the Celanese transaction in the first half before we could deploy them to Spectrum and then the full share repurchase program. So we would see a step down in 2024 from interest income from about $145 million this year to probably $20 million next year.

Operator:

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

Operator:

That does conclude our conference for today. Thank you for participating. You may now all disconnect.

Chris Mecray:

Good morning. And thank you for joining us for DuPont's second 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 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 that have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

Lori Koch:

Thanks, Ed, and good morning. Our focus remains on operational excellence and strong execution, and we are pleased to have delivered financial results ahead of expectations despite volume pressure in some of our most profitable lines of business in electronics. Turning to our financial highlights on Slide 5. Second quarter net sales of $3.1 billion decreased 7% as reported and 4% on an organic basis versus the year ago period. Currency results in a 1% headwind from dollar strength against key currencies most notably the won and yen, and we also saw a 2% headwind related to portfolio changes. Breaking down the 4% organic sales decline, a 6% volume decline was partially offset by a 2% pricing gain reflecting continued carryover benefit of actions taken last year to offset broad-based inflation. Volume decline primarily reflects continued demand weakness in consumer electronics coupled with inventory destocking across the channel and some softness, including destocking in North American construction related markets. Lower volume in these consumer turbine end markets was partially mitigated by continued strength in water, automotive, aerospace and healthcare markets. Volume within electronics and construction end markets during the quarter was down 15 the year ago period, while our remaining industrial-based businesses were up about 4%. From a regional perspective, Europe sales in the quarter were up 4% on an organic basis, while North America and Asia Pacific were down 3% and 8%, respectively versus the year ago period. China sales were down 14% on an organic basis, driven mainly by the electronics demand weakness, but increased sequentially versus the first quarter. Second quarter operating EBITDA of $738 million decreased 11% versus the year ago period, driven by lower volumes and the impact of reduced production rates in electronics as we align inventory with demand. Operating EBITDA margin during the quarter of 23.9% was down 110 basis points versus the year ago period, driven by volume pressure, reduced production rates and mix headwinds in the high margin steady business. On a sequential basis, operating EBITDA and operating EBITDA margins were up from the first quarter. Decremental margins for the quarter was 40%, excluding the impact of absorption headwinds related to reduced production rates within electronics, decremental margin was below 20%, enabled by aggressive actions taken year-to-date to reduce discretionary spend. Adjusted EPS in the quarter of $0.85 per share was down 3% versus last year, which I will detail shortly. Looking at cash performance. I would first like to highlight that we have made a reporting change effective with today's second quarter results and are now providing cash flow disclosure separated between continuing and discontinued operations. This change is being made to improve visibility into cash flow generation and cash flow conversion of the ongoing businesses. On a continuing operations basis, cash flow from operations during the quarter of $400 million less CapEx of $123 million resulted in adjusted free cash flow of $277 million and associated conversion of 73%. This reflects significant improvement versus last year on a comparable basis, driven by lower inventory. Adjusted free cash flow included a benefit of about $80 million in reduced inventory and a headwind of about $200 million related to interest payments. Optimizing cash flow continues to be a top priority for us. On adjusted free cash flow and conversion improved sequentially, we still have work to do to get to our target levels and expect further improvement in working capital metrics by year-end. Turning to Slide 6. Adjusted EPS for the quarter of $0.85 decreased 3% compared to $0.88 in the in the year ago period. Lower segment results more than offset below the line benefits, including a $0.19 benefit related to lower net interest expense and a lower share count. A higher tax rate and exchange loss during the quarter resulted in adjusted EPS headwind of $0.08 per share. Our tax rate for the quarter was 23.7%, up from 22.6% in the year-ago period, driven primarily by geographic mix of earnings. Turning to segment results, beginning with E&I on Slide 7. E&I second quarter net sales of $1.3 billion decreased 14% and organic sales declined 12% due to lower volume, along with currency headwinds and an unfavorable portfolio impact of 1% each. At the line of business level, volume for Semiconductor Technologies decreased 19%, while Interconnect Solutions volume decreased 15% versus the year ago period. The decline in Semi Tech resulted from a continuation of lower semiconductor fab utilization rate due to weak end market demand as well as inventory de-stocking across the channel. Chip fab utilization rates in the second quarter averaged in the low 70s on a percentage basis. The decline in Interconnect was driven by continued weak smartphones, PC and tablet demand along with channel inventory destocking. Our PCB customers in China offerings in the second quarter with utilization rates slightly improved from the mid-40s during the first quarter, which was a cycle low. The PCB market has been in a slowdown for a year now and we are beginning to see signs of improvement within our Interconnect business, illustrated by first and second quarter sequential growth of about 7% and with further expected sequential growth in the third quarter. Sales for Industrial Solutions were flat on an organic basis as pricing and ongoing strength in broad-based industrial markets were offset by lower demand in largely consumer-driven areas, such as advanced screening applications and those tied to electronics markets, including OLED display. Operating EBITDA for E&I of $349 million was down versus the year ago period primarily due to volume declines and lower operating rates to better align inventory with demand, partially offset by reduced discretionary spend. Turning to Slide 8. W&P's second quarter net sales of $1.5 billion were flat versus last year as organic sales growth of 1% was offset by a 1% currency headwinds. Organic growth of 1% reflects a 5% increase in price resulting from the carryover impact of pricing actions taken last year, mostly offset by a 4% decrease in segment volumes due to declines in shelf care solutions. At the line of business level, organic sales growth was led by Water Solutions, which was up mid-teens on continued demand growth for water filtration led by reverse osmosis and ion exchange resins, along with benefits from carryover pricing. IT Solutions sales were up mid-single digits on an organic basis driven by carryover pricing and volume strength in Kevlar and Nomex with an aerospace and automotive market, especially for EVs, coupled with Tyvek strength in health care. Shelter Solutions were down 12% on an organic basis, driven by demand softness in construction markets as well as de-stocking, although we do expect a reduced impact from de-stocking in the second half. Operating EBITDA for W&P during the quarter were $368 million, up 6% or operating EBITDA margin of 24.6%, increased 140 basis points versus the year ago period. The improvement resulted primarily from net pricing gains and disciplined cost control, which more than offset volume declines. Turning to Slide 9, I will close with a few comments on our outlook and guidance for the third quarter and full year 2023. Regarding the demand environment, we continue to expect fairly steady demand in most of our industrial end-markets within E&I and W&P although, we expect sales moderation in our Water business due to slower demand in China. Within Electronics, we saw stabilization and some early lift in our Interconnect Solutions business. The 7% sequential improvement in sales during the second quarter, and we expect mid-single-digit sequential growth to follow, in the third quarter. We believe, challenging markets likely bottom during the second quarter, and we assume net-net sales in the second half will improve slightly on a sequential basis. Given ongoing consumer electronics demand headwinds, notably in China, we have tempered the rate of second half growth to prior assumptions. We are adjusting our full year 2023 guidance to account for the slower cadence of recovery in electronics, including our actions to continue to reduce production to align inventory with demand. In addition, our third quarter and full year guidance now includes the estimated contribution from Spectrum beginning August 1. For the full year, we now expect net sales to be between $12.45 billion and $12.55 billion, operating EBITDA to be between $2.975 billion and $3.025 billion and adjusted EPS to be between $3.40 and $3.50 per share. For the third quarter 2023, we expect revenue of approximately $3.15 billion, operating EBITDA of approximately $755 million and adjusted EPS of approximately $0.84 per share. With that, we are pleased to take your questions, and let me turn it back to the operator to open the

