Q3 2022 Dupont De Nemours Inc Earnings Call
Good day and welcome to Dupont's third quarter 2022 earnings Conference call. Please note today's conference is being recorded 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 Press Star followed by the number one again.
Chris Mcquarrie, Vice President of Investor Relations you May begin your conference.
Good morning, and thank you for joining us for Dupont's third quarter 2022 financial results Conference call. Joining me today are Ed Breen, Chief Executive Officer, and Laurie <unk> Chief Financial Officer.
We have prepared slides to supplement our remarks, which are posted on dupont's website under the Investor Relations tab in the webcast like 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.
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.
'twenty one 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 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 also posted two deposits Investor Relations website.
I'll now turn the call over to Ed.
Good morning, and thank you for joining our third quarter financial review, we posted strong quarterly results above our previously communicated guidance in an extremely challenging environment due to uneven macro conditions and persistent inflation globally.
Revenue growth of 4% versus the year ago period included solid organic growth of 11%.
Customer demand remains strong across most of our key end markets. During the period highlighted by double digit volume increases in select areas, including power as best Bell layered semi water and auto adhesives.
Combat persistent inflationary headwinds in raw materials logistics and energy, we continue to implement necessary pricing actions, which are fully offset such headwinds to date.
Continued energy cost inflation, we now expense expect full year 2022 inflation of about $800 million year over year.
Which we anticipate will be fully offset by pricing actions.
Our third quarter results also demonstrated year over year operating EBITDA growth and margin improvement, reflecting dupont's unique business mix innovative solutions and highly diverse end markets as well as strong operational execution during the period.
We are pleased to have reported strong performance during each of the first three quarters of 2022.
And we remain firmly committed to continued strong execution in the coming periods.
Turning to slide four I will comment on the details of our transformation progress further.
First last week announcement that we completed the sale of the majority of our MRM segment to selling these marks the completion of our last contemplated large scale divestiture for which we received 11 billion in gross cash.
<unk> business is an excellent set of assets that we know will prosper and we are confident that celanese has the right owner going forward.
We are excited by the prospect of proving to the market that our multiyear transformation has brought dupont to a truly different place.
After the Dow merger, followed by the spins that created the new Dupont, we have further transformed our business with large scale deals, including the NMB split off and now the M&A transaction.
We further sold eight smaller businesses over the last three years with proceeds totaling over $2 billion.
We are starting the next phase of our growth from a position of strength.
Leveraging highly profitable businesses with strong and leading market position centered in growing markets as well as a healthy balance sheet.
These assets include some of the best intellectual property in the respective industry verticals with globally recognized brands familiar to us all as well as the thousands of long time b to B industrial customers.
For Dupont, we are confident that our remaining mix of businesses offers a different dynamic with significantly lower volatility.
Higher expected long term growth given our revenue mix.
This is driven by a focus on secular tailwind, including the <unk> build out and other electronics drivers.
As the global clean water infrastructure development.
Continued demand for safety and personal protection solutions.
Secular growth across multiple industrial technology verticals that we serve.
And from next generation automotive growth.
We believe we have built a portfolio that can perform along side the best diversified industrial companies.
Our businesses are aligned with secular growth trends, we delivered top tier levels of profitability and we should clearly benefit from dampened business volatility compared to our portfolio from just a few years ago.
These advantages are clear and will help us to generate superior shareholder value over time.
Regarding the Delaware and divestiture process, we continued to advance our internal work required to divest that business.
We are being diligent with our overall marketing process to ensure we maximize value to proper market conditions.
And expect to have completed a sale in 2023.
Before I move on I'd like to briefly address the intended Rogers acquisition.
We terminated this deal on November one which was the outside date of the transaction agreement originally signed a year ago.
This was an unfortunate outcome.
The strategic fit of Rogers with our business was strong and we saw a lot of opportunity, but were unable to secure regulatory approval for the transaction.
We wish the Rogers team well.
For Dupont the inability to close the acquisition and has no material impact on our ongoing business outside of the obvious loss of opportunity.
We remain confident in the quality of our portfolio and its growth potential and we'll look to be opportunistic with select and targeted M&A moving forward.
Shifting to capital allocation on slide five.
With the receipt of the proceeds from the <unk> sale, we are now able to accelerate our capital return options and further strengthen our balance sheet, while maintaining flexibility to continue to grow the business through disciplined and targeted M&A.
Today, we announced that our board has authorized a new $5 billion share repurchase program, which expires June 32024.
We intend to act immediately and enter an accelerated share repurchase agreement for $3 billion to $5 billion of common stock, which includes the remaining $250 million under the previous authorized authorization.
We anticipate completing this ASR within about nine months with 80% of the shares retired upfront during the fourth quarter. We currently expect to complete the full $5 billion of repurchases within the authorization period.
In addition, we will retire $2 $5 billion of our senior notes due 2023 in the fourth quarter.
The prepayment reduces refinancing risk in a rising rate environment, while generating pre tax annualized savings of over $100 million.
Further we plan to reduce our commercial paper balance to zero by year end of which we had $1 3 billion outstanding at the end of the third quarter.
In combination this significant share repurchase authorization and our deleveraging plan demonstrates our continued commitment to returning capital to shareholders, while maintaining a strong balance sheet.
