DuPont de Nemours Inc (DD) — Q2 2021 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for DuPont's Second Quarter 2021 Earnings conference call. We are making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this conference call. These slides are posted on the Investor Relations section of DuPont's website, and through the link for our webcast. Joining me on the call today are Ed Breen, Chief Executive Officer, Lori Koch, our Chief Financial Officer, and Jon Kemp, President of our Electronics and Industrial segment. Please read the forward-looking statement disclaimer contained in the slides. During our 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 risk and uncertainty, our actual performance and result may differ materially from our forward-looking statements. Our 2020 Form 10-K, as updated by our current and periodic reports, includes a detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today 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 posted to the investor page of our website. I'll now turn the call over to Ed.

Thanks, Leland. Good morning everyone. And thank you for joining us. I will provide comments on another overall strong quarter, including the continued advancement of our strategic priorities as a premier multi-industrial company aimed at growth and creating value for our shareholders. But first, let me acknowledge the continued determination of our teams as we navigate through the unprecedented circumstances of the pandemic. As a result of the principles and protocols that we adopted over the last year, we continue to operate safely and productively on-site and remotely. We have encouraged all employees to get vaccinated. And where possible, we are working with local governments to facilitate access, including on-site vaccinations at some locations. Our Wilmington-based office locations are fully reopened. And I have to say it is great to be back in the office with our teams. Starting on Slide 2, in line with our philosophy that consistent operating performance is a key factor in creating shareholder value, I am pleased to note that this morning we announced another strong quarter with financial results above expectations. Lori will take you through the specifics. But in summary, broad-based organic growth was driven by continued strength in our key end markets, including ongoing recovery in those most impacted by the pandemic. Despite a challenging production environment with escalating raw material costs and continued supply chain and logistics constraints, strong operating discipline and quick pricing actions resulted in about 460 basis points of margin expansion versus the year-ago period. With strong order trends continuing and confidence in our team's ability to continue to navigate through raw material and supply chain challenges, we are raising our full-year guidance for net sales, operating EBITDA, and adjusted EPS. I will provide more details on our updated guidance shortly. In addition to our financial results, we continue to execute on our balanced approach to capital allocation during the quarter. In May, we further de-levered our balance sheet by redeeming 2 billion of bonds, thereby reducing our gross financial debt to 10.6 billion at the end of the quarter. Since the end of last year, we have paid down a total of 5 billion of debt and do not have another debt maturity until the fourth quarter of 2023, which further solidifies our sound liquidity position. We also returned approximately 800 million of capital to shareholders during the second quarter through share repurchases and dividends. During the second quarter, we purchased a total of 640 million in shares, which includes completion of our previous share repurchase program and the start of repurchases under our new authorization, announced last quarter, which expires on June 30, 2022. Through the first six months of the year, we repurchased approximately 1.1 billion in shares, and we plan to be opportunistic with our remaining authorization as we move throughout the year. In July, we repurchased an additional 125 million of shares. With respect to dividends, we returned about 160 million of cash to shareholders during the quarter. As we previously mentioned, we intend to work with the Board to increase our dividend annually as we grow earnings. Before I close, I'm pleased to note that in late June, we closed on the previously announced divestiture of our Solamet business for approximately $190 million. And on July 1, we completed the acquisition of Laird Performance Materials, utilizing cash on hand. The Laird acquisition advances DuPont's strategy of growing as a global innovation leader and strengthens our leadership position in advanced electronic materials. Joining us today is the president of our global E&I segment, Jon Kemp. I am excited to have Jon on the call today. And I will now turn it over to him to provide further detail on how this acquisition complements our Interconnect Solutions business within E&I.