Bhavesh Lodaya:

Hi. Good morning. This is Bhavesh Lodaya for John. Maybe on the Water business, the Water business tends to be a bit less cyclical compared to your other businesses. Can you add some color on what is driving the softness in China? What changed there since maybe last quarter? And what kind of recovery do you expect maybe over the next couple of quarters?

Bhavesh Lodaya:

Got it. And then in Electronics great to see the inflection coming in Interconnect Solutions, we have also seen some positive MSI data points. What are you hearing in semis technologies? Like, when do you expect an inflection there? And maybe any color on your order books for electronics that you're seeing this quarter so far?

Bhavesh Lodaya:

Appreciate the time. Thank you.

Operator:

Your next question comes from Christopher Parkinson from Mizuho Securities.

Ed Breen:

Yeah. Let me comment, and I'll turn it to Lori by just - I don't want to say customer names, but we're in good shape this year on the new models being introduced by a couple of the large cell phone players. So from a market share standpoint, we know which phones we're in, and we're in a better position than we were last year, not that we were in a bad position at all last year. But we feel like we're in a good position with the launch of the new models coming in. We know what we're in, in those phones. And by way, clearly, one of the things I think you all know we're in is the Kapton technology for the 5G antenna is a key component for us, along with some other components, but that's a key one. Lori, do you want to just talk about the timing?

Christopher Parkinson:

That's very helpful. And just as a very quick follow-up, just on the W&P side. You've seen some very, very solid growth out of Water Solutions, but you did have some comments as it pertains to the kind of the second half based on some fairly difficult comps to my understanding. Can you sit on kind of what's the outlook for this business? Just - is that just - is your commentary solely a function of just the difficult comps and you'd expect kind of a reacceleration in 2024? But if you could just hit on that kind of cadence and how we should be continuously thinking about that business in the long term? That would be very helpful. Thank you.

Lori Koch:

And to Ed's comment on the lumpiness, if you put a 2 year stack on the volume, we're up high single digits every quarter. So there is lumpiness of it comments around sometimes the projects work going on. But in general, it's really strong growth for us. And there's no change in our go-forward forecast, especially with the requirements that are going on around sustainability and the access to those are the key growth drivers for us.

Operator:

Your next question comes from John Roberts from Credit Suisse.

Ed Breen:

Yes. We're pretty confident we'll close it by year-end. I would just say private equity has been interested along with strategic, but I don't want to get into any more than that at this point in time. But I think we're highly confident we'll have a deal. There's been nice interest in it.