Our approach remains balanced and in line with our overall capital allocation strategy.
We expect to finish the year with a leverage ratio significantly below our longer term target maintaining balance sheet capacity to further allocate excess capital to a combination of bolt on M&A.
Potential share repurchases over time.
Our M&A focus remains on targets that fit within our growth pillars and are aligned with key secular growth trends with that let me turn it over to Laurie to discuss third quarter details as well as our financial outlook.
Thanks, Pat and good morning, everyone.
We saw continued strong demand during the quarter and most of our end markets with organic growth better than our expectations coming into the quarter.
The global economy remains challenged in some respects, but our keen focus on disciplined pricing and operational execution contributed contributed to operating EBIT margin expansion on a year over year basis.
Turning to our financial highlights for the quarter on slide six net sales of $3 3 billion increased 4% as reported and increased 11% on an organic basis versus the prior year quarter global currencies remain highly dynamic and we saw a 4% headwind, resulting from U S dollar strength against key currencies.
Including the Euro yen and your one 3% portfolio headwind reflects the impact of noncore divestitures.
Breaking down organic sales growth, we saw 8% pricing gains and 3% higher volume.
<unk> growth reflects continued strong demand, most notably in semiconductor water and general industrial.
Somewhat by lower volumes for protective garments against AG solutions, and ongoing softness in smartphone and personal continuing market markets globally and interaction excavation.
On a segment basis third quarter organic growth was 15% for Debbie E&P, Kevin for Eni and I'll highlight is 25% organic growth for the retained businesses that we report in corporate okay, representing the adhesive portfolio from that farmer Mmm segment.
On a regional basis, we delivered organic sales growth in all four regions led by volume increases in North America and Asia Pacific.
From an earnings perspective, operating EBITDA of $856 million increased 5% versus the year ago period.
Adjusted EPS at <unk> 82 cents per share increased 4%.
The increases were driven primarily by volume gain as pricing actions were offset by higher inflationary cost pressure.
And EPS in the quarter included a higher than expected tax rate, which I'll detail shortly.
Operating EBIT margin of 25, 8% increased 30 basis points year over year on stronger volumes and productivity.
Operating EBITDA margin in the quarter adjusted to exclude price cost with over 27%.
Finally incremental margin with 33% on an as reported basis.
Cash flow from operations during the quarter of 419 million adjusted for capital expenditures of $172 million and $115 million tax prepayments related to the <unk> divestiture.
Free cash flow of $362 million.
We continue to experience significant headwinds.
Action costs related to the Eminem separation as well as working capital headwinds primarily from the divested <unk> business.
Free cash flow conversion in the quarter for the total company with 73% for the ongoing portfolio, if M&A with excluded free cash conversion in the quarter would have been in line with our target of greater than 90%.
Turning to slide seven adjusted EPS at ADT increased 4% compared to 79 in the year ago period.
Longer segment results versus the prior year contributed 8% to adjusted EPS growth or <unk>.
Primarily by volume growth benefits from ongoing share repurchases continue to drive earnings growth, providing a <unk> <unk> benefit to adjusted EPS.
The absence of earnings related to noncore that.
Divestitures and the impact of currency headwinds negatively impacted third quarter results and we expect those to be a more significant headwind to year over year earnings in the fourth quarter.
Our tax rate for the quarter was 26.
Up notably from 23, 5% in the prior year, resulting in a year over year headwind to adjusted EPS of <unk>.
And a <unk> <unk> headwind in the quarter compared to the midpoint of our previous modeling guidance.
Our full year base tax rate is now expected to be about 24% with the increase driven by currency and mix and geographic earnings.
Turning to segment results beginning with Eni.
Eni delivered third quarter net sales growth of 3% and organic growth of 7%, including a 4% increase in volume and a 3% increase in price, partially offset by a 4% currency headwind.
Sales growth was led by semiconductor technologies, which increased mid teens organically as strong demand continued led by the ongoing transition to more advanced node technologies and highest semiconductor fab utilization along with growth in <unk> Communications and data center.
And that's your affiliations posted another strong quarter with organic sales growth at high single digits led by ongoing strength from caris semiconductor related product offerings.
About products, serving recovering aerospace market.
OLED materials for new electronic displays related model launches and for health care applications, such as Biopharma tubing and our.
<unk> sales decreased mid single digits on an organic basis due to volume decline.
Coming into the quarter, we expect it to return to positive organic growth within interconnect that continued softness in consumer electronics.
Smartphones, and lower PC and tablet demand globally.
More than offset strong demand for <unk> film product applications, and industrial end markets, such as rail and defense and strength and layered product offering, including electromagnetic sealing and thermal management.
Given this demand softening, we now expect interconnect innovation organic sales for the full year to be down mid single digits.
Operating EBITDA for Eni at $473 million with relatively flat as volume gains in semi and industrial solutions were offset by lower volumes and weaker product mix.
In exploration, along with lower JV earnings.
Operating EBIT margin of 31, 3% was down 110 basis points from the prior year due primarily to the impact of price cost.
Turning to slide nine.
<unk> delivered net sales growth at 10% and organic sales growth of 15% with partially offset by a 5% currency headwind.
Organic growth for Wip reflected a 13% increase in price and a 2% increase in volume.