Thanks, Ed. It's a pleasure to be on today's call and to share more information about the acquisition of Laird Performance Materials. It's an exciting transaction for DuPont that significantly advances our position in the electronics industry and accelerates the transformation of our Interconnect Solutions business into a total solutions provider. We've been following Laird for several years, and have admired their capabilities as a leading provider of electromagnetic shielding and thermal management solutions, and we are excited to have added their capabilities and history of growth to our portfolio. As a reminder, Laird delivered 465 million of revenue with approximately 30% EBITDA margin in 2020. E&I and Laird are both recognized for innovation, quality, and reliability and have a strong relationship across the electronics industry. This combination brings together DuPont's premier applied material science expertise with Laird's industry-leading application engineering capabilities. It also adds more content on many of the devices that we're already in. We have already begun the process of integrating Laird into our existing Interconnect Solutions business, providing opportunities to further optimize business structure, functional support, and our global site network. We expect 60 million in run-rate cost synergies by the end of year three with approximately 60% realized in the first 18 months. We expect to achieve cost synergies through a mix of G&A, procurement, and site consolidation initiatives. On the next slide, I'll share some of the key benefits of this transaction and describe how the combination enhances DuPont's position as a leading electronic materials provider. The acquisition of Laird expands our position as an essential partner of choice for major OEMs. Laird serves a broad set of overlapping and complementary end-markets across consumer electronics, telecommunications, automotive, and other industrials, with a similar geographic representation to the rest of the Interconnect Solutions business with a particularly strong presence in Asia. The second way it enhances our position is through innovation. This acquisition strategically aligns us to critical needs across thermal management, signal integrity, power management, miniaturization, and high reliability and it enables us to have early engagement with OEMs in both system design and material specification creating both greater product differentiation and higher margins. The next benefit of the acquisition is that it broadens our portfolio of solutions. With Laird's unique multifunctional capabilities, we will leverage an expanded customer base, broad product portfolio, global scale, and deep technical expertise to increase speed-to-market, create new efficiencies in the development of integrated and multifunctional solutions, and provide high-value next-generation products that will deliver additional growth in the next several years. We believe customers will see immediate benefits as a combined E&I organization engages across value chains to address the increasingly complex challenges in the industry. Our combined organization will advance our leadership to help customers accelerate solutions necessary for the adoption of high-performance computing, artificial intelligence, 5G communications, smart and autonomous vehicles, and the Internet of Things. We will be well-positioned to capture growth in these key secular growth areas. In addition, we expect revenue synergies from cross-selling into complementary accounts and channels, new and faster product development for a multifunctional solution, and deeper design and co-development partnerships with OEM. With that, I'll turn it over to Lori to provide details on our second-quarter financial performance.