Ed Breen:

Yes. John, what happened here was very typical of these bigger type of settlements that have to these class actions. If you go back and look at any of the other big ones, you always get that, I think, what you're referring to is the challenge from state AGs and all that. I don't think by what we're hearing that there's going to be a problem here we're thinking in the very near future, we get preliminary approval from the judge, and as we said in our prepared remarks, it will be about six months after that preliminary approval from the judge where we would then be finished with that and make the payment.

Steve Tusa:

Hi, good morning.

Steve Tusa:

Can you just give us a bit of an update on the -- I know these businesses aren't the most raw material centric anymore, but maybe just a bit of an update on the raw material outlook for this year. I'm not sure if you called it out in the beginning of the call, the $100 million you were talking about before?

Ed Breen:

Yes, Steve, it kind of takes four to five months on the raws to work its way through in our system and we build a customer. So some of this, we're obviously going to see now in 2024 but the procurement team has been working very aggressively and Lori and I meet with a very consistent basis because it's a big part of seeing up on 2024 for us. And by the way, Steve, just as a side note, the margins on the E&I, remember, not much of the walls were in E&I, we only raised prices 2% there. The predominant part of it is going to become in W&P. And the thing that affected the margins in E&I is really the absorption charge that we've taken. We we're going to take it again in the third quarter, we're probably going to take it in the fourth quarter, just to make sure everything is teed up for 2024, and that's affected our - or like in the third - in the second quarter that affected our margins in E&I by about 400 basis points. So without the absorption, we know we're running that business north of 30, even in a reduced volume environment. So I feel very confident you all watched us run that in a 32%, 33% EBITDA range. I'm very comfortable when I look at our math that we're in good shape there as we rebound.

Ed Breen:

So very small. The one area we're going to give up some price that we forecasted in the second half of the year is in the construction-related markets. We also had to raise very significantly in those markets because of what the raws did last year. So, we've made an assumption in this forecast that we'll give up some of the pricing there. Otherwise, we're feeling pretty solid across the rest of the portfolio.

Ed Breen:

Thanks, Steve.

David Begleiter:

Thank you. Ed and Lori, how much did Spectrum add to Q3 and 2023 guidance?

David Begleiter:

Got it. And then, just on destocking in Shelter, where do you think we are? I know you said you were closely end here or it's moderating? How much further do you think we have to go Shelter Solutions destocking?

David Begleiter:

Thank you.

Operator:

Your next question comes from Mike Leithead from Barclays.

Lori Koch:

Yes. So we had a really strong growth within Corporate M&M. It was driven by the EV piece, which is the largest segment of it. And it's really from the EV growth in the overall Auto build growth. So Auto build were up about 16% in the second quarter, we would have posted a similar number. And we see really nice performance in the EV piece. So that's what drove the improvement year-over-year primarily.

Ed Breen:

Yes. No, we're definitely going to take the absorption this quarter. We're in the third quarter, about $40 million and the same in the fourth quarter as our plan. So we're really getting inventory aligned up very well with demand. So we just feel it's the prudent thing to do right now. So that's what's baked into the plan that we've given here today.

Mike Leithead:

Great. Thank you.

Josh Spector:

Yeah, hi. Thanks for taking my questions. I guess, first, I wanted to ask on the 3Q guidance. So if we look at organic sales and EBITDA, you're kind of guiding flat sequentially but you're talking about ICS up mid-single digits. It sounds like raw materials could be a little bit better with health. Typically with ICS up, you get a mix benefit there. So what drives that flat EBITDA? What are some of the offsetting items that would keep EBITDA flat versus having it up sequentially on an organic basis?

Josh Spector:

Okay. That's helpful. And I guess when I think about ICS, a look into 2024, so I haven't done the full math, but maybe organic, you're down something like 10% this year. I guess when we look at smartphone growth, PC growth, there's not a massive inflection next year. There's better growth forecasted, maybe low-single-digits. I guess, how do you think about that ICS business performing relative to that? Do we overbuild some inventory so we don't get the full bounce back? Or do you expect it stronger? If you could frame that, that would be helpful. Thanks.

Josh Spector:

Okay. Thank you.

Vincent Andrews:

Thank you and good morning, Wondering if you can speak just a little bit about the cost work you've been doing kind of past president in the future? Just looking at the income statement, I've got SG&A down about $76 million year-to-date, R&D down 32, and then sundry expense down 40. And maybe you can kind of contextualize those decreases and how they play out over the balance of the year and which segments, presumably we're seeing the most and the ones that are having the most macro concerns? And maybe just also remind us what sundry expense actually is?

Ed Breen:

Yeah. By the way, we're are - we've been tensioning real good is our travel and entertainment budgets. We're trying to keep them. The salespeople are traveling the application engineers, but we're really being sure of holding people, holding management meetings all over the world and all that. So we're just being -- we've really put the word out to our team, hey, while we're in a tougher environment here will come out of it nice, but just watch anything on the discretionary side.