Organic sales growth was led by self installation, which increased high teens, driven by pricing actions and further aided by volume growth and continued demand in North America.
Construction.
Sales for water solutions were up an impressive mid teens organic growth rate on strong global demand for reverse osmosis and ion exchange resin technology as well as pricing gains.
Sales for Savage installations were up low double digits on an organic basis as pricing actions were slightly offset by lower tieback volumes given the shifts from garments to other type of applications and the resulting impact manufacturing line changeovers on production efficiency.
Excluding the year over year pilot environment headwind total WP volume would have been up approximately 5%.
I would also acknowledge dedicated work of our team for safely and promptly restoring operations at our <unk> plant earlier in the third quarter from an unforeseen utility disruption with minimal impact on the quarter's results.
Operating EBITDA for Wip of $318 million increased 8% versus last year as pricing actions and volume gains more than offset higher product costs, driven by inflationary pressure weaker product mix and currency headwind.
Operating EBITDA margin of 24, 9% included 170 basis point headwind related to price cost.
Excluding net price cost impact operating margin would have been 26, 6% during the quarter.
I'll close with a few comments on our financial outlook and guidance for the full year 2022 on slide 10.
We expect solid demand trend to continue in the fourth quarter and many of our key end markets, such as water industrial and auto adhesives to name a few.
That said, we anticipate continued softness within interconnect solutions related to smartphones and personal computing globally and expect some slowing in customer fab production rates in our semi business.
Additionally, we expect some impact from reducing our production to drive down inventories on a consolidated basis.
Lastly, we expect further currency headwinds to negatively impact both top and bottom line results.
Based on these assumptions, we are adjusting the midpoint of our full year 2022 net sales guidance.
So end of our previous range and now expect net sales to be about $13 billion.
Compared to our previous midpoint. This change reflects about $115 million of incremental foreign currency headwind with the majority of those headwinds impacting the fourth quarter.
For the full year, we now expect foreign currency to be approximately a 4% headwind to reported net sales.
Organic net sales growth expectation of high single digits for the full year remains unchanged.
Due to the same factors just noted we are adjusting the midpoint of our operating EBITDA guidance to the low end of our previous range and now expect full year 2022, operating EBITDA to be about $3 5 billion.
We now expect full year adjusted EPS to be about $3 30 per share within our previous range.
The higher than anticipated base tax rate for the full year that I discussed earlier, which equates to a nine cent headwind versus our previous guide is expected to be offset by a lower share count and net interest benefit resulting from a higher cashback and the capital deployment actions, we are taking in the fourth quarter.
In closing our team remains focused on operational execution and expect to use the levers within our control to meet our financial goals and continue to drive value for our shareholders.
With that we are pleased to take your questions and let me turn it back to the operator to open the Q&A.
Okay.
At this time I would like to remind everyone in order to ask a question. Chris Star then the number one on your telephone keypad. Please limit questions to one question and one follow up we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Jeff Sprague with vertical research.
Thank you and good morning, everyone. Good morning, Jeff.
Morning, guys, congrats on getting all that done.
Hey.
Just would love to put a finer point on how youre thinking about capital deployment beyond what you announced today and.
Specifically as a route.
It relates to kind of M&A.
So should we really think this will be bolt ons and kind of neatly fitting within side of.
How the portfolio is positioned certainly seems like you could benefit from just letting things settle down for a while and allowing people to digest kind of what you do and how the portfolio has taken shape.
Yes, Jeff I think very good points you are making.
We're in no rush to do an M&A deal.
Especially in this environment I don't think any of us know where things are actually headed.
So we're going to take a pause here.
See how the next set of months play out we do have targets. We've been interested in for quite a period of time, whether they are actionable or not is another story.
And they clearly would be in the pillars of the secular growth areas. The five areas that we've talked about so we're not going to deviate off into anything else, but we're in the same mode. I think as your opening comment Jeff let things settle down and we've made a lot of moves.
Pretty much finished our transformation, except still for the sale of <unk>, which will happen in 2023, and so no rush to do anything, but we do have the capacity to do some bolt on type.
M&A and that's the way we're thinking about it is more on the bolt on size of the deal.
Great. Thanks for that context, and then maybe just a follow up for Laurie can you just.
Kind of level set us on what youre expecting for the actual net proceeds for Eminem paid some tax here in Q3 and also you did note some free cash flow headwind from Eminem and I. Thank you.
You were talking about that all throughout the year. So are there actually some kind of favorable working capital adjustments here kind of on top of the gross sales proceeds that we're talking about.
Yes, so to your first question I expected about $10 4 billion net after tax on all of the customary closing adjustments from the Milan transaction. So if you. If you look to the end of the year with all the puts and takes about we announced today on the capital allocation between the share repurchase authorization getting started with <unk>.
<unk> 5 billion and the fixed portion of the November 2023 is being paid down at $2 5 billion that would put our year end cash of roughly $4 8 billion. So a nice position to be and as far as a working capital headwind. So theres no working capital benefit to be had from a cash flow perspective. It was more just calling out.
The headwinds that were in our numbers prior to the separation of the MLM business and so if you look at our our cash use kind of prior to their separation the largest portion of that working capital headwind was from the eminent business and we were just highlighting our actual cash performance would have been better without them in our portfolio. So in the quarter we were.
