Q1 2023 DuPont De Nemours Inc Earnings Call

Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the DuPont first quarter 2023 earnings call. I would now like to turn the call over to Chris McCray, Head of Investor Relations. Please go ahead.

Speaker 3: Good morning and thank you for joining us for DuPont's first quarter of the 2020 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.

Speaker 3: 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.

Speaker 3: 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.

Speaker 3: 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.

Speaker 3: I'll now turn the call over to Ed. Good morning, and thank you for joining our first quarter 2023 Financial Review. This morning we announced quarterly results with operating EBITDA inline and revenue and adjusted EPS slightly better than our previously communicated guidance.

Speaker 3: This performance reflects our team's continued strong execution while facing short-term volume pressure in select consumer-driven short-cycle end markets, including electronics and construction.

Speaker 3: First quarter organic revenue declined 3% versus the year-ago period, despite double-digit declines from our electronics lines of business of interconnect solutions and semiconductor technologies.

Speaker 3: Mitigating the weakness of electrons and construction markets.

Speaker 3: was ongoing broad demand strength in areas including water, automotive, aerospace, and healthcare, along with the carryover benefit of pricing actions taken last year to offset inflationary pressure.

Speaker 4: Adjusted EPS was up 2% as we continue to realize benefits from our ongoing capital allocation strategy.

Speaker 4: As expected, operating even had declined versus the year ago periods driven by lower volumes.

Speaker 4: Given the near-term slowdown in short-cycle end markets, we continue to be proactive in taking actions within our control to minimize volume pressure while also focusing on optimizing cash flow generation.

Speaker 4: As a result, we expect to continue to show the resiliency of the new Dupont portfolio and expect that our financial results will generate returns commensurate with top-tier multi-industrial assets.

Speaker 4: In addition to our commitment to generating values through delivery of consistent operating performance, we also continue to focus on a creative and value added capital deployment.

Speaker 4: This morning we announced a definitive agreement to acquire a spectrum, a leading manufacturer of critical components, and devices for medical end markets for 1.75 billion or 1.72 billion after certain tax attributes.

Speaker 4: This deal fits with our strategy to focus on the industrial technology's growth pillar, expanding our offerings into the fast growing healthcare market. Turning the slide forward, we have had our ION spectrum, which is a current Dupont customer for a long time.

Speaker 4: and our team is extremely excited for this opportunity.

Speaker 4: Spectrum is a recognized leader in advanced manufacturing of specialty medical devices and components, serving 22 of the top 26 medical device OEMs.

Speaker 4: with relationships that date back decades and a strategic focused on fast growing therapeutic devices and components.

Speaker 4: Their business is predominantly North American focused and has demonstrated consistent growth over many years. We expect them to generate revenues of about 500 million in 2023.

Speaker 4: As you can see on slide five, DuPont's existing healthcare portfolio is quite strong today.

Speaker 4: As a reminder, our current healthcare portfolio is comprised of the Lvivio, medical device, and biopharmac consumables business.

Speaker 4: which is a key part of the industrial solutions line of business.

Speaker 4: and our TIEVAC healthcare packaging business reported through safety solutions.

Speaker 4: Together, these businesses represent 800 million of total revenue.

Speaker 4: and grow at rates exceeding the company average and well above GDP at solid rates of profitability.

Speaker 4: The spectrum business fits nicely with our existing Lvivio franchise and will complement our established position in biopharmate consumables.

Speaker 4: bringing world-class manufacturing capabilities and deep OEM customer relationships.

Speaker 4: On slide 6, you can see the addition of spectrum to our portfolio is impactful and the combined presence in healthcare will now represent approximately 10% of Dupont's total sales.

Speaker 4: The transaction adds higher growth.

Speaker 4: the transaction significantly increases the total addressable market we serve within healthcare devices.

Speaker 4: These businesses are expected to grow at high single-digit rates over time and even faster in 2023 due to specific business wins in place.

Speaker 4: This transaction has compelling strategic rationale as you can see on slide 7.

Speaker 4: The Spectrum Business expands DuPont's growth strategy of customer-centered innovation and strengthen our existing stable position in fast growing healthcare and markets.