Thanks, Jon. And good morning, everyone. I'll cover our second-quarter financial performance beginning on Slide 5. Our results for the quarter reflect the diversity and strength of our portfolio. And our team's continued ability to execute in the face of escalating raw material costs and global supply chain and logistics headwinds. Net sales of 4.1 billion were up 26% versus the second quarter of 2020, up 23% on an organic basis. The organic sales growth resulted from a 20% increase in volumes and a 3% increase in price. Currency provided a 4% tailwind in the quarter, which was slightly offset by a 1% headwind as a result of non-core business divestitures in the prior year. Overall sales growth was broad-based, with double-digit growth on an organic basis in all three reporting segments and across all regions. The most notable increase versus the year-ago period is in our M&M segment, reflecting the sizable change in the global automotive market versus the prior year and disciplined pricing actions. I will provide additional color on our segment top-line results on the next slide. From an earnings perspective, we delivered operating EBITDA of 1.06 billion and adjusted EPS of $1.06 per share, up 53% and about 240%, respectively, versus the year-ago period. The earnings improvement resulted from volume gain, most notably reflecting ongoing recovery in key end-markets adversely impacted by the pandemic, and the absence of approximately 150 million in charges associated with temporarily idling certain facilities, partially offset by the absence of a $64 million gain associated with a joint venture that had since been divested. Strong operating EBITDA leverage drove operating EBITDA margin expansion of 460 basis points. Incremental margins for the quarter were about 43%. Given the unique nature of 2020 and the discrete items that impacted our operating results in the prior year, it's important to evaluate our year-over-year operating performance for our core results on an underlying basis. Specifically, operating EBITDA for our core results during the quarter was up about 40%, versus last year after excluding the impact of the 150 million in idle activities incurred in the prior year, with about 240 basis points of margin expansion, and operating leverage of 1.5 times. Similarly, I continue to track our growth versus 2019, given the significant impact the pandemic had in key end markets last year. In comparing our current second-quarter results to a more normalized performance before the pandemic, all reported sales in the quarter were up 6% versus the second quarter of 2019, and up 10% versus that same period for our core sales. Operating EBITDA for our core results during the quarter was up 15% versus the second quarter of 2019 or 1.5 times leverage. From a segment perspective, E&I delivered operating EBITDA margin of 32% with 190 basis points of expansion driven by broad-based volume gains. M&M delivered significant operating EBITDA improvement driven by an overall recovery in the automotive market. And the absence of approximately 130 million in charges associated with temporarily idling polymer capacity in the year-ago period. Operating EBITDA margin for the quarter was 23%, reflecting volume growth and net pricing gains resulting from actions taken ahead of escalating raw material costs. In W&P, operating EBITDA increased 4% versus the year-ago period. Operating EBITDA margin and leverage were adversely impacted, primarily by two key drivers. First, given contractual commitments with customers, local selling price increases lagged a headwind from raw materials and supply chain cost escalation. We expect this to resolve in the second half as price increases start to kick in. Second, production volumes for Tyvek protective garments were at peak levels in the year-ago period, given the company's response to the pandemic. This enabled us to minimize manufacturing changeover to other Tyvek grades, resulting in an overall increase in production rates. As Tyvek's output shifted from protective garments to multiple other applications, the resulting increase in expected changeovers in the current quarter decreased production rates leading to lower volume. For the quarter, cash flow from operating activities and free cash flow were 440 million and 224 million respectively. While these amounts have improved since the first quarter, cash flow and conversion are not where we need them to be. The headwinds we faced are related to increased working capital levels, capital spending, and access to feedstock as we advance critical capacity expansion projects. With respect to working capital, we saw an increase in inventories due to our efforts to create a more stable supply chain for our customers, given the strong demand environment and numerous raw material and logistics constraints. In the second half of the year, we expect higher cash flow and conversion rates as the global supply chain and logistics environment stabilizes. Slide 6 provides more detail on the year-over-year changes in net sales for the quarter. Starting with E&I, organic sales were up 17% on 17% volume growth, with double-digit volume growth increases in all regions. Volume gains were led by mid-20s percent growth in Industrial Solutions reflecting broad-based demand strength across most product lines, but most notably for OLED displays for new phones and television launches, medical silicones in healthcare, and Kalrez seals within electronics. Interconnect Solutions also delivered organic growth of over 20% with high teens volume growth. The volume growth was driven by higher material content in premium next-generation smartphones, partially resulting from timing shifts as select OEM demand shifted from the second half this year along with some share gains for the printed circuit board. Semiconductor technologies continued to benefit from strong electronic demand and advancements in key growth areas such as 5G, high-performance computing, and electric vehicles. During the quarter, new technology ramps and advanced nodes within logic and memory and higher demand for memory and servers and data centers drove double-digit volume growth. The continued recovery of key end markets within W&P drove organic growth of 11% driven by volume increases. Sales gains were led by a recovery in construction with Shelter Solutions reporting organic sales growth of more than 30%, which reflects continued strength in North American residential construction for products like Styrofoam and Tyvek house wrap, and in retail channels for do-it-yourself applications. Commercial construction recorded higher sales in the quarter for Corian surfaces as global demand continues to improve. Within Safety Solutions, organic sales were up high single digits reflecting strong volume improvement for aramid fibers and industrial, oil and gas, and automotive end markets. As previously noted, lower production volumes for Tyvek reduced overall safety volume. In Water Solutions, broad-based demand for wire technologies remains strong. However, logistics challenges, primarily in our ultrafiltration business, impacted our ability to supply, resulting in a low single-digit volume decline versus the year-ago period. We expect organic sales growth for the year for Water Solutions to be in the mid to high single digits. The most notable increase in topline improvement within our M&M segment which had organic sales growth of over 50%. The improvement was driven by the continuing recovery of the global automotive market, which represents about 60% of the segment from an end-market perspective and helps deliver strong volume growth across all three lines of business. Local pricing gains of 13% also contributed to organic sales growth, reflecting our actions taken to offset raw material costs and higher metals pricing in the advanced solutions business. Excluding metals pricing, the local price was up about 8%. Within Engineering Polymers, global supply constraints of key raw materials continue to improve but are expected to remain tight through the end of the year. We continue to expect to recover lost volume related to these disruptions as the raw material constraints are alleviated. Turning to Slide 7, I mentioned earlier that adjusted EPS of $1.06 per share was up over 240% from $0.31 per share in the year-ago period. Higher segment earnings resulted in a net benefit totaling over $0.40. This net benefit resulted mainly from higher volumes and the absence of temporary charges in the prior year. Offset slightly by portfolio changes, which includes the absence of a gain recorded in the prior year. Also providing a significant benefit to adjusted EPS, versus last year, was an approximate $0.30 per share benefit, due to a lower share count. The benefit from lower interest expense in the current quarter, as a result of our recent de-levering actions, was mostly offset by a higher base tax rate compared to last year. Our base tax rate for the quarter of 19.8% was higher than the year-ago period, due to the absence of certain discrete gains benefiting the prior-year rate. For the full year 2021, we currently expect our base tax rate to be closer to the lower end of our expected range of 21 to 22%. With that, I'll now turn it back over to Ed.

