DuPont de Nemours, Inc. (NYSE:DD) Q1 2024 Earnings Call Transcript May 1, 2024
DuPont de Nemours, Inc. beats earnings expectations. Reported EPS is $0.79, expectations were $0.647. DD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the DuPont first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, one again. We ask that you please keep it to one question and one follow-up per person. For Operator assistance throughout the call, please press star, zero; and finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Chris Mecray to begin the conference. Chris, over to you.
Chris 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. 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 and results may differ materially from our forward-looking statements.
Our Form 10-K, as updated by our current periodic reports, includes a detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are in on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly GAAP financial measures 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.
Edward Breen: Good morning and thank you for joining our first quarter 2024 financial review. Our results for the period exceeded our expectations, driven by better than expected volumes in all segments. Broadly, the first quarter confirmed that we are passed the bottom in electronics and on the road to recovery. Our semiconductor technologies business reported sequential sales growth of 8% in the first quarter and 10% year-over-year, driven by a pick-up in underlying chip demand and normalization of customer inventory levels both slightly earlier than expected. In interconnect solutions, we saw a second straight quarter of year-over-year volume growth with volumes up 4%. We did, however, continue to see channel inventory destocking as expected, resulting in year-over-year revenue declines in certain industrial-based businesses, but we believe those conditions have bottomed and our assumed recovery timing is also consistent with our previous expectations.
That said and given first quarter performance, we are raising our full year 2024 guidance for net sales, operating EBITDA, and adjusted EPS. Lori will further detail the outlook shortly. Compared to the year ago period, first quarter reported sales of $2.9 billion declined 3%, operating EBITDA of $682 million declined 4%, and adjusted EPS of $0.79 per share declined 6%. We continued to prioritize working capital and delivered significant year-over-year improvement in cash flow during the quarter. In late April, we completed the $500 million accelerated share repurchase transaction launched in February, retiring a total of 6.9 million shares in this tranche and bringing total share repurchases to over 15% of our outstanding shares since November 2022.
Turning to Slide 4, I want to reiterate that we remain excited about the growth potential of our businesses centered around five secular high growth areas. We are excited about the through-cycle strength of our portfolio as end market recover from recent destocking headwinds, and our teams continue to focus on operational excellence. Almost one-third of sales exposure for our portfolio today is focused on electronics, including leadership positions and strong customer relationships serving semiconductor manufacturing, primarily via consumables used the chip manufacturing process, as well as serving broader consumer-based electronics markets with films, displays, and printed circuit board materials used in smartphones, PCs and tablets. We are very pleased to participate in the AI-driven growth acceleration within electronics via our semi-related products geared towards advanced node chips for data centers and other key AI applications, such as mobile products.
Electronics end markets have positively inflected, and we expect continued volume pick-up in both semi and ICS over the course of 2024. Our water business at 12% of our portfolio constitutes a broad range of filtration technologies and operates in markets expected to generate strong growth, driven by evolving wastewater regulation and the global response to concerns around water scarcity and circularity. We believe demand for filtration products, which have been impacted by slower project work in China in the last year and associated distributor destocking, has bottomed and will begin to recover later in the second quarter. We have excellent leadership positions in various end markets within protection and industrial technologies. Within industrial technologies, about 10% of the DuPont portfolio is geared to growing healthcare markets, including Spectrum medical devices, Tyvek medical packaging, and Liveo biopharma consumables.
We have seen ongoing solid demand for devices and expect to see recovery in medical packaging beginning later in the second quarter. Biopharma product demand is expected to recover beginning later in the year after bottoming in recent periods. DuPont’s next generation auto market participation constitutes about 10% of total sales and is geared to advanced technologies enabling secular demand trends for hybrid and electric vehicles within battery, motor and other applications. Demand for our advanced auto-related products has remained healthy and we have a global customer base that includes EV customers in each region. We see excellent longer term opportunity across our auto-related portfolio. With that, let me turn it over to Lori to review our financial performance and outlook.