73% as reported for our free cash flow conversion, we would've been more in the range of a greater than 90% that we target further at remain co portfolio had had we not had them in the results.
Great. Thank you.
Thanks, Joe.
Sure.
Your next question comes from the line of John Roberts with Credit Suisse.
Thank you I'll ask just one here in.
In semiconductor materials Integrous reduced the December quarter sales by about 10% for the new U S restrictions on China.
Also noted the memory chip weakness was affecting CMP disproportionately are you seeing anything different in the semiconductor market.
Yes.
The export control issue in China.
Theres really three restrictions on that and by that I would put in the category of it's more because of the advanced chip technology. So.
For instance, one of them is logic chips.
<unk> thousand 14 nanometers or below is restricted.
I just wanted to Q1, so for us it's not that big most of the Fabs in China are not the high end advanced chips. So if youll look at it on an annual basis. If we are restricted cannot get a license to supply that would be about $60 million of revenue for us on an annual basis associated about 2000.
$15 million on a quarterly basis, which we talked about $15 million into account and our first fourth quarter guide that we gave.
Thanks might be overall on the semi side, we look at the inventory index for instance, like Gartner puts out.
Give or take one one right now if you kind of go back to the last downturn on semi back in 2019 it.
Peaked out at 131, so just to give you a little bit of a parameter on where that sits so it's on the high end. We think there is two or three quarters of correction there that we'll see.
Yes.
Downturn in 2019 was like 6% to 7%.
Year over year downturn, so just to give you some perspective, but at this point in time, it's not at the peak of where it was in the 19 timeframe.
Great very helpful. Thank you.
Okay.
Okay.
Yeah.
Your next question comes from Scott Davis with <unk> research.
Hey, good morning, everybody Hey, good morning, Scott.
Are you guys surprised at the 8% price didn't fully cover costs. This quarter were there some kind of intra quarter cost increases or surprises there caught you a little flat footed.
Scott It Didnt have maybe weakness stated we did cover all the costs of our cost inflation.
Like last quarter report, we thought it was around $700 million, it's now $800 million for the year and Thats all based on mostly energy increase in Europe as you're all aware of one natural gas.
And by the way just to give you a kind of more color to that we are obviously seeing commodities start to come off their peak, we thought we would start that maybe start seeing some benefit and hopefully we do in 2023, but then energy spike so the energy just about offset what we've been seeing the benefit on the commodity so.
Hopefully now as we progress over the next months, we start to see some spread there.
That would be helpful. But no we did implement more price increase recovered the whole 800 that we're going to have for the year at this point in time and just to remind you every price increase we did we put it into the product cost we did not do with the surcharges that would fluctuate off an index so customers would.
Negotiate with us.
When theres any price changes.
Alright, that's super helpful and just a little.
A follow up on interconnect I mean are you guys I assume youre selling to Fox Con are you impacted by the plant shutdown that's been announced.
Yes, so we did announce a deceleration in our expectation sitting at interconnect solutions in general so it would be covered by what you're hearing in the headlines with respect to smartphone and consumer electronics and then also maybe underlying PCB demand. So for the year. We now expect interconnect solutions to be down mid single digits. So that would all be.
Wrapped up in that number yes.
Just to give you a perspective, we thought in the second half of the year Ics would be up mid single digits now it's down mid single digits. So I think we've.
Taken all that into account and Barry just to remind you that.
It's hard to remember this but we're already two quarters into the Ics that whole PCB smartphone laptop downturn. So they don't last forever, but we've already had two quarters of it.
Okay. That's good color. Thank you appreciate it thanks guys.
Your next question comes from the line of Steve Tusa with Jpmorgan.
Good morning good.
Good morning, Steve.
Given it's election day I will make a recommendation you should run for office someday.
I like what I do know.
Yes, I think Youll get the 10 10 devotes from the 10, guys who cover the stock for sure.
So just.
Just on the fourth quarter.
Price cost you were 130 bps I think headwind this quarter I believe you said I might have missed that.
Does that I assume that gets a little better in the fourth quarter or the math suggests that it may not get better in the fourth quarter.
Yes.
Does get a little bit less in the fourth quarter, because we start to lap some of the prior year increases in so we're expecting about a 5% price increase in the fourth quarter versus the 8% that we posted.
In third quarter and 7% in the second quarter.
As far as the margin headwind it would be a little bit less but our underlying guidance does suggest overall EBIT margin improvement in the fourth quarter. If you back into the fourth quarter from that full year guide that we gave.
More in the low 24% range from an EBIT margin perspective versus last year at $23, two and I'd highlight with that sequential decline expected decline in EBIT margin is really from one seasonality that we tend to decent even audi as our volumes are lowest in the fourth quarter and also we did elect to take down.
Production to be able to better align our inventory levels that we are seeing some stabilization in the supply chain that gives us confidence we can start to to treat down those inventory levels et cetera will be a unit cost headwind in the fourth quarter. So those those two combined are the drivers of the sequential EBIT margin decline.
And then just one more question on this I know you gave the margin headwind, but just so we're on the same page what was the out of the $800 million how much of that came in through Q.
About $240 million.
Above inflation, yes, so we're at 650 year to date.
Okay. Another 150 <unk> to get to the 800 for the full year.
Okay.
Any any carryover for next year when it comes to price and.