Thanks, Lori. Let me discuss our financial outlook on Slide 8, which includes our view of the third quarter and full-year 2021. We are raising our full-year guidance range for net sales, operating EBITDA, and adjusted EPS. Along with the underlying improvements that we are expecting compared to our previous estimates, our revised guidance also reflects the acquisition of Laird and the divestiture of the Solamet business. In addition, this morning we announced the change in how we will treat intangible amortization expense, beginning in the third quarter for purposes of determining adjusted EPS. At the midpoint of this range provided, we now expect net sales for the year to be about 16.5 billion and operating EBITDA to be about 4.235 billion. Also, we now expect adjusted EPS to be $4.27 per share at the midpoint of the range provided. This reflects about $0.23 underlying gains to our original estimate, a $0.10 benefit from the portfolio changes, and a $0.27 full-year benefit related to the amortization reporting change. For the third quarter of 2021, we expect net sales to be about 4.2 billion, operating EBITDA to be about 1.07 billion, and adjusted EPS to be about $1.12 per share. All at the midpoints for the ranges provided. Before opening up for Q&A, I'd like to provide some highlights on our commitment to ESG, and what we're doing to sustainably grow and operate our businesses for the long term. In June, we published our 2021 sustainability report, which reflects our first full-year progress against the 2030 goals that we set in 2019. Our report highlights more than 50 examples of how our teams are addressing the environmental and social needs of our customers and communities. Some of the highlights from this report are reflected in Slide 9. ESG was fundamental to our core long-term strategy, which is why the Board of Directors and I made the decision to incorporate the progress on our sustainability goals into our incentive compensation program beginning this year. As an innovation leader, we believe our biggest lever to effect economic, environmental, and social progress is through working directly with our customers. Today, our R&D investment is focused on the intersection of key market trends and the needs of sustainable development. One example of how we're doing this is in the area of addressing the global need for clean water. Our Water Solutions business recently launched its B-Free technology. This pre-treatment solution enables a significant improvement in the reliability of reverse osmosis desalination plants. Another example is advanced mobility. The broad adoption of electric vehicles is fundamental in addressing climate change. Through leveraging our broad portfolio of expertise and battery assembly and thermal management for electric vehicles, our DuPont M&M team collaborated with General Motors to develop an advanced adhesive solution for use in electric vehicles. In June, as a result of our close collaboration, GM recognized the DuPont team with a GM Supplier of the Year award. The power of customer partnerships to drive sustainability is a key element to our long-term growth strategy. And I am confident that we will continue to deliver these types of wins in the future. With that, let me turn it to Leland to open the Q&A.

Thank you, Ed. Before we move to the Q&A portion of our call, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. We will allow for one question and one follow-up question per person. Operator, please provide the Q&A instructions.

Hi. Good morning, everyone, and thanks for taking the questions.

Hey, John.

Hey, John.

Maybe just the first question is around your gross profit margin improvement in the quarter. I know there are some moving pieces there with the M&M idling, but by my calculation, you're up almost still almost 200 basis points year-on-year. So just curious, how much of that you think is sustainable. Maybe what's driven by some of your longer-term programs versus what might have been benefits from the year-ago comp or something else there to call out?

Yeah. Our margins were around 36% in the second quarter. If you look to the back half and the guidance that we provided that we expect them to remain around that range. And so if you isolate all of the one-timers out of 2020, we were around 35%. We saw about 100 basis points of improvement underlying. We've mentioned in the past that we see a few hundred basis points of improvement in gross margin getting closer to that 40% range over the next few years. So we continue to execute against that commitment. Part of it, as you mentioned, is just from this year's improvement is just from the stronger volume resulting with higher yields for our facilities and higher results. But we're also driving improvement in reliability, enabling some digital tools across the organization and higher throughput throughout our organization with the one exception as we had mentioned, within our Tyvek operations, that we did see gross margin deceleration there. Just a result of the fact that last year we were to run only Tyvek medical grades in order to be able to meet the pandemic response. And this year as that demand waned we returned to other grades of Tyvek, resulting in more changeovers and therefore some yield and volume hits. But overall, we're on track with our commitment to get closer to that 40% range over the next couple of years.