Lori Koch: Thanks Ed, and good morning. Our first quarter results were fairly encouraging with further signs of electronics recovery matched with bottoming across our industrial base end markets. Additionally, a 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. Turning to Slide 5, I’ll cover our first quarter financial highlights. Net sales of $2.9 billion decreased 3% versus the year-ago period as a 6% organic sales decline and a 1% currency headwind was partially offset by favorable portfolio benefit of 4% primarily from the Spectrum acquisition.
The organic sales decline reflects a 5% decrease in volume and 1% decrease in price. Lower volume was driven by the impact of continued channel inventory destocking in water solutions, mainly in China, and safety solutions, most notably for Tyvek medical packaging, and in industrial solutions for Kalrez parts and Liveo biopharma products. These declines were partially offset by strong growth in electronics, where semi and interconnect solutions volumes increased 8% in aggregate versus the prior year period. On a segment view, W&P and E&I organic sales declined 10% and 2% respectively, while organic sales in corporate increased 1%. From a regional perspective, sales decreased on an organic basis globally versus the year-ago period with Europe, North America and Asia Pacific down 8%, 7% and 4% respectively.
In China, sales volumes were up 3% year-over-year as growth in E&I more than offset declines in W&P due to continued pressure in water markets. First quarter operating EBITDA of $682 million decreased 4% as volume declines were partially offset by the impact of lower product costs and Spectrum earnings contribution. Operating EBITDA during the quarter of 23.3% was down 40 basis points versus the year-ago period. I am pleased with our cash flow improvement as we focus our efforts on optimizing working capital performance. On a continuing operations basis, cash flow from operations of $493 million less capital expenditures of $207 million resulted in adjusted free cash flow of $286 million in the first quarter, a significant increase versus $173 million in the year-ago period.
Adjusted free cash flow conversion during the quarter was 86%, significantly ahead of last year. Turning to Slide 6, adjusted EPS for the quarter of $0.79 per share decreased from $0.84 in the year-ago period. Lower segment earnings, higher net interest expense, and higher depreciation more than offset a $0.06 benefit from a lower share count. Our tax rate for the quarter was 24.6%, up from 23.4% in the year-ago period driven by geographic mix in earnings. Our full year 2024 base tax rate outlook of 23% to 24% remains unchanged. Turning to segment results, beginning with E&I on Slide 7, E&I first quarter net sales of $1.4 billion increased 5% as the Spectrum sales contribution of 8% was partially offset by an organic sales decline of 2% and a 1% currency headwind.
The organic sales decline reflects the 1% decrease in volume and a 1% decrease in price due to the pass-through of lower metal prices. Effective with our first quarter reporting, I will highlight that we’ve realigned certain product lines within our three E&I lines of business. The changes streamline our cost structure while also optimizing certain product offerings to better focus on our customers. Additional detail has been provided on Slide 15 in the appendix. For the first quarter of 2024, organic sales for semiconductor technologies were up 10% versus the year-ago period due to the start of overall semiconductor market demand recovery along with normalization of customer inventory levels and continued strong demand for OLED display material.
We expect underlying semi demand to continue to improve throughout the year and note that our forecast continues to call for semi fab utilization rates to increase from the low 70% that we saw in the first quarter to a fourth quarter exit rate in the low 80s. Within interconnect solutions, organic sales were up slightly as mid-single digit volume gains were mostly offset by the impact of lower metals prices. This was the second consecutive quarter of year-over-year volume growth for ICS as broad electronic markets continue to recover. Organic sales for industrial solutions were down about 20% due primarily to ongoing channel inventory destocking for Kalrez o-rings and for our Liveo product line within biopharma markets. We continue to expect to see order improvement over the next several quarters in our Kalrez business, and our Liveo biopharma business is also still expected to recover later in the second half.