Speaker 4: We are excited by the complimentary fit.

Speaker 4: and specifically our ability to leverage the strengths from each side to generate incremental growth opportunities on top of already growing core markets. As an example of this on the BioFarmist side, DuPont Livio has extensive direct relationships with leading OEMs in the BioFarmist space.

Speaker 4: and has approved proven design and build co-development model.

Speaker 4: The added advanced manufacturing capabilities enabled by spectrum will expand its product and capability set to meet stringent customer specifications essentially adding a new pipeline for the spectrum side by adding new customer relationships.

Speaker 4: On the Meta with the Vice-Side as an example, Spectrum has extensive direct relationships with leading OEMs, including with 22 of the top 26 players.

Speaker 4: Adding LIVIO's Silicon offerings and due Ponce Material Science Technology will enhance spectrum's depth of cooperation with customers and expand its product offerings.

Speaker 4: Spectrum is expected to accelerate top line growth for industrial solutions and do top as a whole.

Speaker 4: Regarding deal terms, the net purchase price of 1.72 billion after certain tax adjustments.

Speaker 4: represents a 15.6 even a multiple based on 2023 estimates. We're 13.2 times after moderate expected cost energies of 20 million.

Speaker 4: In line with our return hurdles for capital deployment, the acquisition is expected to deliver high single digit ROIC by year five.

Speaker 4: excluding revenue synergies that we described.

Speaker 4: We believe the combined growth opportunities by just mentioned can add incremental value to the business combination.

Speaker 4: Given a lot of moving parts on our capital allocation over the last six months, let's briefly review our status on slide 8.

Speaker 4: From closing of the Eminem sale in November through today, we have deployment actions and plans in place to account for the full 11 billion of gross cash received from the sale through discipline capital allocation process.

Speaker 4: In the fourth quarter of last year, we announced a 5 billion share-re-purchase authorization.

Speaker 4: and took actions to deliver our balance sheet by paying down 2.5 billion in senior notes.

Speaker 4: and reducing commercial paper from 1.3 billion to zero at year end.

Speaker 4: and remaining on Jerome III, the first quarter.

Speaker 4: Regarding Sherry purchases, we still expect the complete 3.25 billion accelerated Sherry purchase program watched last November in the third quarter of this year.

Speaker 4: and remain committed to completing the remaining two billion of authorization as an ASR shortly thereafter.

Speaker 4: Today's announcement to acquire Spectrum with cash on hand essentially completes the deployment of any remaining excess cash from the M&M transaction. In terms of additional cash sources, I will note that we are progressing with our plans to sell the Delrin business and continue to expect that plan transaction to close by year and 2023.

Speaker 4: Our current capitalization remains very sound with no significant debt maturities until November 2025. Looking through all currently communicated deployment actions inclusive of the dollar and sell, we expect net leverage to finish the year around 2X. We are comfortable with that leverage point which is more in line with our multi-industrial peers and we expect to remain at that level as an equilibrium target going forward.

Speaker 4: With that, let me turn it over to Laurie to review our financial performance and outlook.

Speaker 5: Thanks, Ed and good morning. Our first quarter financial results reflect our teams on going strong focus on execution and operational excellence as we began 2023.

Speaker 5: 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 decarments and some of our most profitable lines of business.

Speaker 5: 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-go period.

Speaker 5: Currency resulted in a 3% headwind from dollar strength against key currency, most notably the Yen, Yuan, and Euro. We also saw a 2% headwind related to portfolio changes.

Speaker 5: Breaking down the 3% organic sales decline. 4% pricing gains were more than offset by a 7% volume decline.

Speaker 5: Cracing reflects the carryover impact of actions taken during 2022 to offset broad-based inflation related to raw materials, logistics, and energy.

Speaker 5: Volume decline reflects weakness in consumer electronics, resulting from decreased consumer spending.

Speaker 5: channel inventory destocking, 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 the aggregate versus the year-ago period, while our remaining businesses were up low single digits.