Great. And then maybe just as a follow-up, I was curious if you could be a little bit more explicit with your views on the timing of smartphone demand and shipments in the back half. One of your competitors is expecting to see a decline there. I was just curious if you could provide a little bit more color there.

Since we have Jon with us, we'll let Jon take that one.

Yeah. John, good question. So in the first half of the year, we definitely saw some acceleration of orders from smartphone customers really as a result of a couple of factors. There was a late timing to device launches in the back half of last year. Strong demand moved some of those orders into the first part of this year. And then you had a lot of folks just trying to secure supply reliability in the face of some of the raw material and logistics challenges. So in general, we think smartphones are going to grow about 10% over the course of the year, not quite as deep a seasonal curve as maybe what we've seen in the last couple of years. So the curve is flattened, but general demand continues to be strong.

Jon, you might want to clarify for the group that this is part of ICS and that it's not solely focused on smartphones, correct?

Yeah, sure, Ed. The Interconnect Solutions business is about 25% driven by smartphone demand. About 30% of the demand is other consumer electronics, whether that's laptops, computers, tablets, and smart devices, about 20% is automotive, 20% broad industrial demand, and then the rest in telecommunications.

Great. Appreciate the color and I'll pass the baton.

Thanks, John.

Thanks, John.

Thanks. Good morning, everyone.

Hey, Jeff.

Hey, Jeff.

Good morning. Ed or Lori, could you just elaborate a little bit more on what you're thinking about cash flow, how the working capital might kind of unwind over the balance of the year here, and could you give us a range of what you expect actual free cash flow to be?

Yeah, Jeff. Look, we purposely have to build up some inventory. Obviously, look, our receivables were up with sales, were very good on payables. We purposely kind of took a turn here to build some inventory, by the way it's really in three categories, semi-finished, raw, and a little bit of finished goods inventories you will see when we come out with our Q. And it's mostly in the M&M business. And by the way, on the raw side, we've taken in inventory, and in many cases, we're waiting for glass fibers to do our compounding and finish it. But we wanted to supply in-house just because of all the challenges out there in the supply chain. So we purposely have allowed that to build some. All of the inventory, by the way, is good and we'll ship that out. So we are free cash flow conversion of the first half is not what we would normally run as a company obviously. We will clearly improve fairly significantly in the second half of the year. And I think, Jeff, we’ll give you a little more guidance when we get to the third quarter on where we think we will land for the year, but we definitely took a little bit different tack to be able to satisfy our customer base better in this challenging environment.

I’d like to add one more point regarding the headwinds, specifically around capital expenditures compared to depreciation and amortization. We are forecasting approximately $900 million in capital expenditures, which is higher than the roughly $650 million in depreciation. We are focusing on selected high-return capacity investments, including completing the Kapton K4 investment in Circleville this year and advancing the Tyvek Line 8 expansion in Luxembourg. This is leading to our capital expenditures being higher than depreciation as we progress with these initiatives. However, we will still have cash available and will continue our stock buyback program in the second half of the year. As mentioned during the call, we executed a buyback of $125 million in July, and we plan to return to the market soon to continue implementing our $1.5 billion buyback strategy.

Great. Thanks for that color. And I guess maybe just as a natural follow-on to that. Obviously, all the puts and takes going on this year, but on the new EPS construct, would you expect to be able to normalize be converting in the low nineties on this EPS construct, free cash flow…?

I don't think we'll reach the 90% this year. Considering the headwinds we're facing, as well as working capital and capital expenditures exceeding depreciation and amortization, achieving 90% will be challenging this year. However, if we look at our historical performance, it's been very strong. Last year, we had around 170%, and in the previous couple of years, we hovered around the 100% mark. Once we navigate through the current tough raw material and supply environment, we should return to our typical run rate, but I don't foresee that happening this year.

Great. Understood. Thank you.

Thanks, Jeff.

Hey, good morning.

Hey, good morning, Steve.

You may have addressed this, but I'm trying to understand the incremental growth in the second half, which seems to be in the mid to high 20s. I think there are also some residual idling impacts. So the core incremental growth might be slightly lower than that. Am I interpreting the numbers correctly, or are there other factors to consider?

You are. Yes, you're in the right ballpark. And really, that deceleration from incremental margins that we saw in the first half is really just the impact of the pickup in raw material escalation. We are getting it all-in price that, as you know, will hurt margin percent, and then the incremental margin will be a little bit weaker as we navigate that in the back half.