Ed Breen:

No. No, I don't think you'll see anything obviously, the rest of this year and at least well into next year. I think, I said on the last call, a good year pause. We love where we've got the balance sheet at, as I think Lori mentioned on the call I did -- we're going to have leverage action in here somewhere around 2x. That's where we want to be. And we're in a great spot. And I don't feel like we need to do anything. So we are -- we got to where we need to be.

Ed Breen:

Thanks.

Frank Mitsch:

Hey. Good morning. Ed, I had the RiverHouse Benedict that Odette's on Sunday. It was very nice. So, congrats on that.

Frank Mitsch:

You haven't had it yet, I highly recommend it. Hey, following up on the M&A question, Auto Adhesives is still in your corporate line item. When might we expect that to be folded back into the -- into one of the businesses? And/or is that a candidate for divestiture?

Frank Mitsch:

Okay. Thank you. And then, if I look geographically, I mean Europe has been up year-over-year based on price. What are your thoughts in terms of volume growth in that region?

Frank Mitsch:

Great. Thank you.

Operator:

Your next question comes from Steve Byrne from Bank of America.

Ed Breen:

Yeah. So look, we -- there's a percent that have, I'll call it, opt in or we can walk away from the settlement. So by the way, that's a very high percentage, and we think just to get up that, that will not be a problem. Remember, a lot of these water districts have been being talked to by the plaintiff side of this. This hasn't been done in a vacuum. So, it's - they've been talked to along the way here to get to this, what I'll call it preliminary settlement. So I think shortly, as I said, we will get it approved by the judge on a preliminary basis and then you work all the opt-ins to make sure you get that done and then you have final approval once you hit that threshold. So it's really up to each of the difficulty for water districts, how they're going to handle that to clean up any PFAS that's in there. So I don't want to comment on that.

Lori Koch:

I don't see any change in our go-to-market strategy for the province of its direct as we go to the customers the projects in place and we're just replacing the filter, which is where the recurring revenue rate comes from. So this is a -- as we had mentioned earlier on the call, kind of mid to high single-digit grower for us, a lot of opportunities as we go forward around the sustainability and the access to clean water.

Ed Breen:

Thanks, Steve.

Arun Viswanathan:

Great. Thanks for taking my question. I just wanted to ask about the electronics market here. Could you just elaborate on the destocking, the volume trajectory, I guess, from here. I think previously, you had expected this year to be the main volume negative hit. You'll be facing easier comps next year. Do you think you should grow in kind of, say, the mid-single-digit level for next year? Or where do you expect electronics volumes to be next year? Thanks.

Arun Viswanathan:

Great. Thanks. And just real quickly on the share buyback plans. So you'll be completing the 3.25 very soon. Could you just describe how we should think about the other $2 billion, that you commenced shortly thereafter. Would that be done ratably or how should we think about that? How it flows in? Thanks.

Arun Viswanathan:

Thanks.

Mike Sison:

Hey. Good morning. In terms of Semi Technologies and Interconnect Solutions, I think historically after a destocking event, you do see some restocking. But given it's taking so long for the destocking to end, how do you think that plays out this time around or is there any differences between the regions on that?

Mike Sison:

Got it. And then just quick follow-up E&I historically been above 30% for EBITDA margins and sort of get back there? Is it just simply getting all the volume back?

Mike Sison:

Got it. Thank you.

Operator:

Your final question comes from Patrick Cunningham from Citibank.

Lori Koch:

Yeah, no update to that. We still expect $20 million. It probably will take the better part of 12 to 18 months to get $20 million out. I mean, obviously, for us, it is more of a revenue synergy opportunity as we bring the two portfolios together in verge our expertise biopharma with their expertise in medical device comes from a revenue synergy perspective.

Ed Breen:

Yeah. So our Liveo business were -- I think Lori mentioned this a little while ago in the biopharma side. We're seeing some destocking there. And I think I heard, I think, six other companies I heard in the last week would make the results that they were seeing some destocking in biopharma. In my gut is that last a couple of quarters. Just to correct that a little bit. And it was another one of those markets just like semi. I remember I was getting calls from CEOs in the healthcare business, but we need more. And I think just like semi everyone overshot, there's a little bit of a correction going on there, but I'd say that's probably the third and fourth quarter a little correction there. As Lori mentioned earlier, the spectrum numbers are kind of right on where we thought they would be. So they look like they're keyed up for the year, we thought they were going to happen in the second half of the year here. And I would expect, again, that the growth in our healthcare businesses will be above company average and certainly above GDP.

Ed Breen:

Thank you.

Chris Mecray:

Okay. Thanks, everybody, for joining our call. Just to be a reference, a copy of the transcript will be posted on our website once available. This concludes our call. Thank you.

Chris Mecray:

Good morning, and thank you for joining us for DuPont's first quarter 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 is 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 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.