Speaker 5: From a regional perspective, Europe and North America sales in the border were up 5% and 1% respectively on an organic basis, Malaysia Pacific was down 10% versus the year ago period. China sales were down nearly 20% driven principally by the electronic sweetness. technological hospice. drought recorded around 20% was used only on Cameras.

Speaker 5: First quarter operating EBITDA of $714 million decreased 13% versus the year ago period driven by lower volumes and the impact of reduced production rates in electronics as we scale that production to better align with demand.

Speaker 5: operating even thought of 714 million decreased 13% versus a year ago period, driven by lower volumes in the impact of reduced production rates and electronics as we scale back production to better align with demand. Currency was also a headwind.

Speaker 5: Operating EBITDA margins during the quarter of 23.7% was down 130 basis points driven by volume pressure and inclusive amixed winds related to lower volumes within the high margin strategy business.

Speaker 5: Decormental margin for the quarter was 41%. Given the high teen-solving declines in our electronic portfolio, our overall decoramentals were disproportionately impacted as these businesses are some of the most profitable within the Dupont portfolio.

Speaker 5: Adjusted EPS in the quarter of 84 cents per share increased 2% versus last year, which I will detail shortly.

Speaker 5: Looking at cash performance, cash flow from operations during the quarter of $343 million, less cash paid for capex of $241 million resulted in an adjusted free cash flow of $102 million.

Speaker 5: Included within free cash flow are transaction cost headwinds of about 75 million, related to both cash payments associated with the M&M deal closing and ongoing Delvering divest at your car.

Speaker 5: Turning to slide 10, adjusted EPS for the quarter of 84 cents per share increased 2% compared to 82 cents in the year ago period.

Speaker 5: Ted wins related to overall volume declines, were more than offset by the low-the-line benefits, including an 11-cent benefit related to lower net interest expense.

Speaker 5: and a nine cent benefit through the sharey purchases, including the upfront benefit of our ongoing ASR program initiated last November . Our tax rate for the quarter was 23.4% up from 21.8% in the year-go period, resulting in a two-set headwind to adjusted EPS.

Speaker 5: 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%, an unfraverable portfolio impact of 1%.

Speaker 5: The organic sales declines reflect a 15% decrease in volume, partially offset by a 2% increase in price.

Speaker 5: The organic sales decrease for E&I was driven by interconnect solutions which was down 21 percent and semiconductor technologies which was down mid-teens.

Speaker 5: The decline in interconnect was driven by weak smartphones, PC and tablet demand.

Speaker 5: along with channel inventory destocking.

Speaker 5: Our PCB customers in China operate in the first quarter with utilization rates in the mid-40s, which is an expected cycle low.

Speaker 5: and ongoing strength in best-fell aerospace products and in health care for applications such as biopharma consumables or partially offset by lower demand and largely consumer-driven areas such as advanced printing and lighting applications.

Speaker 5: Operating even the for E&I of 362 million was down versus the year ago period, primarily due to the drop through impact of volume declines, which correspond to the lower custom re-utilization rates just referenced and our lower operating rates, as also mentioned.

Speaker 5: Turning to slide 12, WP First Quarter Net Sales of 1.45 billion increased 1% as organic sales growth of 4% was mostly offset by a 3% currency headwind.

Speaker 5: 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 volume.

Speaker 5: 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.

Speaker 5: Safety solution sales were up mid-single digits on an organic basis on pricing and volume gains.

Speaker 5: Volume booth was driven by Kevlar and Noemexta Man in aerospace and automotive markets, especially for EVs.

Speaker 5: Shelter solution 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 discipline cost control were largely offset by inflationary cost pressure, primarily related to higher raw material and energy cost, currency headwinds, and lower volume. Before I turn it back to Ed, I'll close with a few comments on our financial outlook in guidance for second quarter and four year 2023 on slide 13. As we look at the current demand environment, we continue to expect

Speaker 5: 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.

Speaker 5: 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 delay in the near term recovery.

Speaker 5: We are adjusting the high end of our full-year guidance ranges for net sales, operating EBITDA and adjusted EPS.

Speaker 5: We now expect full-year net sales to be between 12.3 and 12.5 billion, operating EBITDA to be between 3 billion and 3.1 billion, and adjusted EPS to be between 355 and 370 cents per share.