Got it. That's helpful. Regarding the price in mobility materials, there was a significant increase this quarter. Will that maintain itself in the low double-digit range in the second half, considering the price mix impact?

It does, yeah. We see it strong again in Q3. We'll see how Q4 plays out and we'll also start to get price within W&P as we had mentioned. We didn't have price in and W&P in Q2. We will look to have low to mid-single-digit price improvement in W&P. One thing to be careful of is the metals impact. That really plays with the results running through corporate, and then the results running through M&M. As silver price, for example, that impacts the M&M portfolio, rises, we've got contractual passback that we get the price, but it does impact the cost. So that's one piece. So if you normalize that out from the M&M results, which were reported at 13, we are about closer to 8%. So that's more like the underlying polymer-driven price increases.

If the raw materials start to decline, will you reduce the price? Is it structured contractually so that the price can go down as we look ahead to 2022?

On the metal, Steve, yes. It would move directly with the metals price. Within the overall polymer portfolio, we would envision that we would have to start to give it back if we see the nylon feedstocks, for example, start to reduce. We would imagine that we would be giving back that price. I don't know about the exact timing of it. We will obviously try to hold the price as best as what we can, but it would be a headwind if raws start to decelerate.

Margin would remain stable in that environment. However, price increases would not occur on a quarterly basis; instead, they would likely accumulate over the course of a year.

Got it. Got it. Okay. Great. Thanks a lot for the color. Super helpful.

Thanks, Steve.

Good morning, everybody.

Hey, Scott.

Can we talk about the water business a little bit? I mean, the comment on the appendix, just water technologies hit due to logistics. What is it about that business in particular, that made it harder to get price, and we've seen price pretty broadly, I think across the industrial segment this quarter. So what is it about that business structurally, and can you capture it in real-time? Are you perpetually behind here on price, or can you catch up pretty quickly in the upcoming quarter?

Yes, Scott. Overall, the water business appears to be quite robust as we move ahead. As Lori mentioned, we expect our top-line growth to be in the mid to high single digits this year. There was a logistics challenge, which I would also categorize as an export issue from one of our product lines in Germany, that delayed a significant project shipment we were attempting to process at the end of the quarter. This will be resolved in the third quarter, where we anticipate solid revenue growth. Generally speaking about the water business and the W&P sector, we implemented price increases during the second quarter; however, many of these adjustments will lag due to contract obligations for project-driven business that usually lock in prices for about a quarter. Therefore, we expect to see positive pricing in the third quarter for the entire W&P sector, which was not reflected in the second quarter. The effects of these increases should start to manifest in the third quarter.

Okay, that's helpful. Since we have Jon on the line, are there more deals like Laird in the electronics sector? Many of us aren't deeply familiar with that particular business, but could you help us understand how fragmented it is or if there are potentially more opportunities like that available?

Thank you, Scott. We've observed several deals in the electronics sector, which is characterized by a diverse supplier base across various core technologies. We are keen on expanding our portfolio in areas where technology provides value to our customers, particularly those focusing on advanced technology and semiconductor 5G materials. Additionally, in our Industrial Solutions segment, we are enhancing our offerings with precision parts and medical silicones. We believe there will be ongoing opportunities to grow and strengthen that segment of our portfolio.

Fantastic, thanks. Good luck, Jon. Thanks, everybody.

Thanks, Scott.

Thank you again and have a good quarter. Question for Jon. Jon, given the new rebrand, strengthened Portfolio, what is the underlying growth of this business over the next three years?

Yeah David, good question. Obviously, it's been a really strong demand environment for the last couple of years. 2020, even in a pandemic environment, was strong, and we were able to grow nicely. 2021 is also shaping up to see the continuation of those trends. Overall, broadly, we would expect it to be mid to high single-digit growth over the time horizon that they'll be puts-and-takes along the way. But really strong, robust demand conditions across all three of our businesses going forward.

Very good. And then, how is the M&A pipeline in the non-electronics areas of the business?

Yeah, David, I'm not going to get into specifics on it, but we do have a few targets we're seriously studying. I'd say a little bit bigger than Bolton, but on the bigger end of Bolton, if I could use that term. Barry, I know I've highlighted before we were looking at one water asset that was tucked in and we talked about that. We didn't think the economics worked well for us. So that's off the table, but there are a couple of the areas we're interested in, but it would be something that we're already in. Like electronics, for instance, Jon just talked about where we can add on some technologies and grow, so there are a couple of areas besides electronics we're looking at. But again, down the sweet spot of what we know how to do.