Operating EBITDA from E&I of $374 million was up 3% versus the year-ago period, driven by strength in semi and interconnect solutions and the earnings contribution from Spectrum, partially offset by the impact of lower volumes in industrial solutions. Turning to Slide 8, W&P first quarter net sales of $1.3 billion declined 11% versus the year-ago period due to a 10% decrease in volume and a 1% currency headwind. Within safety solutions, organic sales were down low teens on lower volumes, driven mainly by channel inventory destocking, most notably for Tyvek medical packaging products. We believe our customers’ inventory is close to normal at this point for Tyvek medical packaging. Within water, organic sales were down mid-teens, driven by distributor inventory destocking and lower industrial demand in China.
We continue to have active communication with our distributors and believe orders will pick up towards the end of the second quarter. Shelter solutions were flat on an organic basis compared to the year-ago period and we expect sequential lift in the second quarter. Operating EBITDA for W&P during the quarter of $295 million decreased 14% due to lower volumes, partially offset by the impact of lower product costs. Turning to Slide 9, I’ll provide an update on our full year 2024 guidance, as well as our expectations for the second quarter. We are raising our full-year guidance for net sales, operating EBITDA and adjusted EPS. At the midpoint of the revised ranges provided, we now expect full year net sales of about $12.25 billion, operating EBITDA of about $2.975 billion, and adjusted EPS of $3.60 a share, which now indicates expected year-over-year earnings growth.
For the second quarter of 2024, we expect net sales of about $3.025 billion, operating EBITDA of about $710 million, and adjusted EPS of $0.84 per share. The sequential sales and earnings lift in the second quarter assumes volume improvement driven by favorable seasonality in both ICS and shelter, continued electronics recovery, and reduced destocking impacts in water and medical packaging. Year-over-year sale and earnings growth in the second half embedded within our full year guidance is expected to be driven by further electronics market recovery, including continued improvement in semiconductor fab and PCB utilization rates, along with a return to volume growth in W&P. Second half earnings drivers include both volume improvement as well as expected mix benefits.
With that, I’ll turn it back to Ed.
Edward Breen: Thanks Lori I’d like to note that we published our annual sustainability report earlier this week, highlighting the work of our global team to meet our commitments across all aspects of ESG, and I’m pleased with the progress and speed with which we are advancing our 2030 goals. There are three dimensions to our sustainability strategy: innovation, protecting people and the planet, and empowering employees and communities. I’d like to mention just a few recent accomplishments. More than 80% of our innovation portfolio is expected to advance our customer sustainability road map. This is a critical metric that aligns our product development with customers’ expectations for both performance and sustainability.
We were pleased to be recognized for this commitment by Samsung Electronics, which awarded us as a Best ESG Partner this past year. On climate, we delivered another year of strong performance, surpassing our 2030 goals which are aligned with the ambition of the Paris Accord. This past year, we achieved a 58% reduction in Scope 1 and Scope 2 greenhouse gas emissions from a 2019 baseline, exceeding our 2030 goal of 50%, and we achieved a 39% reduction from the 2020 baseline in Scope 3 emissions, also ahead of our 2030 goal. This past year, we made strong progress in the continued deployment of a company-wide operational excellence framework designed to drive continuous improvement and productivity, including deployment of standardized tools, best-in-class technologies, and practices that enhance workflows, reduce errors, minimize waste, and improve safety.
Related to this, 2023 was our safest year on record for employees and contractors. Finally, our strong governance practices underpin our sustainability strategy as we remain committed to transparent reporting on our policies and performance with oversight from our Board. A key focus in 2023 was strengthening the DuPont supplier code of conduct with our new responsible supplier program. These are just a few of the many great examples in the report of how our teams are delivering on our purpose and driving sustainability. With that, we are pleased to take your questions, and let me turn it back to the Operator to open the Q&A.
Operator: [Operator instructions] Your first question comes from the line of Jeff Sprague from Vertical Research Partners. Your line is open.
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