Speaker 5: For the second quarter 2023, we expect similar results for the first quarter, as overall market conditions are anticipated to be generally consistent.

Speaker 5: On a longer-term view, historical data suggests downturns in these markets are short, lasting about 3-4 quarters, which gives us confidence in the longer-term growth for electronics as we get through this year. With that, I'll turn it back to Ed.

Speaker 4: Thanks, Laurie. Before we take your questions, I'd like to highlight that we published our annual sustainability report yesterday highlighting the ongoing work of our employees across the globe to meet our commitments across all aspects of ESG.

As a reminder, our sustainability strategy is grounded in three pillars, innovation, protecting people on the planet, and empowering employees and customers.

I continue to be proud of the progress we are making on our 2030 goals and remain impressed at the speed in which we are advancing.

On climate change, we exceeded our 2030 acting on climate goal to reduce scope 1 and 2 greenhouse gas emissions by 30 percent well ahead of schedule. And we have set a new goal which has been validated by SBTI to reach a 50 percent reduction in emissions by 2030.

Regarding innovation, 80% of our top innovation programs deliver sustainability value for customers.

Within water, we've helped to enable sea water to be used as a source of potable drinking water with our reverse osmosis technology.

We're also helping reduce carbon emissions through building materials innovation and protection.

In auto markets we're making electric vehicle battery safer with our materials for thermal management.

And with an electronics, we've directly enabled increased performance requirements and semiconductor manufacturing.

In our community, we engaged over 500 community projects with over 300 nonprofit partners across three countries focused on STEM education.

From a DENI standpoint, many aspects are inclusive culture, continue to be recognized. 2022 marked our second year on Forbes Bagazines' world's top female friendly companies list as one example.

There are many great examples and stories in the report of how our teams are delivering on our purpose and driving sustainability.

Overall, our teams have done a tremendous job. With that, we are pleased to take your questions and let me turn it back to the operator to open the Q&A. The floor is now open for your questions. Staffs have questions. Time, please press star one.

Our first question comes from Steve Tulsa from JP Morgan. Please proceed. Please proceed.

Hey guys, good morning. Morning Steve. 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 reminds us of the proceeds you're expecting there and what you'd expect to do with that cash.

Yeah, I'll take the Sherry purchase. So we still have two billion left to complete, which we will do on the back of the completion of the current ASR, which is expected sometime in the August , September timeframe. We'll get started on the second program and be able to take 80% of the shares out upfront and then it usually will take us about six months, six months, six months.

about what we sell it for, but the EBITDA 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 end of year beginning of next year.

Got it and then just lastly on price cost. What's your outlook for pricing for the nonelectronics businesses in the second half and any update on the spread for the year if there's any positive benefit there? I think it was $100 million or something in prior guide.

Yeah, 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 way because of logistics and shipping rates being down. But the big bulk of it will be on the Rawls, it'll be more on the WMP side and remember it by time we renegotiate contracts. And then you've got like a four month window to get it through our supply chain into a finished goods that sold.

You know, you see kind of figure out timing of it, but we have not changed the assumption which is very little of the 800 million that we raise pricing. And you know, 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. Yeah, and on the pricing side. So we thought.

4% total in Q1, it was 6% in W&P. We see that decelerating as we laugh the 2022 benefits. And so in the second quarter, we expect to improve all about 1% price lift.

really 2% and W and P and slide B and I. Great, thanks a lot. Thanks Steve.

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

Thank you. Good morning, everyone. I'm running Jeff.

Good morning. Hey, maybe a little color on how active you are on the

the you know what the pipeline looks like

I don't think you responded to the potential use of Delrin proceeds. You know, when that happens, should we expect, you know, kind of more M&A like this or some combination of even additional repo plus M&A?

Yeah, 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 way of the layered 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 way we've had our eyes on for quite a period of time. I think we said in our comments there 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 repurposing.

I'll take us till the end of the first quarter of 2024. So any excess cash will 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. Like, my gut is we'd lean towards Sherry Purchase.