You said now inflation, you probably won't get relief, there, but any carryover on price into next year.
The other should be found especially in first quarter. So that's why I'm really sorry to ramp the price increases and then we.
Did see some inflation start to ramp in the first quarter, our number hasnt materially changed I believe back in Q2, we thought the full year would be $500 million and we had we did see some escalation in the Q2 timeframe, but the numbers have been starting to normalize in the back half of the year. So the increases that we just saw.
Recently have been more on the in the European natural gas side versus the underlying raw material side.
Yes, Steve it would be interesting for all of us going into 2023, as we work our way through and how we handle.
Handles as price cost issue because of the commodities are definitely coming down.
Pretty uniformly and not crazy, but theyre down 2025% in many cases, so if the natural gas thing settles out I think we've peaked on all of this inflation and then how do we handle price cost as we move forward with all the price that we got.
It makes tons of sense.
Thanks, Thanks for all the detail I appreciate it okay.
Your next question comes from the line of Mike <unk> with Barclays.
Great. Thanks, Good morning, guys.
Just one from me.
Ed I was hoping you could provide.
To the degree you can a bit more color about the decision to walk away from Rogers as opposed to pursuing another extension or rework transaction.
It sounds like Youre, saying that was ultimately unworkable from a regulatory perspective is that fair just Michigan sitting in limbo for an elongated period of time here.
No. It's very simple, we did not get regulatory approval in China. It had been a full year.
That was our outside date.
We ended it which was the contractual agreements or was it really there's nothing more to it.
Okay. Thank you.
Thanks Frank.
Your next question comes from John Mcnulty with BMO capital markets.
Hey, good morning, Thanks for taking my question Ed.
You spoke a little bit to the interconnect solutions weakness can you speak a little bit broader in terms of the macro trends that youre starting to see right now some of your business is pretty resilient through that but are you starting to pull any levers just on macro concerns at this point that we should be thinking about.
Yeah, I'll, let Lori start out and I'll add some color, yes, I think as far as clothing lever to make sure that we drive the best margin profile that we can we did announce in the queue that will come out. This afternoon. Our restructuring program. Initially it's really just to get accurate of stranded costs from the <unk> transaction naphtha has closed and we think out about $50 million of stranded.
Costs associated with the M&A transactions that will get it.
First to take those out to be able to drive further profitability and then we've got room underneath the restructuring that we announced to take further cost action as appropriate if we start to see further further deceleration in the top line and we have already as a management team laid out what those so we will do the stranded cost as Lori said, but we've.
<unk> already laid out the detailed actions we do for some additional restructuring if we felt it was needed and then I'll go back to the point I made a minute ago. There is a big lever in price cost that we're going to have to figure out how that plays out through 2023.
Got it got it and it makes sense fair enough and then just maybe just a follow up on the on the M&A.
<unk> from before so I guess with Rogers clearly, having some problems on the regulatory front and maybe it's a political thing U S and China or not it seems like a lot of things are kind of getting held up at this point does it make it hard.
For for Dupont going forward to make acquisitions in the electronics area and should we be thinking going forward that bolt ons would be more focused on on the water and protect scenario or is that really not the right read on this.
Let me say it this way just by the way it's played out some of the things we're interested in happened to be in water and happen to be in the industrial technology space. So I guess.
If it stays there kind of targeted for down the road when we want to do something that's probably not an issue that we would have to deal with and who knows when the electronics I just don't know the answer to that.
No what we don't know.
But having said that I mean, we loved Rogers coming in close it added some tools in the toolkit, but we have a very comprehensive portfolio in electronics with the layered in there. It's really been beneficial layer has been performing all estimate they've gotten as we highlighted I think Liz Earle.
Earnings they've gotten some wins one for Dupont technology.
With some layered customers and also.
I don't feel bad about where we're at at all on the electronics side again, it would've been nice that Rogers, but.
And we're not probably looking at electronics deal anyway at this point in time, so I'm not going to be an issue.
Got it thanks very much for the color.
Yes.
Your next question comes from the line of Aleksey <unk> with Keybanc capital markets.
Thanks, Good morning, everyone. Good morning, how do you think about.
How did you think about the debt reduction versus potentially doing even larger buyback.
Okay.
For those kinds of capital allocation.
Well first of all and we said this in our prepared comments, we will do the $5 billion.
Repurchase and by the way we can be in the market in the open market doing some of that if we feel its appropriate during the year, depending on what the economy is looking like so it's the ASR will take us nine months, but we can be over the top.
Doing some additional purchase so we'll just see how that plays out but no panel and have the opportunity to do another ASR right on the heels. If that's how we want to handle it. So we have our options open to US there, but we also have a fair amount of firepower as we kind of go through 2023, if you do the math and.
Yes, again, it would be for bolt on potential acquisition, but we also had the opportunity to do more share repurchase if we want so we don't need to make those decisions now.
Contemplate that as we go through 2023.
Thanks, Ed and going back to interconnect business would you try to maybe forecast when when this reaches a bottom do you think Q4 Q1 could be when it starts stops going negative.
Yes. It does feel like we have reached the bottom in the interconnect space between the PCB application. So as Ed had mentioned or two quarters and so it feels like we bottomed out and so youre not ready to call kind of growth in the next quarter or anything, but we do feel like the deceleration has plateaued.