Lori Koch:

Thanks, Ed, and good morning. Our first quarter financial results reflect our team's ongoing strong focus on execution and operational excellence as we began 2023. In a pressured volume environment within consumer electronics and construction, we are focused on the operational levers within our control to drive solid operating EBITDA and minimize margin impact despite volume decrements in some of our most profitable lines of business. Turning to our financial highlights on Slide 5. First quarter net sales of $3 billion decreased 8% as reported and 3% on an organic basis versus the year ago period. Currency resulted in a 3% headwind from dollar strength against key currencies, most notably the yen, yuan and euro, and we also saw a 2% headwind related to portfolio changes. Breaking down the 3% organic sales decline, 4% pricing gains were more than offset by a 7% volume decline. Pricing reflects the carryover impact of actions taken during 2022 to offset broad based inflation related to raw materials, logistics and energy. Volume decline reflects weakness in consumer electronics resulting from decreased consumer spending, channel inventory destock and softness in construction. Lower volume in these consumer driven short cycle end markets was partially mitigated by ongoing strength in water, automotive, aerospace and healthcare markets. Taken in combination, volume within electronics and construction end markets during the quarter was down high teens in aggregate versus the year ago period, while our remaining businesses were up low single digits. From a regional perspective, Europe and North America sales in the quarter were up 5% and 1%, respectively, on an organic basis, while Asia Pacific was down 10% versus the year ago period. China sales were down nearly 20%, driven principally by the electronics weakness. First quarter operating EBITDA of $714 million decreased 13% versus the year ago period, driven by lower volumes and the impacts of reduced production rates in electronics as we scale that production to better align with demand. Currency was also a headwind. Operating EBITDA margin during the quarter of 23.7% was down 130 basis points, driven by volume pressure and inclusive of mixed headwinds related to lower volumes within the high margin semi business. Decremental margin the quarter was 41%. Given the high teen volume declines in our electronics portfolio, our overall decrementals were disproportionately impacted as these businesses are some of the most profitable within the DuPont portfolio. Adjusted EPS in the quarter of $0.84 per share increased 2% versus last year, which I will detail shortly. Looking at cash performance, cash flow from operations during the quarter of $343 million, less cash paid for CapEx of $241 million resulted in adjusted free cash flow of $102 million. Included within free cash flow, our transaction cost headwinds of about $75 million related to both cash payments associated with the M&M deal closing and ongoing Delrin divestiture costs. Turning to Slide 10, adjusted EPS for the quarter of $0.84 per share increased 2% compared to $0.82 in the year ago period. Headwinds related to overall volume declines were more than offset by the below the line benefits including an $0.11 benefit related to lower net interest expense and a $0.09 benefit due to share repurchases. Including the upfront benefit of our ongoing ASR program initiated last November. Our tax rate for the quarter 23.4% up from 21.8% in the year ago period, resulting in a two set headwind to adjusted EPS driven primarily by geographic mix of earnings. Turning to segment results beginning with E&I on Slide 11. E&I first quarter net sales of $1.3 billion decreased 16% as organic sales declined 13% along with currency headwinds of 2% and unfavorable portfolio impact of 1%. The organic sales declines reflect a 15% decrease in volume, partially offset by a 2% increase in price. The organic sales decrease for E&I was driven by Interconnect Solutions which was down 21% and Semiconductor Technologies, which was down mid-teens. The decline in Interconnect was driven by weak smartphone, PC and tablet demand, along with channel inventory destocking. Our PCB customers in China operate in the first quarter with utilization rates in the mid-40s, which is an expected cycle low. The decline in semi tech results from reduced semiconductor fab utilization rates due to weekend market demand as well as downstream destocking of finished chip inventory. Semi chip fab utilization rates in the first quarter averaged around 80%, which we expect to dip somewhat in the second quarter as these customers work down inventories. We expect recovery and fab rates to begin during the third quarter. Sales for Industrial Solutions were up low single digits on an organic basis as pricing and ongoing strength in Vespel Aerospace products and in healthcare for specifications such as biopharma consumables were partially offset by lower demand in largely consumer driven areas such as advanced printing and lighting applications. Operating EBITDA for E&I of $362 million was down versus the year ago period, primarily due to the drop through impact of volume declines, which corresponds to the lower customer utilization rates just referenced and our lower operating rates, as also mentioned. Turning to Slide 12, W&P first quarter net sales of $1.45 billion increased 1% as organic sales growth of 4% was mostly offset by a 3% currency headwind. Organic growth reflects a 6% increase in price resulting from the carryover impact of pricing actions taken last year, partially offset by a 2% decrease in segment volumes. Organic sales growth was led by Water Solutions, which was up low double digits on strong pricing and continued demand growth for water filtration led by reverse osmosis product lines. Safety solution sales were up mid-single digits on an organic basis on pricing and volume gains. Volume growth was driven by Kapton and Nomex demand in aerospace and automotive markets, especially for EVs, coupled with Tyvek strength in healthcare. Shelter Solutions was down mid-single digits on an organic basis on greater than 10% volume declines due to softness in construction markets, partially offset by pricing. Operating EBITDA for W&P of $344 million increased 1% as pricing and disciplined cost control were largely offset by inflationary cost pressure, primarily related to higher raw material and energy costs, currency headwinds and lower volume. Before I turn it back to Ed, I'll close with a few comments on our financial outlook and guidance for second quarter and full year 2023 on Slide 13. As we look at the current demand environment, we continue to expect ongoing strength throughout the year in areas such as water, automotive, aerospace and healthcare. Within electronics markets, we continue to see weakness in channel inventory destocking in the near term. Based on recent customer feedback, echoed by their public commentary and third party market forecast, we expect customer utilization rates to bottom relatively near term and to improve during the third quarter, which is about a quarter later than previously expected. To highlight these assumptions, we've included current market forecast for both semiconductor and smartphone markets on Slide 14. For semiconductors, third party research now suggests MSI will be down 13% for the full year 2023 compared to estimates last quarter indicating down mid-single digits, with fab utilization expected to ramp back up above 80% beginning in the fourth quarter. For both of these end markets, you can see the expected improvement beginning during the third quarter, which reflects a later and somewhat more gradual pace than the assumptions last quarter. Due to the delay in the near term recovery, we are adjusting the high end of our full year guidance range for net sales, operating EBITDA and adjusted EPS. We now expect full year net sales to be between $12.3 billion and $12.5 billion, operating EBITDA to be between $3 billion and $3.1 billion and adjusted EPS to be between $3.55 and $3.70 per share. For the second quarter 2023, we expect similar results for the first quarter as overall market conditions are anticipated to be generally consistent. On a longer term view, historical data suggests downturns in these markets are short, lasting about three to four quarters, which gives us confidence in the longer term growth for electronics as we get through this year. With that, turn it back to Ed.