And could you, thanks for that. Could you speak to, I guess, for lack of a better term, kind of contingency planning on the electronic stuff, as you said, I think you tried to triangulate between your own intel and third parties and what your customers are telling you, but it does look and feel like some of these customers are chasing a ball down the hill here on some of this stuff.

So, you know, there's things you can't control, but the question is, and things you can control, kind of cost actions that you might be taking or considering. And I wonder if also a part of that answer you could kind of speak to, you know, maybe the opportunity to unlock some additional cash from working capital.

as you know as we work through this kind of cycling down in the electronics markets. Yeah, if I were you just as an overall comment though Jeff, it's interesting the semi. You know you go back and study all the other downturn remember I was semi is a great industry by the way. It's going to go up the next couple decades but you always do hit these pockets of.

some destock and some softness. But this actually for us, when you look at our sales rates, Semi started coming down at the beginning of the fourth quarter. So we're two full quarters into the downturn. Now we think the quarter we're 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

The right question though, we've got a couple other layers of actions we would take on the cloth side to protect ourselves and then back to the conversation we just have with Steve to obviously we're gonna work this.

price-close thing real hard and you know having paid the time at this point in time. So that would be where the two levers would be. Yeah, I think on the inventory piece too. So we did take action in the first quarter that was a headwind to E&I margins of about 40 to $45 million to be able to better align inventory.

and production rate. And so we saw a headwind there. We'll continue to see that headwind in the second quarter as well as we try to get inventory more in line with where the demand signal is. But to Ed's point two, just to reiterate, on the discretionary side, we are doing a fair amount of actions. You can see on the face of RP, and now that we took about 10% out of our total SAR, that was really a function of the restructuring that we did in the tail end of 2022, as well as really tensioning back fills and travel and expense. And so we'll continue in that mode as we go into two queue as we said.

Spectrums are more with the medical device, OEMs, but a lot of our technology actually goes through companies like Spectrum into that industry. So when we look at the ability for Dupont to move its technologies and material science into the medical device market with Spectrum and by our opposite of that Spectrum moving into the biopharma space and when we look at the joint opportunities we can have together, you know we could drive some nice incremental growth there and by the way we've been talking to them and looking at this opportunity that I'm talking to for a very long time. So I think that's the big benefit. Can we get some more cost synergies probably 10 but we haven't counted on it yet but...

It will be the growth that this business has been growing. As you can see in our charts, kind of right around 10% over the last four years. It's going to actually grow faster this year. They've got a couple big new wins from OEM customers. And then we can broaden it out a little bit more globally because of our footprint on the Livia side. But remember, a lot of the medical device players, our US-based companies that

because just the growth rate they've been on you think about four years in a row of 10 percent. They have a fair amount that they're just completing on the factory expansion side. As we fill up those assets and get them utilized, we'll drive the margins up another 300 basis point. That would back to me would even be a bigger lever than.

the cost one. It'd be more of that margin expansion and then the revenue opportunity. Okay. Interesting. And then just as a quick follow-up, the price comments that you just made, Laurie, the sequential kind of dropdown, is that, mathematically, is that more just that we're getting to the tougher comps on when you jacked prices up a year ago or is there, okay, so there's no sequential weakness. No, there's no sequential price declines of any magnitude baked in, it's more just lapping. Last year, the bulk of the raise was in February .

Can you speak to the potential resiliency of those two businesses in terms of your expectations for the second half and better than guidance? Thank you. Yes, so we still expect continued shrinks in water. So we had a nice organic growth in the first quarter on both the price and volume basis. We'll expect that to continue as we head into the rest of the year. There's a lot of secular trends for aboring.

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 and tie-back 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 EVP. So there's that.

a nice application for no-mix paper within the e-mode and that we're seeing nice growth in the first quarter. And look, look for that to continue as well.

Yeah, I mean, that's still our expectation with, you know, three big tailwinds between me now and then one is obviously the volume recovery and 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 to 45 million dollars created, created the headwind in the first quarter. So that, you know, was not permanent. That will resolve itself. Another tailwind is the price cost piece. So as we can see potential feature 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 mixed component. So as you get E and I back on its growth trajectory, obviously, is the highest margin piece of our portfolio. So there's a table mix list there.