Yes, we got a pretty deep into it at this point in time I mean, the PCB players in China really shut down so I think they're correct in their inventory really quickly I mean, they truly shut down its not like they cut back on production. So I think they can fix things pretty quickly.
And so I don't want to put a date on kind of building out of it but again, we are pretty far into it months wise at this point in time.
Great. Thanks, a lot.
Yes. Thanks.
Your next question comes from the line of Mike Sison with Wells Fargo.
Hey, good morning, Nice quarter, just one question for me.
It seems like the consensus view is sort of a recession next year can you maybe talk about each of the businesses and how it should perform in a downturn and just when I think about the fourth quarter outlook.
Multiply that by four probably isn't the right way to think about a recession case and maybe.
Walk through the puts and takes of that.
Sort of potential.
Yes, I mean, I think first starting on the financials I think you're right to take the fourth quarter. It tends to be usually our seasonally weakest quarter and sorry to take it and run rate.
It could be difficult to.
To highlight too just the natural EPS growth that we have on the actions that we've taken on the capital allocation side, which will bolster S. As we head into 2023 so between.
Between the share repurchase that we announced today that the $3 billion to $5 billion and lower interest income that we called out about <unk> lower.
Lower interest expense that we called out about $100 million in further interest income from the cash that we'll be holding in the balance sheet. We've got north of 15% EPS growth just from those actions alone. So.
Nice to be positioned to be in as we head and head into 2023.
It had mentioned will aim to maintain them favor ability on the price cost side as we start to continue to see that commodity prices decline and I did highlight that we have initiated a cost restructuring program should we need it beyond the stranded costs that we highlighted to take out so from that perspective and from maintaining a good margin profile.
I feel like we're protected as we head into next year.
From an end market perspective, we've highlighted that we probably feel like were already two quarters and say that consumer electronics downturn.
And the semi piece that had highlighted to stay inventory index that we pay attention to and so while it is elevated versus where it was during the pandemic. It's not is that really and it was it was back in late 2019 timeframe. When we saw semi volumes down in the in the mid single digit range.
From the industrial side of the portfolio. So the remaining piece of electronics, and then broad broadness and getting even fee. Besides the shelter pieces pieces feel pretty stable also water. We've got a really nice backlog at least six months backlog and the water business.
And nice performance on the defense side, especially on the on the Aero piece within the safety portfolio as we see those markets continue to recover.
The one piece besides consumer electronics and semi that we're paying close attention to is obviously the shelter business.
North America residential side, which is about 40% of the business, we will pay close attention to obviously with the news out there on that.
And the potential headwinds in that space that we're not seeing anything material at this point so.
Great. Thank you.
Your next.
Question comes from the line of Laurence Alexander with Jefferies.
Everyone. This is Dan Rizzo on for Laurence and thank you for taking my question.
You mentioned before about having prices not be surcharges, but just kind of be in the production cost or in the cost of the product I was wondering historically speaking have you ever would.
That scenario have you ever had to give price concessions or are they generally relatively sticky.
Okay.
Well I think for all of US it's hard to totally answer that question, because we never had inflation like this.
At least in my career and raised prices as much as all of us have.
So our game plan clearly is to keep a spread there.
Because.
I'm a strong believer, we have big intellectual property and a lot of our products are needed they're the best in the industry.
And they should have good EBITDA margins with them.
And generally we do a very good EBIT margins across the board. So the game will be to keep.
Keep that spread there, but when you have had this kind of inflation you I don't think you'll hold onto all of it and I don't think any company holds onto all of it by and large but can you keep the spread will be will be the real game.
Thank you that's helpful. And then just I just wanted to other question in terms of FX you mentioned the headwinds I was wondering if there is if you've ever given a rule of thumb like a 5% move in the euro versus the dollar or something like that or the basket.
Since the X percent and I'm sorry.
Sales or EBITDA.
Okay.
So we've never given a rule of thumb that dropped out from the topline headwinds, though in the fourth quarter, we expect about a 6% year over year headwind from a currency perspective, it drops down into EBIT is not materially different than the overall EBIT margin that we have for the total company. So you could use that to kind of model, where we think.
The roughly $200 million year over year headwind in currency translates to EBITDA.
Alright, Thank you very much.
Your next question comes from the line of Christopher Parkinson with Mizuho Securities.
Great. Thank you so much for taking my question just given the solid result on WP margins.
On your longer term pathway back to 27 28 has the calculus change it changed at all between the buckets of.
Price cost over the intermediate to long term improving ops and just overall business mix is there any change in thought process or is just hey, we have a lot of things going in the right direction and we'll get there in due course, thank you.
Yeah, No. There is no no change in the EBIT margin improvement drivers that you had mentioned the one piece that we will continue to watch it that had mentioned with can we drive continued favorability within them.
Margin improvement from price cost so ads at the costs start to decelerate or are we able to maintain a more favorable price profile.
Got it and just very quickly on Eni.
Are you seeing any changes in deferrals in leading edge capacity ramps in any way shape or form in terms of.
Poor MSI heading into 2023 and in any way does that change your expectation for 200 to 300 basis points.
Outperformance just any color on that let's just say preliminary framework would be very helpful. Thank you.
Yeah, I would say longer term there is no material change in the profile of high single digit capex going in and driving high single digit.