Operator:

The floor is now open for your questions. [Operator Instructions] Our first question comes from Steve Tusa from JP Morgan. Please proceed.

Ed Breen:

Good morning, Steve.

Steve Tusa:

Could you just help level set us on where you stand as far as the amount left -- you have left to buy back for the rest of the year and the pace on that? And then when Delrin closes, just remind us of the proceeds you're expecting there and what you'd expect to do with that cash?

Ed Breen:

Yes. So Delrin, we're expecting to close by the end of the year. And we've been doing all the carve out work. So we're very far along on accomplishing all that. I'm not going to talk about what we sell it for, but the EBIT is about $180 million on the business. So you kind of figure out the zip code on that as we move forward. Again, that cash should be somewhere kind of in the year beginning of next year.

Ed Breen:

Yes, we have not changed that, Steve. Maybe we're being conservative, obviously, as we've said before, we've worked very hard with our teams on how we're going to handle this. As we move forward, the timing is -- we're seeing a little bit of it by the way because of logistics and shipping rates being down. But the big bulk of it will be on the raws. It will be more on the W&P side. And remember, by the time we renegotiate contracts and then you've got like a four month window to get it through our supply chain into a finished good that's sold to kind of figure out timing of it, but we have not changed the assumption which is very little of the $800 million that we raised pricing. And we'll just update everybody as we get to next quarter on that and we'll have a clearer picture of what that potentially is.

Steve Tusa:

Great. Thanks a lot.

Operator:

Our next question comes from the line of Jeff Sprague from Vertical Research Partners. Please proceed.

Ed Breen:

Good morning, Jeff.

Ed Breen:

Yes, Jeff. Our leaning right now is nothing else on the radar screen over the next year on the M&A side. We want to get the spectrum deal done, focus on that. By the way, the Laird acquisition we did the other year is going extremely well. So I think there's nothing that we're excited about that we see out there. This one, by the way, we've had our eyes on for quite a period of time. As I think we said in our comments, they're actually a customer of ours. So this is really where we've been focused for the last kind of year, year and a half with our thinking. If I had to say right now with any extra proceeds, I think we would lean towards additional share repurchase. But remember to Lori's comments, it's still going to be about over the next year that we're still taking shares out of the market, existing ASR as we said. And then we'll -- as soon as we finish this one, we'll launch the new ASR for $2 billion, and that will take us till about the end of the first quarter of 2024. So any excess cash we’ll deal with at that point in time, but it depends on the environment, obviously, but if the environment were like it is now where the multiple is for the company. My good is, we lean towards share repurchase.

Ed Breen:

Just as an overall comment though, Jeff, it's interesting. The semi -- you go back and study all the other downturn. Remember semi is a great industry, by the way, it's going to go up the next couple of decades, but you always do hit these pockets of some destock and some softness. So -- but this actually for us when you look at our sales rates, semi started coming down at the beginning of the four quarter. So we're two full quarters into the downturn. Now we think the quarter right we are in now is the bottom, just slightly down more from the first quarter. When you look at them, they're usually three to maximum four quarters of a destock. Remember, a lot of this is destock on top of some consumer softness obviously. So we're pretty deep into it. It would appear having said that to your direct question though, we've got a couple other layers of actions we would take on the cost side to protect ourselves. And then back to the conversation we just had with Steve Tusa, obviously, we're going to work this price cost thing real hard and haven't baked a ton in at this point in time. So that would be where the two levers would be.

Jeff Sprague:

Great. Thank you.

Operator:

Our next question comes from the line of Scott Davis from Melius Research. Please proceed.

Ed Breen:

Good morning, Scott.