2022 revenue was about 450 million and EBITDA was about 95 million.

Great, thank you. And then secondly, Keith, just talk about the lower leverage targets. Now about 2.0 instead of 2.75. Is this just more conservatism in the current rate environment or just kind of help frame the pivot there?

Yeah, it's exactly what you said. It's more, you know, a higher interest rate environment. And I think it's, you know, just prudent to set there. By the way, I'd not the number one reason, but another reason is the premier multi-industrial companies are all, if you look at a kind of centered around two times leverage.

We were kind of targeted up at that time, 75. So we think that this environment, an interesting environment, it's just a proven place to be. And so that's where we'll end the year of out there, maybe actually a little slightly below 2X, depending on the Delrin proceeds that we get. And then, yeah, but we always have.

We preserve our strategic flexibility there, but that's kind of where we'd like to bargain ourselves moving forward. But really, the interest rate environment is the key reason. So far in grief.

Thank you. Yeah, thanks. Our next question comes from the line of Alexi, Yeframan from Keybank. Please proceed. Thank you. Good morning, everyone. Add, I want to follow up on your 300 basis point.

margin expansion opportunity for Spectrum to clarify. Is this opportunity in your high single digit ROTC number or it could push the number higher?

No, it's in there. We have a pay, I mean, just to growth rate they're on right now, you'll look at it. They're going to be, I won't get into specific knowledge. It'll be north of 10% growth this year. So just adding that leverage into the system.

Thanks. And as a follow-up, in the semi-synenter connect, clearly, it's a challenging market. Can you discuss your outgrowth? Are you continuing to gain content in these markets this year? Yeah, we would expect to see that. And we actually are seeing some share gains in the list of packaging space still underneath the numbers that we're reporting. And 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 clouding the story a little bit, but we still expect that content.

and exposure to advanced news to be able to give us out performance in Toyota. Thanks a lot. Thank you. Our next question comes from the line of Vincent Anders from...

just give us that performance in Toyota. Thanks a lot. Thank you. Thank you. Our next question comes from the line of Vincent Anders from Morgan Family. Please proceed.

Thank you and good morning everyone. You know, Ed, point taken on the sort of historical electronics cycle, the 3-4 quarter downturn. Just curious if there's any sensitivity to that and what I mean by that is that you're looking for the recovery in the third quarter. If for some reason it doesn't come in the third quarter.

And are there any particular folks that they tend to compete against? Yeah, so they compete against TE, Nordson, and integer, some of their larger competitors. As far as on the input side, they use their specialty polymers and design expertise to manufacture very high complexity materials for the large med device players. And so that, as Ed 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. And so being able to bring our two portfolios, leverage our expertise in material science.

across the broader portfolio is where we see the opportunity for us ahead. Thanks very much. Our next question comes from the line of Jaws specter from UBS. Please proceed. Yeah, hi. Thanks for taking my question.

and better sequentially, and is there anything you don't care? That's maybe different than what you expected.

No, you had walked through the pieces so Endusher will be so expect continued strength overall within Endusher. There's a little bit of a flip between interconnect and semi sequentially so you'll start to see a little bit of the seasonable that happens normally and interconnect primarily within the smartphone space.

And then we actually see a little bit of sequential deceleration in STEMI 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 NetNet, there's not a material change in revenue for the total company or E&I from Q1 to Q2.

Okay, thanks. No, appreciate that. And I guess kind of following up on a prior question, you know, if this all, this recovery and semi pushes out again, another quarter, you know, you had 300 million sales cut, 100 million EBITDA cut, you talked about some production kind of realignment.

If this were to push forward again or push out again, would there have been any difference in the decrements that we should expect to either do the price cost or anything else that would maybe be an additional lever you consider?

Yeah, 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 and I.

not being there in Q3 and Q4 in the second half. And so if this recovery extends in the fourth quarter, then you'd 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 too, that could offset any decriminal weakness if the recovery is pushed out is that price cost piece. So we don't have anything material.

Please proceed.