Thanks and good morning, everyone. Just maybe, Ed. How are you thinking about the fourth quarter in terms of maybe seasonality, as well as sort of what you think happens in terms of raw material costs and availability? Just help us understand what's baked in there.

This year, I believe the seasonality will differ slightly. We are expected to recover some of the M&M volumes that we couldn't ship due to supply constraints, particularly in the fourth quarter. If you examine our guidance, you will notice that we initially anticipated a $300 million headwind from raw materials entering the second quarter, which has now increased to an estimated $400 million. However, as Lori mentioned, we will secure a price to offset this, although it may not correspond quarter-to-quarter. We have already seen a positive price in M&M this quarter and expect to see pricing in W&P next quarter. We anticipate some additional increases in raw materials in certain areas of W&P, which may slightly restrain the margins more than we would prefer heading into the third quarter, but they should still remain solid compared to the second quarter. Personally, I think raw materials have peaked at about 80% to 90% of their current levels, and our guidance assumes they will remain at these elevated levels throughout the year. Nevertheless, we will be able to secure a price to mitigate the impact.

Okay. That's very helpful and this may be a follow-up. A few weeks ago, you reached a settlement with Delaware. Could you provide an update on your broader PFOS settlement strategy and whether we should expect more state-by-state settlements, particularly in states where you might not have manufacturing capabilities? I understood the focus was to concentrate on the states where you do have operations, but I would appreciate a general update on your thoughts.

Yeah, look, Delaware ended up costing us $12.5 million. And remember, Delaware was one of the ones I would say where we manufactured because our big plant is literally right across the Delaware River. And the state of Delaware actually owned and controls the Delaware River basin in that area. Look, I think the good news is we have a really good agreement between the three companies Comoze, Corteva, and DuPont. We're holding hands and working together really well, and I think that the Delaware one was a great example of that. So we have a few other states where we did have manufacturing locations. Let me just say, obviously we're in conversations. I think you could probably use Delaware as a blueprint. Some other states have wrapped us into legal issues where we absolutely didn't do anything at all. I would point out Vermont as one of them. We have nothing there and nothing even close to being there. So each one is a little bit of a different strategy, but we're very focused on trying to resolve more and more of those issues. And I think Delaware was the first step to see what we're up to.

Yes. Thank you. It's curious to hear your views on what you think the opportunity is to utilize your suite of water treatment technologies in direct lithium extraction, and assuming there are some brine deposits out there that you might be able to treat that others can't, do you think the best way to realize the value of your technology is just continuing to sell materials, or would you consider more of an investment in that business?

Yeah, we're looking at the opportunity right now with our water filtration business in the lithium-ion battery space. And so it's early days looking at it, we're working with some partners as well to understand the opportunity. I don't know that we would do it. An investment in an area outside our current technology, we are looking to take advantage of that right now. We'll continue to study and see if that's the right decision we've got. Capacity constraints that we're biting up against in the water business too. So we're studying some high-return water capacity expansion efforts. Right now, I'm actually on my way to Minnesota on Thursday to look at our current operations to understand what the opportunity is. So we're aware of the potential opportunity and landscape and we'll continue to study it.

Thank you, Lori. I want to follow up on your comments regarding the settlement with the State of Delaware and your efforts to address PFAS issues related to your manufacturing plants. Recently, there was a case in Hoosick Falls, New York, and your team opted not to settle that. Is that a downstream manufacturing plant for you? Were you supplying materials for that plant, or is it a matter of not wanting to open the door to additional settlements?

No. I would say that while the settlement has been announced, we chose not to settle alongside three other companies. At some point, we may consider it, but the relatively low amount of the other settlements was not something we were prepared to accept because we believe we have not done anything wrong. We do not want to set an inappropriate precedent for the Company. Even though it was a single million dollars, we felt that was not appropriate. We have a strategy in place and we will see how it unfolds.

Thank you for taking my question. First, regarding the supply chain disruptions you experienced, can you quantify the impact on your sales from the freight-related issues? Is it reasonable to expect that any losses or delays this quarter can be recovered in the third or fourth quarter, or is there a possibility that some of those sales are permanently lost? How should we approach this?