Scott Davis:

Can you guys talk -- I know it's not giant, but it can move the needle if you do it right on Spectrum. What -- can you make it better -- you commented just that it's more North American based. Is there an opportunity to take it globally? Is there anything that you can do. Synergies look fairly modest to maybe just being conservative. But is there anything you can do with that asset to perhaps drive those returns up a little higher than the deal model?

Scott Davis:

Okay. Interesting. And then just as a quick follow-up. The price comments you just made, Lori, the sequential kind of drop down. Is that -- mathematically, is that more just that we're getting to the tougher comps on when you jack prices up a year ago or is there – okay. So there's no sequential weakness.

Scott Davis:

That's what I figured. Okay, great. Best of luck. Thanks. Appreciate it.

Operator:

Our next question comes from the line of Christopher Parkinson from Mizuho. Please proceed.

Lori Koch:

Yeah. So we still expect continued strength in water. So we had a nice organic growth in the first quarter. On both the price and volume basis and we expect that to continue as we head into the rest of the year. There's a lot of secular trends favoring our water portfolio right now. And on the safety side, we're seeing strength as well in most areas, especially what we highlighted with respect to the Spectrum acquisition on our healthcare portfolio. So we've got about a $500 million medical packaging business in Tyvek that's performing very nicely. So we see those secular trends continuing throughout the rest of 2023. One other area too that we can highlight of growth within the safety portfolio is the EV piece. So there's a nice application for Nomex paper within the e-motor that we're seeing nice growth in the first quarter and we'll look for that to continue as well.

Lori Koch:

Yes. I mean that's still our expectation with three big tailwinds between now and then. One is obviously the volume recover in E&I and getting those margins back into the low 30s. So we dipped in Q1. That was really a reflection of the volume and the actions we took to align production with demand. So that $40 million to $45 million created a headwind in the first quarter. So that is not permanent, that will resolve itself. Another tailwind is the price cost piece. So as we can see a potential future benefit there that will be margin accretive for us. And so, those are the two biggest levers. And then obviously, the final piece is the mix component. So as you get E&I back on its growth trajectory, obviously, it’s the highest margin piece of our portfolio. So there's a favorable mix lift there as that market starts to recover.

Operator:

Our next question comes from the line of Mike Leithead from Barclays. Please proceed.

Ed Breen:

Good morning.

Lori Koch:

Yes. So 2022 revenue was about $450 million and EBITDA was about $95 million.

Ed Breen:

Yes, it's exactly what you said. It's more higher interest rate environment we are in. And I think it's just prudent to set there. By way, not the number one reason, but another reason is, the premier multi industrial companies are all, if you look at it, kind of centered around 2 times leverage. We were kind of targeted up at that 2.75. So we think that this environment interest rate environment, it's just a prudent place to be. And so that's where we'll end the year about there, maybe actually a little slightly below 2 times depending on the Delrin proceeds that we get. And then, we always have -- we preserve our strategic flexibility there, but that's kind of where we'd like to target ourselves moving forward. But really the interest rate environment is the key reason.

Ed Breen:

Thanks, Mike.

Aleksey Yefremov:

Thank you. Good morning, everyone. Ed, I wanted to follow-up on your 300 basis point margin expansion opportunity for Spectrum to clarify. Is this opportunity in your high single digit ROIC number or it could push the number higher?

Lori Koch:

And even if you back into the numbers that I have mentioned for 2022, that's about a 21% EBITDA margin. 2023 is expected to be 22%, so already 100 basis points of improvement. And they had a really nice first quarter ahead of their management plan actually. So they're on a very nice trajectory to achieve that average $110 million of EBITDA in 2023.

Lori Koch:

Yeah. We would expect to see that. And we actually are seeing some share gains in the [indiscernible] in the packaging space still underneath the numbers that we're reporting. So what is clouding our performance versus the MSI is the destock piece. So the destock is pretty significant, that's going on in the first half that would be another headwind on top of the MSI numbers that we had presented in the deck. And so, that's what's crowding the story a little bit, but we still expect that content and exposure to advances [indiscernible] to be able to give us that performance in total.

Operator:

Our next question comes from the line of Vincent Anders from Morgan Stanley. Please proceed.

Ed Breen:

No, there's no seasonal reason, Vincent. It's hard to tell exactly what month it is in there. But we've modeled all the other downturns. Remember, this downturn is pretty significant now, 13% down is correct. You're hitting it pretty quick on the destocking. And then, by the way, there's one other factor here that kind of pushed it out a little bit. One of the very large semiconductor players kept running hard on their fab utilization through the first quarter and that's public knowledge. I'm not going to mention the name, but one of the big players. So that is creating also the fact that they got to take their utilization down pretty rapidly here. And I think they just talked publicly about that a week or so ago. So that was one of the other reasons that gets kind of pushed it out a little and they got to go through destock also.

Lori Koch:

Yes. So they compete against [TE, Nordson and Integer] (ph) are some of their larger competitors. As far as on the input side, they are -- they use their specialty polymers and design expertise to manufacture very high complexity materials for the large med device players. And so that's -- as I had mentioned earlier, where we see a really nice sweet spot of being able to leverage the two portfolios. They've got really nice positions with the medical device guys and we've got really nice positions with the biopharma guys. So being able to bring our two portfolios, leverage our expertise and material science across the broader portfolio is where we see the opportunity for us ahead.