Thank you. Healthcare alone now is going to be almost the same size as shelter solutions. So do you create a reportable healthcare segment and move the rest of safety into industrial or do you put spectrum into a larger safety segment where healthcare will be about 40% of the safety segment?

Yeah, Jawe, it's something we've been looking at how to report it. It's interesting. Healthcare will be 10% of the portfolio now. The water business by way is developed into 10% of the portfolio. I think both really nice, good secular end markets for us over the coming years at high

any long lead time orders that actually show an inflection in demand yet?

No, because it's a short cycle business, so you can't really, you know, 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 know, you're going into the holiday season later in the year, so we start our shipments and.

You can see one of our charts, you know, just the smartphone piece alone picks up in third, fourth quarter there, so we begin shipments there, but past that, you know, it's birth cycle business and we'll see it and we'll ship it pretty quick. Okay, thank you. Yep.

Our next question comes from Alina Steve Bern from B.O.A. Please proceed. Yes, wanted to ask about your water treatment growth. Would you say that it's being driven more by the treatment of water for consumption or for wastewater discharge? And are you seeing any increased demand for both of those buckets?

due to fluorinated compounds either from EPA's drinking water standards that are underway or EPA scrutiny on any company that's using a fluorinated material. So the growth we have seen would be more on the industrial side. The business is about 70% favored towards industrial wastewater treatment.

That's what's driving driving the growth. There's nothing material that we're seeing with respect to any Groundwater remediation that's coming out from the EPA You know 70% of that business is requiring you know, we're replacing them greens and all at these industrial sites And it's just the secular trend that should continue because we're including Dupont where all work

Is it likely to remain a core business for you?

No, it's a core business force. I remember a very key component of that is our Tyvek franchise, which is a very nice margin business force against all of the end markets that we service with Tyvek, including the construction market. Obviously, Lori mentioned a really nice market for that is medical packaging. So it's definitely part of the portfolio. Okay, thank you. Thanks.

Yeah, no, it's a core business force. I remember a very key component of that is our Tyvek franchise, which is a very nice margin business force against all of the end markets that we service with Tyvek, including the construction market. Obviously, Laurie mentioned a really nice market for that is medical packaging. So, it's definitely part of the portfolio. Okay, thank you. Thanks. Our next question comes from the...

line of John McNulty from BMO Capital. Please proceed. Yeah, good morning. Thanks for taking my question. So on the topic of raw materials, I know what you said is in the guide. I guess I'm curious, in terms of the raw material basket that you're buying today, acknowledging it takes some time to work through the P&L, can you help us to understand how much that might be down from the peak and how we should be thinking about that?

Yeah, so we saw around the $800 billion of escalation last year. It was about 60% rose and the rest roughly felt between logistics and energy. We are seeing desaleration on the logistics and the energy size. Obviously you can look at European and US natural gas and see there's been a size of bull back there.

and the ocean freight race for 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 fire on the tailspin. So that's the upside as we head into this.

the rest of the year is when we start to see an inflection in the raw material buy. Okay, so you haven't actually you're not buying them lower now, so that's to come and then it still has to work through the P&L, is that right? Yeah, yes, correct. John , it's important to note that there are individual raw materials where we would be buying at lower prices, but you know there are others that have maintained an inflation curve and there are a lot of things that we buy by.

that are very, very supplied driven and in terms of the dynamic and it could take quite a while to kind of unlock any kind of relief there. Even if you take a really basic benchmark price and suggest that that could be down already today. So there are puts and takes within the portfolio but I think the punchline here is that there's well less than $100 million of net benefit in the model that we have today. And that's inclusive some of the savings at Laurie.

reference from logistics and energy but you know netting out as we go through the year later some potential give back that could be necessary so there really isn't that much in there and yes suppose that could present an opportunity as we look forward but we haven't seen you know a lot of benefit come through today.