Increases in production some of the numbers as we head into 2023 from the market research expectations do you see a decline in MSI. So the initial numbers right now are around a 5% decline MSI, but we would still expect that same outperformance of two to 300 basis points since I'll ask if MSI is down 5% next year.
We would expect and we would expect to be down.
Two to 300 basis points ahead of that.
Very helpful. Thank you so much.
Thank you.
Your next question comes from the line of Josh Spector with UBS.
Yeah, Hi, Thanks for taking my question I wanted to follow up on the recession question earlier. So you said not annualize or annualized in the fourth quarter is not the right way to look at it that's about $3 billion in EBITDA talked a lot of positive points that you could have the price cost side and some other restructuring items.
I mean is it fair to say that you're starting bogie for next year from an EBITDA perspective is about flat year over year, even in a recessionary environment.
Yeah, I think it's a little too early to call what to what 2023 EBITDA looks like so we highlighted the actions that we're taking to drive EPS improvement from a share repurchase and from <unk>.
Overall improved performance in interest expense and interest income.
We haven't really indicated anything yet about what the EBITDA profile will look like beyond the actions that we're taking on the cost side to take out the stranded costs and then we've got the ability to do more there should we see further further need to.
A lot of it by the way it comes down to how you all individually model a recession scenario next year and therefore, how do you model commodity inflation or deflation coming.
Because thats going to have a big bearing on all our all the multi industrial companies.
If you start seeing that benefit and then back to the question earlier can you hold some of that I think is really going to be an interesting question for all of the multi industrial so how that plays out is very different than any other recession, we've been through.
Yes, understood Fairpoint and just wanted to follow up on WP.
And just specifically I guess the shelter side are you seeing any destocking is that baked into your fourth quarter guidance I guess, we've seen other firms talked about pretty severe destocking globally and even in North America construction market. So I'm, just curious where you stand on that cycle or what the risk is of that increasing or access.
<unk> into early next year.
Yeah, I wouldn't say, there's anything material at this point you there our elevated inventory levels at some of the big box retail.
The retailers, but we haven't seen any material destocking yet at this point. So we did see positive volume growth in shelter in Q4, and I will just remind you of the distribution of the shelter business.
Roughly $1 billion of sales about 40% of it is commercial which scene, which remains to be very strong for us. So that's selling into health care and education and other types of of commercial applications, 40% residential and then 20% kind of a do it yourself market.
And we did just as a correction we did see positive volume growth in shelter in Q3.
We're assuming that moderates a little bit going forward as lorie noted given inventory in the channel, but it really hasnt.
Changed materially in the order books today.
Okay. Thank you.
Thanks.
Your next question comes from the line of Iran. Mr. Walton with RBC capital markets.
Okay.
Great. Thanks for taking my question.
I guess I had two questions so first off.
When you think about the volume outlook.
Can you just describe maybe the volume outlook for water and some of the portfolio.
Parts of the portfolio that are less economically sensitive.
Do you see kind of the law.
Lower peak to trough variability on earnings playing out as you expected.
Earlier communications thanks.
Yes, we do see continued strength in wire so in the quarter third quarter volumes were up low double digits, and we see kind of mid mid and mid single digit growth in Q4, and as I had mentioned, we've got a really nice backlog there so should there be any.
Moderation in demand we've got over six months of the backlog that we can work down to be able to.
Bolster the overall volume profile for the water business.
And then just a question on capital allocation.
You, obviously have some proceeds left over after the debt reduction.
Share repurchase is there a timeline that you would look to deploy that.
Two plus billion dollars is there any kind of.
So you could offer for us how to think about that will be deployed.
So it's interesting we're moving as fast as we can on the share repurchase would you only get take out so much volume so quick.
So we'll move as fast as we can there.
And then.
We said earlier just to punctuate again, we are in no rush to do anything from a bolt on M&A standpoint, we want to see how the economy is going to play out there might even be a better entry 0.6 months eight months a year down the road. So I wouldn't answer that we have at whatever excess cash we have at this point in time.
Theres really nothing were going to do with it presently.
And we will just monitor the next few months on that and remember we still have to sell Dell Rins. So we don't have the money for that yet and that's probably more towards the back half of 2023 at this point in time.
Thanks.
Thanks.
Your next question comes from the line of David Begleiter with Deutsche Bank.
Alright, thank you.
Auto adhesives is doing quite well.
What are the prospects of this business and we would always we'll stay in corporate other going forward.
Well Laurie manages it and it's growing like a week so I'll, let her answer it.
So we are we are seeing really nice growth in the auto adhesives, primarily driven by that conversion and the opportunity that we have on the battery side and so we felt and the 25% organic growth.
In the third quarter, and we expect further growth as we move forward.
The distribution between.
<unk> E V from a 2022 builds perspective, it's really pretty desperate so the overall expectation for IC equals is actually I think could be slightly down.
And for E V E D related materials is to be up well into the double digits and so that dynamic is what it is playing into our growth portfolio as we move forward.
As far as finding a permanent home for the adhesives business. It will not de incorporate so here in short order, we'll figure out where those businesses need to be aligned.
Wanted to make the decision after we had got through the Rogers decision and now that we know that Pat Florida. We can we can figure out where these differences.