Operator:

Our next question comes from the line of Josh Spector from UBS. Please proceed.

Lori Koch:

No. You had walked through the pieces. So industrial, we still expect continued strength overall within industrial. There's a little bit of split between interconnect and semi sequentially. So you'll start to see a little bit of the seasonal build that happens normally in interconnect, primarily within this smartphone space. And then we actually see a little bit of sequential deceleration in semi from Q1 to Q2 really a function of what Ed had mentioned earlier on one of the larger customers overbuilding in Q1 and then pulling back in Q2. But net-net, there's not a material change in revenue for the total company or E&I from Q1 to Q2.

Lori Koch:

Yes. I mean, we would -- so right now, we expect that, that headwind that we'll see in the first half of roundly $90 million from pulling back production in E&I not being there in Q3 and Q4 in the second half. And so if this recovery extends into the fourth quarter, then you would expect that $45 million to recur again in the third quarter. The one caveat that we will make that we don't have baked into the guide to that could offset any decremental weakness if the recovery is pushed out is that, price cost piece. So we don't have anything material baked in that could become a tailwind to the second half based on what we see right now versus what we see right now.

Operator:

Our next question comes from the line of John Roberts from Credit Suisse. Please proceed.

Ed Breen:

Yes, John, it's something we've been looking at how to report it. It's interesting. Yes, healthcare will be 10% of the portfolio now. The water business by the way is developed into 10% of the portfolio. I think both really nice good secular end markets for us over coming years at higher growth rates, obviously, both of those. So we'll take a look at that. We don't -- we'll probably look at it as we enter 2024 to see if we do anything, but no decision on that yet.

Ed Breen:

No, because it's a short cycle business, so you can't really -- we'll have a little bit of lift as Lori said in the ICS business. And that’s typical for us as she said, you're going into the holiday season later in the year. So we start our shipments and you can see one of our charts, just the smartphone piece alone picks in third, fourth quarter there. So we begin shipments there. But past that, it's short cycle business and we'll see it and we'll ship it pretty quick.

Operator:

Our next question comes from the line of Steve Byrne from BOA. Please proceed.

Lori Koch:

No. I mean, so the growth we have seen would be more on the industrial side, the business is about 70% favor towards industrial wastewater treatment. So that's what's driving the growth. There's nothing material that we're seeing with respect to any groundwater remediation is coming out from the EPA.

Steve Byrne:

And then one on shelter. Clearly, it's going through a cyclical downturn, but just curious about your longer term view on Shelter solutions? Is it likely to remain a core business for you?

Steve Byrne:

Okay. Thank you.

Operator:

Our next question comes from the line of John McNulty from BMO Capital. Please proceed.

Lori Koch:

Yeah. So we saw around the $800 million of escalation last year. It was about 60% raws and the rest roughly split between logistics and energy. We are seeing deceleration on in the logistics and energy side. So obviously, you can look at European and U.S. natural gas and see there's been a sizable pullback there and the ocean freight rates we're seeing tailwinds as well. And so that's where we're seeing most of the deceleration. I wouldn't say we've seen a material amount thus far on the raw material side. Either on both the bulk buy or on the tail spend. So that's the upside as we head into the rest of the year is when we start to see an inflection in the raw material volume.

Lori Koch:

Yes. Correct.

John McNulty:

Got it. Okay. Fair enough. And then just one question on the acquisition. So the growth rate from 2019 to 2023 of 12% is a pretty chunky number. But at the same time, if memory recalls, like during the COVID period, medical device demand was actually pretty soft. You didn't have a whole lot of access to surgical suite. So is that 12% understated in your mind or is that kind of a fair run rate and it's just based on the specific products they make maybe it didn't have that pressure that maybe some others in medical devices did. How should we be thinking about that?

John McNulty:

Got it. Thanks very much for the color. Appreciate it.

David Begleiter:

Thank you. Ed, do you have an update on PFAS and the MDL ahead of the upcoming trial in Florida?

David Begleiter:

Got it. And can you provide a little more color on the weakness you're seeing in North American construction, resi versus non-resi and any destocking that's still ongoing in that space? Thank you.

David Begleiter:

Thank you.

Arun Viswanathan:

Great. Thanks for taking my question. Hope you're doing well. So just looking at the full year guidance of $3.05 billion of EBITDA at the midpoint and your Q2 of $715 million, that would imply that your second half is around $1.62 billion and your first half is around $143 million. So that $190 million uplift or $200 million almost uplift when you look at first half to second half, is that mainly the comps getting easier on the volume side for E&I? Are there any other special items we should kind of consider when we think about that cadence?

Arun Viswanathan:

Okay. Thanks. And just one quick one on M&A. So you guys have now reentered the market with the Spectrum acquisition. Would you say that the portfolio transformation is now kind of complete and/or are you still considering other opportunities within the five markets that you've been looking at?