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 during the COVID period.

medical device demand was actually pretty soft, you didn't have a whole lot of access to surgical suites. So is that 12% understated in your mind, or is that kind of a fair run rate, and it's just, you know, based on the specific products they make, maybe, you know, it didn't have that pressure that maybe some others in medical devices did? How should we be thinking about that? Yeah, I mean, it wouldn't have had the same magnitude of pressure as some of the other providers into the elective surgery, so it's selling into the...

really nice growth in 2023. On the back of already underlined strong volume as well as they had some sizable new customer wins that are in the process of ramping and really get to a nice clip as we head into the back half of 2023 as well.

on the back of already underlying strong volume as well as they had some sizable new customer wind that are in the process of ramping and really get to a nice clip as we head into the back half of 2023 as well. Thanks very much for the call. I appreciate it.

Our next question comes from the line of David Beglider from Deutsche Bank. Please proceed. Thank you. Ed, do you have an update on PFAS and the MDL ahead of the upcoming trial in Florida?

Yeah, so the trial comes up in about a month out now, David. And I'll just say we've been talking pretty regularly with the plaintiffs.

As I mentioned last quarter, the judge did appoint a mediator who, by the way, is very actively involved with these regular conversations we're having. So we're feeling positive, but I'll leave it at that right now.

Got it. And keep it a little more color on the weakness you see in North American construction, Resi versus N9 Resi, and any destocking that's still ongoing in that space. Thank you. Yeah, we saw it's pretty similar volume defines across all three end markets. So do it yourself, residential.

and commercial markets. And reminder, just on the exposure and commercial, it's more so on like the healthcare and education side versus large commercial construction in downtown cities. And so we saw similar performance from a volume deceleration in all three. We don't have a material pickup in 2023 planned for those markets, so we'll see how they continue to perform, but we don't see an inflection like we do in electronics.

of 3.05 billion of EBITDA at the midpoint and your Q2 of 7.15, that would imply that your second half is around 1.62 billion and your first half is around 1.43. So that 190 million almost uplift when you look at first half to second half.

Is that mainly the comms getting easier on the volume side for E&I? Are there any other special items we should consider when we think about that, cadence?

Yeah, I mean, it's mostly within E&I, that lift, and it's going to be more favored to Q4 versus Q3 as you look at the slides that we presented on both the smartphone and the semi-MSI side. So, most of it is that anticipated second half recovery. There is a little bit of seasonality that would play into a first half versus second half. However, there are some of them that will be my Skyrow and we'll start a new series of rollbacks if we continue to gatherahu- get that on the line for the future. Next week, you'll hear some mind-start among others. We normally get a little bit MondayOWN on the floor, but today, I mean, hopefully we'll get better with all that. But going forward, we're expect to see a new axis return format. We can come back with a frustrating hardware-based work-ass and numbers-

comp, but most of it is that electronics recovery, and as I had mentioned, a little bit more favorite to Q4 versus Q3.

Okay, thanks. And just one quicker or one on M&A. So you guys, you know, have now re-entered the market with the spectrum acquisition. You know, would you say that the portfolio transformation is now kind of complete and or are you still considering other opportunities within the...

the five markets that you've been looking at? You know, you're never, I guess, complete, but I would summarize it, yes, we feel like we're complete for a period of time here. We like where we're at. This was the last piece we were looking at. And so I don't see anything over the next year just against.

stay the time period. I think we're like where the portfolio is at. We just want to operationally run it well. Perfect. Thanks. Great. Thanks. Our final question comes from a line of Mike Cicin from Wells Fargo. Please proceed.

Hey, good morning. In terms of spectrum, is there a pretty big runway in terms of other acquisitions there? You sort of exited plastics, you're back in the plastics and I get it healthcare is not much better at market, but is this an opportunity to build a pretty big you know?

plastics health care unit over time? There's definitely more you could add to it. And again, we like it secularly. So that's why we've kind of doubled down in this area. But remember, we have a lot of opportunity between what we already had and what they had. So we really like it because of that. So yeah, there's a lot of...

when I take a look at slide 14, does is inventory, is inventory, inventory destocking end into Q and even if the third quarter isn't that much of an improvement, sequentially E and I's results could improve if the destocking is sort of done. Yeah, we do see the destocking moderating in Q2, yes.

So, it peaked kind of in the 1Q, 2Q timeframe, and then we see it pulling off a bit in Q3, Q4. Thank you. Thanks. I would now like to turn the call over to Chris McCray for closing remarks.