I think it breaks them really across M&M and W&P. And in M&M, it's the more raw material constraint. So we saw a $100 million of the top line in the first quarter and another $100 million in the second quarter. We'll look to eat away at that in the second half, but I don't know that we'll get all of that in the second half. It depends on raw material availability. Most of them have generally resolved themselves except glass fiber, which goes into a significant amount of our polymers. And so, we'll see how the glass fiber market continues to evolve but as we see it right now, we don't see the full 200 million in the second half. It will trickle in 2022 but we intend to get it all back over time. It's not lost sales, it's really just shifted. And then in W&P, it was more on the logistic side, hitting our water business. As I had mentioned, we had some logistical constraints in Europe. We would size around $25 million and we would look to get those back this year.

Got it. Fair enough. And then, maybe just to speak to the Semiconductor industry. I mean, the cycle seems like it's heated up. We're starting to see significant investments, especially with concerns about security, and national security, and that kind of thing. So we're also seeing further investment in the U.S. and maybe away from the more traditional Asian regions. I guess, can you speak to how that opportunity presents itself for DuPont and if there are incremental challenges just given some of the diversity or some incremental benefits and how we should be thinking about that in terms of your investment going forward there?

That’s a great question. When considering the semiconductor market, it's clear that leading OEMs are making strong investments across various regions. The Tier 1 fabs are collectively investing hundreds of billions of dollars over the next two to three years, with some projects in the U.S., others in Asia, and some in Europe focused on expanding and building capacity. Much of this new capacity is aimed at advanced technologies in both logic foundries and memory production. This is very beneficial for our business, as these investments at cutting-edge nodes increase manufacturing complexity and the purity of materials, aligning perfectly with what we provide to our customers. Our diverse portfolio means we are involved in every phase of the wafer manufacturing process. Our partnerships with OEMs remain strong, and we are collaborating on material qualifications for next-generation technologies. As new wafer capacity comes online, we've already seen some benefits this year, and we anticipate an increase in wafer capacity in the coming years as these investments materialize. We are well-positioned to take advantage of this trend.

Thanks very much for the call. Appreciate it.

Thanks, John.

Thank you very much. Good morning.

Good morning, Bob.

Good morning.

And I wanted to talk about the characterization of the Company. I know when you came on board, and spun out and separated DuPont, there was an ambition to be a services provider and not necessarily a chemical company, but it seems like the last few months you've traded a lot like a chemical company. You get some devaluation and some raw material issues that hit you. Why do you think the market's not willing to look at you more through that multi-lens? And then, I know you looked at competitors at the time, ITW, Honeywell, 3M, those kind of names. How many benchmarked versus them, say over the last 6 or 9 months, how do you feel you are stacking up? Thanks.

We evaluate every market we're involved in and assess all the multi-industry companies. I believe we compare very favorably. I agree with your overall point. We've established ourselves more like Dow or Lyondell, albeit at a higher multiple. Over time, the consistency of our results will demonstrate that we are a leading multi-industrial company. It takes time, but we've maintained consistent results for a year and a half. One thing we've shown, especially to those following multi-industry companies, is how DuPont would perform during a downturn. When the pandemic struck, our decremental margins were among the best in class compared to top-tier companies, even with a 10% drop in our top line. Many expected the chemical sector to experience significant declines in a downturn, but we did not see that. This was a crucial proof point that demonstrated our strong performance throughout the cycle, and we're currently seeing excellent incremental margins as revenues recover. If you look closely at our company, there's very minimal direct exposure to chemical commodities anymore. For example, our electronics business is stable, consistently achieving mid-to-high single-digit growth. I believe over time we will see a favorable evaluation, as we have significant potential compared to other leading multi-industry companies. Consistency in our performance will ultimately validate our position.

Yeah. Perhaps. Old perceptions just die slowly. But Lori, I wanted to ask you one thing. You mentioned in Tyvek that a year ago, you guys were really pumping out the personal protection and maybe had more efficient runs through your plants. Was there also an issue where those were higher-margin sales or was it just a function of you had better operating utilization, and that's what gave you better profitability there?

It really just came down to the number of gains and productions. The margin profile across the different end markets is the same. It was really just the ability to just run out the protective garments, not have the changeovers, that enabled us to really reduce our downtime and up to our data protection.

Thank you, Ed. Before we move to the Q&A portion of our call, I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. We will allow for one question and one follow-up question per person. Operator, please provide the Q&A instructions.