Reside permanently going forward, yes, we think we can leverage as well with some of our other auto exposure, especially on the EV side. So we'll organize ourselves to advantage ourselves as we talk to that customer base that we have other products and opportunities to sell into so.
The advantage the adhesive business over time, but we're feeling very good about our win rate there and you can see by the organic growth Laurie what was the only 25% growth.
Is pretty spectacular in that business and I don't see it slowing down just because of Lori. Just described is the build rates comment over the next five years.
Very good and do you have update on PFS and in South Carolina and deal.
Nothing really new to report, although we've been in pretty intense.
Conversations just let you know I am personally involved in them with my General Counsel.
And.
We're really hoping we get to a resolution, but I don't want to put a timeline on it but.
I think this is public knowledge. The judge has continued to encourage settlement talks.
With the planes this year.
That's a good sign and potentially even using a mediator.
And so we've made tremendous progress but.
I don't want to put a timeline on it it's a continuing process.
Very well, we want to get the water district cases settled.
Really the big focus for us.
Thank you very much.
Your next question comes from the line of Steve Byrne with Bank of America Merrill Lynch.
Yes, Thank you Ed.
Ed you made a comment about.
Some cross selling between layered in and legacy Dupont and we also made the comment about.
Okay.
EBITDA.
We lost the Erika we must have lost and we can move on to the next.
Your next question comes from the line of Frank Mitsch key with Burnham research.
Okay.
Good morning, Greg.
Looking to graphically, obviously very strong growth in North America for the quarter, but still high single digits in Asia and in Europe , and I'm curious if you could provide.
On outlook here in Q4, what are you seeing so far in those regions as many others have talked about some of the difficulties that <unk> been seeing there.
Yes. So as you had noted we had really strong performance in North America and Asia Pacific.
If we look into the fourth quarter, our overall volume expectation in the guidance that we had provided was to be about flat. So that no that's versus about a 3% that we saw in Q3 Wheeler.
The top of the House North America had mid single digit volume how many specific had had kind of a synthetic volume. So as we head into <unk>, we don't see a material change in Asia Pacific volume.
Our Europe , we do see a little bit of a deceleration in the North America volumes some more in the low single digit range overall racking up to about flat.
Year over year.
That's helpful.
On top of that that was the price piece is what provides us with a nice organic number and so we will continue to see as I had mentioned earlier in the call that 5% pricing.
Understood.
<unk> that youre going to lower operating rates in the fourth quarter, obviously interconnect stands out as an area where else may you be looking to lower your operating rates in the fourth quarter, yes.
Yes, generally across all the lines of business, just as we get more comfortable with the supply chain environment. So we feel like things have normalized there. So that we can be a little bit more.
Aggressive on the inventory front end so it's across all the lines of business that we will be reducing production rates. Yes. So we'd look we made a fundamental decision. We did it a couple of years ago, we are losing some EBITDA.
The expense of lower working capital and we decided to make that decision.
Get more in line going into 2023, with where we want to be from an inventory standpoint.
Yeah.
Thank you so much thanks Ryan.
Good to hear from you.
Your final question comes from the line of Steve Byrne with Bank of America Merrill Lynch.
Yes. Thank you we will give it another shot here.
Good.
Yes, I just wanted to hear your view on on your pipeline and R&D in each of your businesses.
Putting end market outlook side, where you see the potential for the most growth from.
Internal R&D discovery.
Well the biggest look the biggest area always for us and it's quicker cycle as the Eni business and more centered in the electronics business, we have an 8% of R&D spend there its very very robust and we're constantly.
Introducing new products in that area, Steve, but the one of the areas, we're really focusing on remember one of the strengths that Dupont is the application engineering expertise, we live with our customers, we do design and work with them and we're really focused on leveraging for instance, the layers platform.
With the existing Dupont technology. So one of the things I was alluding to we've got a couple of auto customers were layered was already and doing electromagnetic shielding thermal management and they have now been pulling in some dupont applications and products for road.
Wiring protection and all that so theres a lot of focus there on how can we get the synergies from a revenue stand point from those two so I'd say, that's the biggest area, but remember R&D for US is the heart of the company and application engineering is the heart of the company. So it's across the board here.
We're very big on intellectual property, when we look to do a bolt on I think I mentioned this in my remarks intellectual property to US is very key and the ability to have strong application engineering across the board in all our verticals is very key for us.
Yes.
And maybe just one more to drill into your water business do you monitor your customers water treatment systems too.
Seek ways to lower their energy costs to upgrade into newer technologies.
We do yes, we got a really nice portfolio that we're growing in our lithium battery space that we've mentioned for the water for the water business. So there is about 30% of water is in the specialty so it kind of outside of the industrial applications and Thats, where all of those high growth opportunity set also obviously.
We're well aligned with you and sustainability goals and that is front and center with the water business as well and then to your point by the way one of the Big things we work on with our technology is right to the heart of the question you asked is reducing the energy consumption.
So we're working on with technologies around that and that could be cutting edge for us to be.
Competitive advantage.
Thank you.
Yes. Thank you.
And at this time I'll turn the call over to Steve to Chris Macrae for closing remarks.
Yes, just thank you everyone for joining our call and for your reference a copy of the transcript will be posted on our website. This concludes the call have a great day.
Thank you for participating you may disconnect at this time.
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